Transcription
Everyone's debating on whether we're in a recession. We have over 10,000 apartments. That's over 10,000 households. And I can tell you right now that something is shifting. Our tenants are behaving differently than they were just a few years ago. They're asking very different questions. They're making very different decisions, and that's always the early signal on the economy because tenants always feel the economy and what's going on before the investors do. And today I want to show you exactly what we are seeing. And here's Shannon. She runs our property management company, and she sees this every single day.
So Shannon, like there's a lot of new construction that's hitting the market, and there's a lot of people have a lot of choices right now. So that's the first thing, right? There's there's softness and there's an affordability problem, and and the tenants are actually in a great, great situation right now.
Yes, I would agree with that 100%. Right now, we are definitely in a tenant's market with all of the new builds and the new construction. All of those buildings are on construction loans. They're giving huge concessions, and the stabilized assets are competing against that, and we're seeing our residents have a lot of opportunity for brand new products and being able to be move around and have new opportunities, right?
So, so here's the deal, guys. Like, let's say we have a 300-unit apartment building on the corner of Main and Main. It doesn't really matter where, and it's 10 years old, right? Across the street is something new, right? And the the the person across the street is trying to fill it up because they have 100% vacant. So, they're trying to get our people, right? Like there there right there the these people have choices. They can go across the street, get a month free or two months free, and completely wipe us out. So we're struggling for occupancy, and of course, there's almost no rent growth right now. And so as new units hit the market, what's happening? It's creating stress and competing for, of course, the existing tenant base, which is we're all sitting on.
So so this new product needs to what we call get absorbed, right? So there's no rent growth right now. Occupancy is a struggle. We're spending more money on marketing. There's all the stuff happening right now. And the the person who's winning right now are the actual consumer or the residents right now are winning because they have lots of choices, unlike just a few years ago.
Okay. So Shannon, of course, we got all that going on, which is actually good for the tenant because, you know, they deserve it. Like for the longest time, the landlords have had a run here. They had higher rent growth and all that kind of stuff. But now, of course, we're starting to see the inflation hit our tenants, right? And you and I did a video about this, and you know, they're starting to finance their rent. They're starting to get extra jobs, you know. So, what are you seeing here with our 10,000 people?
Well, we continue to see residents require that financing of rent. Flex is the company we currently use that allows the residents to make multiple payments throughout the month, which has been very, very successful for us to be able to support our residents and keep them in place with a very, very low cost to the resident. Um, they actually highly enjoy it and are just now moving to where residents can use that for deposits. As for the job market, we're seeing, you know, a lot of the same things going on. It is starting to increase. We're seeing in Phoenix and Tucson a little bit better of a job market, but we still see multi-generational living. We see people uh having roommates. Uh, one-bedrooms are the biggest struggle for most of our portfolio right now because it's harder to do the roommate situation or have somebody else living with you to help provide and pay rent.
That's a really good point. So, think about this, guys. Like, if you have a one-bedroom, um, typically that's one person or maybe a couple, right? Um, they want the two bedrooms. Why would that be? Because they can split the rent. So, right. Essentially. Yeah.
So, so there's there seems to be a glut of one-beds on the market right now because affordability. Again, going to affordability. If you take a let's call it a $2,000 two-bedroom, it's $1,000 bucks each. Or a one-bedroom is going to be probably close to $1,500, $1,600. Right?
Correct.
So, big difference, right? So that they can save $400, $500, $600 a month by getting a roommate or, you know, somebody else, right?
Most definitely. We're also starting to see in like our screening results. Um, I just did a quick look at our last 30 days for our resident screening and and what that looks like for them. And right now, we have about 32% of the people who apply for our apartments come back 100% approved, meaning they don't need any additional deposits or anything extra. 61% of the folks that are applying with us require additional deposits.
Oo, that's high.
