Loss To Lease, The Golden Metric?

Loss To Lease, The Golden Metric?


What is loss to lease?

If you’ve spent as much time around profit/loss statements as us, you’ve likely come across the term “loss to lease” multiple times.

It can be a rather large deduction, and you may be wondering who is this lease, and why do we keep losing to them? 

Let’s dive into it.

Loss to lease is defined as:

“the difference between the market rate (or gross potential rent) and the actual lease rate for a property or unit.” 

Think of it like your mom’s favorite kid. The gold standard you’re always trying to live up to.

Well good for Karen, mom, some of us are happy the way we are!

….I may be too close to this issue.

Let’s use examples instead  

Say you have a unit renting for $900 per month with a lease coming due.  You let your resident know their rent will be increasing by $27 (or 3%). After some consideration, the resident calls your bluff and moves to terminate their lease.

But, you (as the skittish operator) decide it’s better to keep a resident in the unit at $900, then incur the cost of a make-ready and vacancy.

Advantage, resident. They gracefully accept your surrender.


Now, the difference between the market rent of $927, and their actual rent of $900, is your loss to lease. Or, in this case,  $27 per month.

The larger the difference and the bigger the complex, the more this number expands.

Our simple formula:

[(Market Rent – Actual Rent) * (# of units)] * 12months = Annual loss to lease

$27 x 1 unit x 12 months = $324 per year “loss”.

$27 x 100 units x 12 months = $32,400

Like death from a thousand cuts, these small amounts add up fast.  

This “loss” is just a paper loss. You’re not required to pay anyone the difference. Rather, it’s an indicator of how efficiently a property is operating. The higher the loss to lease, the more money is being left on the table each month. 

Why should you care?

At this point, you’re likely wondering how the loss to lease is relevant to your investing. 

In essence, there are two scenarios where loss to lease plays a key factor.

  1. Acquisition.

When looking at a property to purchase, you’ll often get presented with the seller’s idea of market rents. Surprisingly, this isn’t always accurate (can’t think of why).

So, it’s crucial that you conduct your own market research.

Look at nearby similar communities, compare their rents to your own. 

Rentometer is a great tool for this, as is Apartments.com, Zillow, Facebook Marketplace, or other ILS systems. Yet nothing beats in-person secret shopping your competition.

The added bonus is feeling like some watered-down version of James Bond, but there are tangible things that don’t come across in staged property photos. 

Once you have an idea of where the market rent is, you subtract the property’s current average rent and you now have the loss to lease.

So easy, a caveman can do it.  In fact, many experts believe they often did. The earliest cave drawings are speculated to be intricate (for the time) loss to lease calculations. Which would make the world’s oldest past time calculating how much money we should be making, and then grumbling about it to our cave-spouses.

In the present, we use this to show how much upside is currently achievable on a property and to determine if the investment is worth making. 

Which brings us to our second use for loss to lease…


  1. Operations

It’s time to put up or shut up.

Put your money where your mouth us.

Go big or go home.

You’ve set your goal and now it’s time to chip away at that loss to lease number, whether through renovations, efficiencies of management, or outright bribery (“concessions”).

Remember this number is not static. As the market rent changes, so does your loss to lease. It’s important to keep your finger on the pulse of the market, that way you make sure your property is always operating at peak performance.

Your loss to lease number is just as critical during operation as it is when purchasing.

Wrapping up

In the real world, some of your units will be near market rent, and others will be very far below.

It’s also quite likely that getting your lower rents to market levels will require significant capital and labor. 

To top it off, the higher paying leases will be the bulk of your organic turnover. The more seasoned resident base paying the lowest rates will find it less attractive to move, especially in rent-controlled markets.

This shouldn’t deter you from the loss to lease calculation. It’s a solid metric, both in acquisitions and operations, but these are factors you need to take into consideration.

How have you been using the loss-to-lease in your portfolio?

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Preferred Return 101

Preferred Return 101

Offering a preferred return (or “hurdle rate”) continues to grow in popularity.