That is high. And that's um we don't allow co-signers for income or for um background checks, but for credit, you can get a guarantor. Um, but we are seeing that very high. Um
So, let's talk about that 61%. So historically, basically what that's saying is of 100% of the applicants, only 31% are are solid yeses, right? That the 61% um require something else, right? And so what has that historically been? And now a word for my paid sponsor, Pad Split. Look, if you've been trying to make single-family rentals pencil out in this market, you already know that the math can be tight. With high rates, properties that would have cash flowed five years ago now often break even at best. So what do you do? You wait on the sidelines and miss out, or maybe you find a better model? That's why I want to talk about today's sponsor, Padsplit. Here's an example of the math. In some markets, a four-bedroom renting for $2,700 as a traditional rental may be able to gross over $6,000 a month in a co-living setup through Padsplit, depending on location, occupancy, and costs. The same house can potentially more than double the gross revenue in the right market. And before you think that sounds like a headache, Padsplit helps with member screening and rent collection while still allowing you to operate the property and make management decisions. This is one strategy investors use to try to make deals work when traditional rentals don't pencil. If you want to see the numbers for yourself, go to Padsplit.com/hosts. I'll have a link in the description. Just run the math on the property you already own and see if it's a fit. You might be surprised.
Uh, additional month and a half's deposit. Like I said, a guarantor. Uh, we also are rolling out a program that's called Guarantors. It's been very helpful for us to get people approved. Um, it's a a company that basically becomes a guarantor for you because what we're seeing is people's parents and family members aren't able to co-sign for them anymore because they're in the same financial situation as the people applying. Okay. So, there's new companies that have come out, and one of them's called Guarantors, and they allow the resident, if they don't get approved with us or they need an additional guarantor, they'll act on that on their behalf.
Okay. So, let's let's unpack this for a minute. This is a red flag for sure. So, in the old days, and not that we wanted to like I never wanted to go to my parents to ask them to help, right? Like no kid wants to do that. Now, their parents are in trouble, right?
Yeah. No, it's true. I mean, we're seeing it harder and harder for, you know, people to come back with that full approval. Um, the good news is is only 8% of our people were 100% declined. So, um, we're still able to help them find a home. We're still able to work with them. It's just those additional deposits that are required, um, because of their
So, let's talk about why are people declined right now? What's been your experience on that 8%? By the way, we're talking about hundreds of people for our company, right? A year. So, so what what makes somebody get declined right now?
So, with our rental criteria, we do a credit check, um, which anybody who owes an apartment community money is a 100% decline. There's nothing they can do until debt is paid in full. We also do income and ID verification.
So, obviously people skip out, they owe money. That's one thing. But the other thing that uh I learned last week from you is fraud is on on the rise here, right? Like people are fabricating IDs and W2s and AI, by the way, you all think of AI as, you know, obviously helpful. Well, in this particular case, it's creating a whole industry around this, right?
It is. I mean, there's people out there that post it on Facebook and LinkedIn and tell you they can get you into any apartment community with their fraudulent documents. So, it's definitely something you need to be very aware of, and it's very hard to detect with the human eye or just reviewing something that's been emailed or sent to. We we do use a company to help us do that, which is an ID and income verification company, and they have their own AI to help us combat this, and it's been incredibly successful.
Fighting AI.
We have AI fighting AI.
For fraud. I guess the question is, who has the better AI? I guess.
Well, hopefully we do.
I do. I hope so. But these are all things that's very interesting that a lot of times you don't think of it. And I will tell you this, this always hits the mom and pop landlord first, right? Because they're they're typically not on the cutting edge of of things. Not always, but usually it starts, um, you know, in organizations like the National Apartment Association or Texas Apartment Association or Arizona Multi-Housing Association. Typically, they're on the front edge of a lot of this stuff. So, I if you own stuff, make sure that you guys are getting connected to some of these grassroots, uh, organizations because you you you can u a lot of times they're paving the way for you. The industry is changing right now. And as you start to see distress at the tenant level, you're also going to start to see, um, it's going to be tougher, uh, to get people out that owe. It's going to be tougher to rent people to rent to people that owe, and of course, you're going to start to see different levels of fraud.
Most definitely. And and speaking of, you know, having those qualified residents, high volume of the residents that are leaving us right now, um, for our company, I did um a quick review on the reasons for for move out this year. Uh, 12% of our move-outs, companywide, were due to home purchases. So, those 32% that came back 100% approved are the ones leaving and buying a home.
Oh, that's that's also tough. Yeah. Yeah.
Yeah. So, those qualified residents that pay their rent every month that you can rely on are right now capable and and willing to go out and purchase homes.
So, if I was a home builder or a realtor, and I would target a high-end Class A apartment building, uh, to try to sell my stuff, right? I would I would fly the heck out of it, say, "Hey, look, I'm right next door in the subdivision. Come buy over here. Why rent when you can buy?" Right? And so, by the way, that's always been the case. You know, we've always been counter-cyclical with single family. Sometimes when real estate people talk about real estate, they put it all in one big bucket, you know, like like an office building is the same as a house or a multifamily apartment community, um, is the same as an office building or whatever. So, so usually obviously if if the single-family market is, uh, in distress, it's going to try to get people with good credit and get them into a home. I mean, that's that's pretty common. And so that's certainly one of the things that we're battling.
Yeah. And we're all going after the same people. So.
Yeah. Yeah. And that it's dwindling, right? It is. It's only 31% for us.
It's getting harder and harder.
On the 61% uh that's in, call it, that gray area. What percent did that used to be? Was it in the 40s? Was it in the 50s before?
Yeah, I would say a couple years ago. Um, it was definitely, um, more of about a 40% 45% approval rate and then a more of a 40 to 50% conditional. So, we got 10 or 20% that's actually moved from, call it, an instant yes into that kind of gray category, and that's a lot of people. Yes. Right. That's hundreds and hundreds of people each and every year.
Yeah.
So, let's talk about the job market real quick. You, you know, I know we we know a lot of these residents. Right. We know where they work, obviously. They fill out applications and and, um, you know, what are you seeing on the unemployment or employment side of the equation? Are you seeing a lot of these jobs being taken by AI? Are people moving around? Are they getting second and third jobs? What are they doing?
Well, we definitely are seeing some changes in the job market. Um, overall, one of the things with the notices and the people moving out, um, one of our higher percentages are people leaving towns or job transfers. So, that's up to about 15 to 20% in our region. So, people are moving for their jobs. And what we've also found is in the markets that we're in, uh, where they live in conjunction to their job has become very important to them. We've found that a lot of our renters don't want to, they don't want to commute. Uh, they don't want to be out on the road. So, what we're starting to see is if they're not even they're leaving Phoenix, say, but they're going from the west valley to the east valley, they want to move. Which, by the way, is about a 45-minute drive. But since gas is no now a dollar more per per gallon, these things, you know, we're talking about hundreds of dollars a month for moving, right?
Yeah. So, people are being very.
Mobile.
They're being very mobile. Yes.
So, people are very mobile right now, right? In the way that they're just making decisions.
Making decisions. Yeah. And they want to be close to where they work. They don't want to have the big commutes if they're not able to work from home. That's a really big, big piece for them. So, um.
Thankfully, we're in markets, uh, this is another really interesting point. This is precisely why you want to be in a market that's at least growing, right? Because there are markets that are shrinking. So, um, as employers move, employees move. And so, it's really important that wherever you invest, it doesn't really matter. You need to make sure that you're investing in areas and in markets where the employers are growing because if the employer is growing, then the then you're going to have more employees in that particular market.
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So, are do people need, say, two or three jobs or side hustles in order to pay their rent these days?
I would say we still see a lot of Uber drivers, Uber Eats, they're doing that as well as what they're doing during the day. Um, but it kind of goes back to having multiple people in the home too. So, you know, instead of it just being a single f, you know, husband and wife and one person works, they're leaning more towards having roommates and everybody working. So, I don't know if it's necessarily multiple jobs, but it's multiple people in the home with jobs that can contribute to the bills. They're targeting the expense side of it as opposed to the revenue side. Right.
Right. They're trying to lower their expense.