As an investor, it’s very likely you’ve encountered this term at some point. You may, however, be unfamiliar with what it means for your investment and the subtle differences between the various types.

So, what is it and what does it mean for your investment?


Basics First

By definition, a preferred return refers to the threshold return that the limited partners (LP) must receive before the general partners (GP) receive payment.


Traditionally, this is expressed as a percentage return per year. Once the hurdle rate has been achieved, the profits will be split between the LPs and the GPs on a predetermined ratio (sometimes referred to as the “split”).


Preferred Return vs Preferred Equity

Preferred return is not preferred equity, and this distinction is important for your investment.


A preferred return is a preference in the return ON your capital investment. In contrast, preferred equity is a preference in the return OF your capital investment.


Preferred equity sits behind the debt in the capital stack, and investors get their initial investment and set return before any other investors receive a penny.


Preferred equity is similar to an unsecured loan. The lender (investors) receive payments at a fixed rate, and the original capital balance is returned over time and at sale. Much like a lender, preferred equity does not participate in the upside in the property.


Common Equity Investors

Common Equity investors can receive a preferred return, but it can be treated in different ways.


For a “true” preferred return, investors receive profits up to a set percentage before the sponsors get anything.


However, there are instances where both the sponsors and investors receive the preferred return at the same time, in such cases this is referred to as a Pari Passu return.


Fun fact, Pari Passu is French for “on equal footing.” I bet you didn’t think you’d be learning French!


How it is Calculated: Compounded, Cumulative, or Neither


Surprise, there are also different ways in which it can be calculated. The most common are compounded and cumulative.


Compounded means both the unpaid owed distributions and capital account balance are subject to the hurdle rate.


Non-compounded means that only the non-returned capital balance is used in calculations.


Cumulative means that all the money earned in one period, typically annually, that has not been paid out in distributions will be carried forward to the next period. This can also be referred to as an investor “catch-up.”


This is common in investments where the yearly cash flow is typically below the 6-10% hurdle rate. Investors in these projects are “caught up” at disposition.


Non-cumulative means just that, if the return is not paid out in that period, it is not rolled forward into the next.



Wrapping it Up: Why is a Preferred Return Important?

A preferred return is a great way of making sure investor and sponsor interests are aligned. It assures investors that they will receive a set return before the sponsor, and that the sponsor is confident they will reach and surpass the hurdle rate.


Knowing how it is calculated and handled is vital for your investment, be sure to clarify with your sponsor or investors before making any investment decisions.


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10 Ways Recessions Impact Real Estate (& How to Dodge the Worst of It)

10 Ways Recessions Impact Real Estate (& How to Dodge the Worst of It)


Given the recent stock market volatility, many real estate investors wonder, “Are we headed into a recession? How will that affect real estate? And how long is Brandon going to stay committed to that beard?”


The beard is a puzzle that’s baffled scientists for years—but when predicting how the next recession will affect your portfolio, history can be a guide.


Is Real Estate Recession-Proof?


This is a common misconception. Unfortunately, it’s not.


Many silly real estate investors who believed that myth got wiped out during the last recession. But the good news is that real estate can be recession-resistant. With proper precautions and an understanding of recession dynamics, you can prepare your portfolio to navigate choppy economic waters.


I had the great privilege of going through the horrific, Armageddon-like real estate collapse of 2008 with multiple properties. It was like a Michael Bay movie—people screaming in the streets, explosions, cars flipping over…


OK, not exactly. But it could’ve been if they’d have let him direct “The Big Short.”


I had six multifamily properties at the time.


Below I’ll walk you through the economic cause-and-effect patterns that impact rents, values, and the ability to maneuver (sell/refinance) during recessions.


The Pre-2008, 2008, and Post-2008 Investing Climates


It all started pleasantly enough…


I discovered real estate investing in 2000 and loved it. Everyone did. You couldn’t lose. That went on for seven years. Then, 2008 happened.


Lehman Brothers and Bear Stearns, two of the world’s largest investment banks, collapsed. The stock market plunged, and the financial world went into panic mode


Sound kinda familiar?


These events then unleashed an economic chain-reaction. Below are several of the ways real estate was impacted.


 1. Real Estate Investment Activity Ground to a Halt

Shell-shocked investors watched with fear, uncertain how long the economic slide would last. Values were at record highs prior to the crash, and many felt this was a long-time coming. The sense was that things could get a lot worse before they got better.


When investment stopped…


 2. Construction Ground to a Halt

New construction projects, and many already in the pipeline, were put on hold. Investment dollars dried up, because the investors providing those dollars were reeling from their own losses. And confidence that new projects would get completed and be profitable was in doubt.


One thing was certain: The boom clearly over.


Ten million workers are employed by the construction industry. Many are project-based, not salary-based. So when the construction activity stops, a chunk of the labor pool becomes unemployed overnight.


Many other industries are impacted by the health of the construction sector.


Also… in boom years, there’s a tendency to overbuild.


You’d think that building would be based on need. But when the spigot of construction financing flows enthusiastically, no one’s there to monitor how much gets built and turn off the spigot.


The result is oversupply.


There’s a saying that goes, “Boom markets die from oversupply.” Another one goes, “Cranes in the air, investors beware.”


For some reason, there are a lot of cute rhymes about overbuilding. I think Dr. Seuss may have moonlit as a construction economist.


3. Banks Became More Conservative

The recession began with a spike in delinquencies and defaults, which turned into a tidal wave of foreclosures. Lenders who’d made risky loans started going bankrupt, culminating with the world’s largest lender at the time: Countrywide.


So, banks reacted by becoming more conservative, making it difficult for struggling property owners to refinance. And purchase loans were given much more scrutiny.


This conservative lending added to the market slowdown.




4. Renters’ Incomes Went Down

The stock market plunge and growing layoffs caused consumer confidence to drop. People were cautious and spent less. This caused corporate profits to go down, resulting in salary cuts and layoffs.


We were seeing a steady uptick in unemployment.


Many of those laid off were renters, who then struggled to pay rent. Many others were homeowners, struggling to pay mortgages. (I won’t go into the compounding effect of adjustable-rate mortgages, because it was specific to 2008. The intent here is to highlight general recession patterns.)

5. Renters Sought Cheaper Alternatives

Renters in high-priced, A-class apartments moved down to more affordable B-class units. Others moved in with friends, or back home with their parents. There was a “renter consolidation” that caused…


6. An Uptick in Vacancy

It was most pronounced in A-class properties, but it was felt at all tiers and exacerbated by the overbuilding of recent years. Much new construction tends to be A-class, because it’s the most profitable.


However, apartment vacancies were mitigated, because a new pool of tenants was entering the market…


7. Former Homeowners Became Renters

Job cuts caused many struggling homeowners to fall behind on their mortgages. Here’s yet another downer saying, “Recessions create renters.”


Not as catchy. It doesn’t even rhyme.

This brought some stability to multifamily occupancy levels.

But due to the confluence of factors—oversupply, lower incomes, investor fear, and tightened lending…


8. Property Values Declined

Single-family residences were hit the hardest. There were far more sellers than buyers.


Also, SFR values are based on buyer sentiment (or “emotional buyers”). The emotion had been irrational exuberance during the preceding years, but now it was fear.


Multifamily values were more stable, due to their income stream supported by leases. But that didn’t mean multifamily properties were in the clear.


Rent growth stalled, transitioning into rent declines in some locations hard-hit by the recession.


Additionally, unit class mattered. Rent drops were most precipitous in A-class, as many tenants could no longer justify paying top-of-the-market rents for luxury units. Many A-class renters relocated to B-class properties.


Meanwhile, to address the turmoil…


 9. The Fed Stepped in and Lowered Interest Rates

It was an attempt to stimulate the economy, and it provided a lifeline for many property owners in trouble.


Owners who were not in trouble (aka were prepared for the recession) had an opportunity to refinance at rock-bottom rates, improve the health of their portfolio, and navigate out of the storm.


But the lenders were still reeling from their losses. And as values went down, they were enforcing the “maximum loan-to-value” clause—a clause often forgotten in normal times because loan balances go down and property values go up.