I think you're seeing more people willing to have a roommate and move in with each other than to have to have the higher expenses.
Yeah. People do make do. That's for sure.
They do.
Yeah. So, obviously, we both went through 2008, '09, '10, right? That was crazy. And so, what happened during that time was the people were losing their houses. If you remember, like we were actually getting tenants during that period of time because people were losing their homes and then they were moving into rentals. So, you know, we we saw this interesting run of people into the multifamily space, essentially going from single family to multifamily, let's say, as an example. But now it's very different. We're not seeing that. We're seeing a a a high supply of of apartments right now. So, it is it is very, very different where the tenants actually right now have a fair amount of choices. I mean, right now it's this window is going to close here, I think though, in a year to two years, right?
Yeah. Most of the markets that we currently operate within, we're seeing that the construction is kind of coming to an end. So, we're hoping 2026, 2027, we'll be able to absorb all of those units and that competitiveness will kind of start to decrease.
So, because here's what happens, guys. Like, when rates were low, which is going back to '22, let's say, um, and you put a shovel in the dirt, like you're committed. Like, it's like you're pregnant, right? You have to finish the project, right? That project could be a year to three years of construction depending on where it is and if it's a high-rise or downtown or on the rural or whatever. So, there's different time frames, but our projects usually are at least two years long. Um, sometimes even longer. So, let's just call that 2022. A lot of those came and are now leasing up in '24, '25, and now into '26. So, we saw a record number over 500,000 units hit the market in 2025. It's a 50-year high. So, all that has created a supply and it's created obviously concessions. So, it's it's good for the tenant, not good for the landlord, but in order for us to compete, you know, we we just went, I went to 10 projects last week with Shannon, and every single one of our projects is offering some kind of concession. Our properties is offering some kind of rental concession for somebody to move in, like one month's free on a 12-month lease. And why would they do that? For competitive, right?
Are you seeing more and more of that? Right.
Yeah, we're definitely seeing a lot more of the concessions or the rent specials in the market. Um, some of our, uh, lease-up competitors are upwards of three to four months free. That's in Phoenix. We're seeing that in Houston. Um, really tough to compete with that. So, my advice with concessions or specials is try to have as much of that concession or special in the beginning half of the lease agreement. So, don't give it all upfront free. You want to make sure that the residents have the ability to pay, but you also don't want that to run throughout the whole year because it affects your effective rent. And when they move out, if the market has since changed, it's a lot harder for you to get them back up to a market value rent with that concession in place as well.
That's a good point. So, so let me just break down the math for you guys. Like, if your two-bedroom rents are $2,000, that means that you're going to collect $24,000 for for 12 months. That's what that means. So, one month free means you're at $22,000. Two months free, $20,000. Three months free, $18,000. Four months free, $16,000. Okay? So, $16,000 over 12 months, right? Versus $24,000 over 12 months. So, that's what concessions mean. And so, what what happens is as people start to do that on brand new projects, mind you, like sometimes they have elevators, sometimes they have incredible facilities there. And these are now digging into what we call the Class B and even the Class C communities that were built 10, 20, even 30 years ago because obviously now you're looking at $1,500 rents or, you know, $1,400 rents as opposed to $2,000 rents. And so, all of a sudden, you're competing with everybody in that area. So, what does the C-class property or the B-class property have to do? They have to also do a month free because the Class A's are doing one, two, three, four months free. So, that's the domino effect that happens as the new supply hits the sub market.
Let's talk about operating expenses because I know you're working all over this. So, like, we're getting crushed from property taxes to insurance to utilities, obviously all the components and labor, right? Like, like one of the things that is not really talked about a lot is all the hard work in this office here just to try to maintain our operating expenses, right? So, what do you what do you what's your crystal ball look like for 2026 for operating expenses?