But during recessions, when property values slide, borrowers who had been at max leverage (often 75 percent LTV) find themselves having to pay down their loan to meet the required LTV.


What does this mean?


Basically, if you bought a property for $1,000,000, and the lender’s max LTV (leverage-to-value) is 75 percent, they will give you a $750,000 loan. But if for any reason your property value drops to, say, $900,000, your $750,000 loan has now increased to 83 percent of value. So, the lender will require you to pay down the loan to get to 75 percent LTV.

$900,000 x .75% = $675,000

Therefore, you’d be on the hook to fork over another $75,000.

This happened to me.


I had to pay down a loan by $95,000 to meet the LTV requirement. The upside, however, was that due to the Fed’s rate cut, my interest rate went from 4.5 percent to 3.5 percent, and my loan balance was now lower—resulting in a big boost to cash flow.


And luckily, I had the reserves to make that $95,000 payment!




10. Where You Invested Mattered

Each market experienced the recession differently. The severity and recovery timeline varied depending on where you were. Markets with diverse economies were the most resilient.


Prices recovered sooner in major markets, as cautious investors sought the safety of top-tier markets.


Those top-tier markets then became the first where prices became overheated as the economy recovered, so investors moved on, seeking returns in secondary and tertiary markets.


And the whole cycle began again…


Key Takeaways from the Last Recession

  • Don’t over-leverage. Especially late in a boom market.
  • Be prepared for rent volatility. Many investors don’t realize rents can go down. But they do!
  • Have reserves, and bolster your cash positions (no-brainer).
  • Monitor the supply of new units being built in your market. (I make a point to invest in cities where it’s very hard to build.)
  • Buying value-add helps—you can offset declining values through forced appreciation.
  • Avoid A-class properties, or bolster those reserves. (I’m not anti-A-class, but I prefer to buy these premium assets coming out of a recession, when they’re beaten up and bargain-priced.)
  • B & C-class multifamily is most stable (but not immune). This was my experience, and statistics seem to support it.

Rent Declines 2008-2010 and Rent Growth 2010-2018


I’m fortunate that all of my multifamily properties survived the 2008 recession. And yours can, too—just prepare!


I hope this was helpful and good luck!


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9 Ways to Survive (and Thrive) During the Next Market Crash

9 Ways to Survive (and Thrive) During the Next Market Crash

Interest rates have been rising. Single family residence prices are softening. Does that mean we’re headed for a downturn?


Well, sure—at some point.


Recessions have been around forever—they’re an unavoidable part of the investing landscape. But you don’t need to fear them. You can prepare for, and even thrive, during a recession if you have the right tools and strategies.


This is the story of my first recession. As recessions go, it was a doozy.


Getting Started


Throughout the 2000s, I was pumping every dollar I earned into value-add multifamilies in up-and-coming neighborhoods in Los Angeles, like Koreatown and Hollywood. I loved it. I was a multifamily evangelist.


But by 2006, nothing seemed to make sense, and, like a lot of investors, I was anticipating a downturn.


That’s right—the correction didn’t come out of the blue. The warning signs were everywhere. Reckless lending practices combined with the irrational exuberance of the market had most sensible investors cowering for what was to come.


I stopped buying in 2006, waiting for the inevitable correction. I’d be ready to jump in, lock in discounted “correction pricing” before values once again reverted to their upward, long-term trajectory.


Timing the Market


It came in early 2008. Prices slid 10%, then started to tick back upward. This was my chance, and I jumped in. I found a C+ class multifamily property with cashflow and value-add. The sellers were suing each other and were motivated to sell. It was a great deal.


And pretty sweet market timing on my part. Right?


Not exactly. It turned out that this 10% decline wasn’t the end of the correction, it was just the beginning. That tick back upwards in values? It was caused by investors like me, waiting on the sidelines to jump in after a correction. We all jumped in, and it caused an uptick.


But we were still at the top of the waterfall.