Well, you know what we tell our teams is when you're looking at income and you're having all those concessions and your rents are are being affected and your occupancies being affected on the income side, you know, we all focus on where are expenses going, but you have to balance that with still providing the resident with a really great, happy living environment, which can cost money. Um, you want to keep your asset, you know, valuable to the resident because, like we just said, they can go to brand new builds. So, if you're a B or C-class asset, you definitely need to make make sure you're maintaining a beautiful community, but that costs money. So, it's all about finding a balance, and we work very hard with our vendors and our site teams to ensure that we're always getting the best deal and we're evaluating every single thing we spend money on.
Yeah. And one thing is for sure up this year, it's marketing costs, right? Because you're trying to attract the same tenant that's across the street, you know, it's getting two, three, four months free. Uh, you know, you're spending dollars in in Facebook ads or, uh, apartments.com or whatever it might be, just to try to attract the same resident because if somebody's coming to our project and across the street is a brand new, trust me, they're going to both, right? And so, what are they making decisions on? The staff, for sure. Most definitely. Without a doubt. Uh, it's not always price, but certainly price. And then what the place looks like, right? It has to be perfect. Even if it's 20, 30 years old, it has to look perfect.
Yeah, I agree with that 100%. I do think on the marketing side, there's a lot of ways to advertise where you can control your expenses as you need them. So, it's a gas and a break and a gas and a break. So, things like Meta and Google, like you spoke of, you're not in a contract. You're not locked in. So, you can turn those things dials up and you can turn those dials down as you need it. So, if traffic's flowing, you can turn the dials down if you don't need that big of a spend. If traffic slows down, turn the dials. You're not locked in. It's a week by week. It's day by day. Things like Zillow and Apartments.com, they're all important. And I I do believe for certain size assets and certain companies where you can get the good deals and you can get the good rates because of your size and your volume of units, they're great things to be in, but you're locked in. Uh, you have to sign a three, six, 12-month agreement. So, you could be rocking and rolling with traffic, but you're still paying $2,000 a month for Apartments.com that's doing nothing for you. Where if you're doing that with Google, you can turn it down, you can turn it up. It's a lot more, um, flexible with your spending.
The one thing I do know about expenses, and it's interesting because a lot of people break expenses into controllable and uncontrollable. I think everything's controllable. So, there is a way, uh, and this is what we specialize in, and this is exactly why we have our property management company in-house. But there's always a way to negotiate prices down. The question is is how, right? And so, we can't can't give you all the secret sauce now, but I will tell you there's a lot of ways to save on the operating expenses, and it really does get into the details, but, um, you know, from controlling how how a how a property can spend, right? You can control your utility costs largely, both on common area and interior. Insurance is 100% negotiable, and there's lots of things that you can do, and so is property tax. We appeal everything, and there's a right way and a wrong way to do that. So, all of these things are controllable, and, uh, you know, and and if if you're in a situation where your expenses are going up, trust me, you do have a chance to to try to negotiate some of these things down. Would you agree with that?
I would definitely agree. And training your team and holding your teams accountable is very important. The checks and the balances. Um, I was talking to somebody, um, at one of your events the other day, and he was like, "I get all of these receipts for, you know, Lowe's and Home Depot, and how do I know what what they're really spending on?" And those are the things that are really important to focus on. We've got to make sure we know and we're holding our teams accountable, um, for what they're spending and why they're spending. We as a company try to do as much as we can internally. So, the less that you can vend out in some situations, the better. In other situations, it's cheaper and and more affordable to vend it out. So, you should be evaluating those situations with every single type of expense because it's not cookie-cutter. Not everything should be done in-house, and not everything should be vended out.
So, well said. And the thing is, act, you know, a lot of times people confuse what property management really is. It it's not just processing the bills. Like it's actually controlling the expense before there is an expense and negotiating with the vendor and, of course, managing the process, the maintenance, the people, um, the management of the of the residents. All that stuff is meaningful and drops straight to the bottom line. And I think what happens a lot of times is people take over a property, they don't, you know, it's like anything, like, but they don't know, right? But after you got the heck beat out of it, like us, right? Like, I mean, this this business is brutal. Brutal, right?
Yeah. Yeah. Well, and it's holding your vendors accountable, too. When you do choose to use a vendor, make sure you vet them out. There's sometimes vendors get comfortable. Uh, your landscaping vendor sometimes.