A Seductive Temptress


I’ve read that this is a common occurrence during recessions. There’s a portion of investors anticipating a downturn, who wait on the sidelines, ready to jump in once prices correct. After a 5-10% decline, the first wave of side-liners jumps in to lock in the discount. This wave of buyers results in a slight uptick in the market. The uptick is misinterpreted by the rest of the sideline investors as the correction being over, and they rush in so as not to miss it! But the reality is that the crash has just begun. And they all go over the waterfall.


They call it the seductive temptress of a market crash. It takes down the foolish investors, but seduces otherwise smart ones as well. Cruel—but kinda funny, right?


I was one of those idiots.


To make matters worse, I’d convinced some work colleagues to invest with me. We bought with confidence, feeling good about our price. But then Lehman Brothers collapsed—and along with it, our entire economy and real estate market. We entered the worst real estate crash in the last 50 years.


It was Armageddon.


My greatest dread was losing my colleagues’ money. (I would much rather lose my own money than to have people trust me, then blow it.)


A Resilient Asset Class

As real estate news got more and more grim—mass foreclosures, investors walking away from properties—something strange was happening at our C+ class building. Rents were actually inching upward.


Renters in higher-end properties were facing layoffs and salary cuts, causing them to move into more affordable, mid-tier units, like ours. And former homeowners were becoming renters. During the recession, demand for this asset class actually increased.


The recession was nerve-racking, but fortunately, we survived. I was able to deliver my work colleagues triple their money (crushing the stock market returns during the same period). I felt more relief than triumph.

9 Takeaways From the Great Recession

The experience taught me a lot about recession-resilient investing. I’d completely mistimed the market, but was saved by other factors—some that were part of my strategy, others accidental.

Here are strategies I now use to invest with confidence in any market:


1. Stick with B and C-class properties.

I have no problem buying A-class buildings at the beginning of a recovery—when I can buy them cheap. In late stages of a real estate boom, they’re overpriced and I avoid them like the plague. I also avoid turnkey. The high end of the market is the first to get slaughtered in a bad downturn. I aim squarely for mid-tier properties I can improve!


2. Multifamily is resilient.

Recessions tend to create renters, so multifamily tends to be resilient during downturns. From 2008-2012, 8 million single-family homes went into foreclosure. During the same time, multifamily default rates were less than 1%.

3. Buy as cheaply as possible.

The saying goes, “You make your money when you buy.” If you want to overpay, do so at the beginning of a market recovery. But not now. Prices are high, but deals still exist. Be patient. Make sure you’ve got that cushion that will allow you to absorb declines in value that could wreck other investors. Learn how to negotiate. Battle for the best price possible.

4. Cash flow is a must.

Late in a real estate cycle, positive cash flow is a must. I make sure the buildings I buy generate income from day one. An added benefit of this is that you get a better loan-to-value. Bonus! An adjunct to this is: Don’t over-leverage. Only borrow what the property’s cashflow will cover.


5. Buy in an up-and-coming neighborhood.

Even during a downturn, submarkets are evolving. Some evolve in response to the downturn—renters move out of pricier areas into nearby, more affordable neighborhoods and then make them cool! This lead to the birth of neighborhoods like Silver Lake, in LA, a neighborhood that is downright posh now. Catch neighborhoods on the rise.


6. Beware of oversupply.

Another saying goes, “Most real estate booms die from oversupply.” Keep this in mind. Supply and demand is a basic fundamental of investing. Overbuilding is a growing concern in several markets, especially at the high end of the market. Track your metro’s supply/demand stats, absorption rates, etc., so you don’t get caught.


7. Add value.

This is a must for me in any economy. If you can reduce expenses or increasing cashflow with strategic renovations, you are increasing the value regardless of the economy. So you don’t really need to worry about it. It’s another layer of cushion.

8. Have cash reserves.

This is basic common sense and key during any stage of a market cycle. The reality is your expense projections will usually be too low. Be prepared with reserves.


9. Don’t try to time it.

I tried to time the market and failed. Market cycles are predictable, but the timing of them is not. Our economy is too complex to know the event that will trigger the investor fear and cause a recession.