Most of the time, I guess you're right, Ken. Most of the time, you got to keep them, um, held accountable on a regular basis. And you should be constantly vetting out new opportunities and new vendors because you don't want to set and forget anything. Property management is not a set it and forget it business. You should always be evaluating new ways to do things, new places to spend money, and new people to provide you with services.
So, I know I I always laugh because I was like, the landscapers are always so good in like the first six months, right? Like they're always the best, right?
And then they give you the B team.
Oh, I know. I know. I know. Well, the same thing with painters or whatever. So, the it's just like probably the way you guys pro might see at your own home. The literally like like when you're always going to get the best deal when they're trying to get the business, right? And so, if you set and forget, trust me, like, uh, so there needs to be a little bit of, there always needs to be pressure at all times on your vendors. Um, it doesn't necessarily mean you have to get rid of them, but you just constantly have to have that pressure on them because these things do get away from you.
Yeah. They've got to know that you're keeping an eye on them and that you know what else is out there in the market. Definitely think strong vendor relations is really important. So, I agree with you. Doesn't mean you need to get rid of them, but you do need to make sure your teams on site are holding them accountable.
And I I'll just leave on this last note. I think a lot of times people focus on, I don't know why, but they focus on like who hasn't moved in yet. Like as if, you know, the people out there are going to be better than the people that we have right now that are paying all our bills. So, we focus on resident retention. Yes, we have 10,000 tenants, but they're the most important people. Not the people we haven't met yet. I mean, obviously that's what the marketing's for and that's for people coming in the door, but, uh, often times it's funny how once you sign a lease and you kind of move on, you just, oh, they're my customer already. And then you just kind of focus out the windshield, uh, instead of take a look at the rearview mirror and see what what you have, right? I've been doing this for over 30 years, and I'm telling you right now, what's happening in the economy is something that most people are completely unprepared for. Interest rates, private credit, the banking system, energy, AI wiping out jobs completely. It's all converging at the same time. That's exactly why I put together a free virtual event with some of the smartest people that I know. Robert Kiyosaki is going to be there. George Gammon, Jeff Snyder, Tom Wright talking about tax. We've got experts on gold, oil, AI, and real estate. Nine speakers, one day, completely free. This is the playbook for what's going to be coming up for the next 12 months and more importantly, how to position yourself to be on the right side of it. Click the
Ken, I love that you brought that up because it's such an important part of what we do. And happy residents lead to longtime occupancy and great resident reviews and a really positive impact. And people who take ownership of their apartment and their home, they treat it better. Um, they have a higher standard of how they want to maintain it. And we want those folks living in our communities. At MC, we have about a 75% renewal retention rate at our communities currently. And that's because our teams are focused on giving the highest level of customer service. That doesn't always mean giving the customer what they want. It means giving them a high level of customer service, listening when they talk to us, answering their questions honestly, addressing their situations as quickly as we possibly can. And sometimes we can't say yes, but we can definitely come up with other solutions that help resolve it. People want to be heard and they want to know that you're out here taking care of us.
This is a relationship business, and you can't hide behind software. I will tell you something like if you can resign somebody right now going into this market, you should be resigning people at not an increase, right? You're just trying to maintain your occupancy and trying to maintain your cash. Think about what you've done. You've eliminated the need for a paint or a maintenance or the marketing or the turnover or the vacancy loss. There's all these things that you've minimized to zero by just being nice, responding to the people that are paying your bills today. And if you can do that, if you can lower your turnover rate, your occupancy obviously is going to go up. Your staff's going to love you, your maintenance is going to love you, and all your expenses are going to be lower. So, this entire point, the key to this whole business is taking care of our customer or the tenant because don't forget, they pay everybody. The tenant that pays your rent, pays your mortgage, pays your bills, pays your investors. So, they're the most person on the team, aside from, of course, the employees that manage them. Last year, we did over $500 million in transactions. If you want to see what changed, what we bought, and why we pulled the trigger, watch this video.