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Investment Principals

Investment Principals

Investment Principals

1. Risk Mitigation


We invest conservatively during all phases of the real estate cycle, buying only properties that can be acquired significantly below market value, in up-and-coming neighborhoods where values are rising faster than the Los Angeles median. 

We buy properties with positive cash flow, plus the potential for significant value-add.  We buy B and C-class properties, the segment of the rental market in shortest supply, and highest demand. 

This demand only increases during recession, when renters move down from more expensive A-class units.  This has proven to be among the best risk-adjusted investment strategies during all market phases.

2. Transparency 

We take the privilege of being stewards of your hard-earned capital very seriously. 

We seek to provide clarity and full disclosure throughout all phases of the investment cycle.  From acquisition to operating strategy to disposition, we allow investors access to our process, and the information they need to be as integrated in the decision-making process as they desire.

3. Discipline + Experience

We have two decades of experience, and an intimate understanding of the neighborhoods we invest in, along with extensive broker relationships.  Due to our track record, we are given first shot at some of the most undervalued properties and exceptional deals. 

We then put our knowledge and experience to work adding value and decreasing expenses in multiple ways through our value-add business plan. This has resulted in exceptional returns in good markets and bad.

4. Impact Our Communities

We believe that by improving the often-neglected living spaces that we purchase, we’re generating a better experience for our tenants, and improving the community at-large.

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Why We Like Los Angeles Multifamily

Why We Like Los Angeles Multifamily


Why We Like Los Angeles Multifamily


 Los Angeles is a diverse economy with a growing population.

It’s experiencing a severe shortage of rental units, and renters are becoming an increasing portion of the population due to the the prohibitive cost of single-family homes.


Recent interest rate increases are only pushing homeownership further out of reach for most residents. This has resulted in a chronic lack of supply.


Simple Supply & Demand


For the next 10 years, the Los Angeles economy is projected to add 60,000 jobs annually, yet add only 10,000 housing units. This failure to meet the housing need is due to several factors: the lack of available land, the city’s difficult permitting process, and an anti-development regulatory environment. These combine to make LA a notoriously difficult place to build.

Thus, the gap between supply and demand, already a problem, will only grow.

For comparison, Dallas, a city with half the population of LA, annually builds twice the apartment units. The saying goes, “Most real estate booms die from oversupply.”  This seems unlikely in Los Angeles.

Even with new supply, occupancy rates are at 96.5%, among the highest in the nation.

These factors have contributed to the steady rise in multifamily values. Even during the real estate collapse of 2008-2011, which saw mass single-family home foreclosures, Los Angeles multifamily had a default rate of less than 1%.

A Gateway City


Another factor in the Los Angeles real estate market has been foreign investment. In the past decade, the rest of the world (i.e. China and India) has become more affluent, and foreign investment in U.S. real estate assets has increased dramatically. 

Despite its political challenges, the U.S. remains the world’s most stable political system, strongest economy, and the dollar its most stable currency. In short, this is where the rest of the world parks its wealth. 

Foreign investment in U.S. real estate reached a record $351 billion in 2017. And coastal, “gateway” cities like Los Angeles, New York, and Miami received the vast majority of this investment.

As the insatiable demand for Los Angeles multifamily grows, there has been an increase in new units being built. However, these new units are overwhelmingly luxury, A-class units. This is not due to need, but because after land, permitting and regulatory costs are factored, these luxury units are the only ones that pencil out for builders.

The units most in demand by far are affordable, “B and C-class” apartments, which remains, and will continue to be in severe shortage.

This is what we invest in.

Los Angeles, B and C-class multifamily is the most stable, recession-proof asset class, and it is the most poised for continued price-appreciation.

Our returns bear this out. During the 2008 real estate collapse and recession — the most severe in 50 years — our investors tripled their money. The buildings we owned saw increased demand during the recession, due to renter flight from high-end apartments into more affordable ones, and many homeowners turning into renters.

Over the last three years, Los Angeles asking rents have increased by an average of 5.9%/year, occupancy rates are currently at 97.1%, and the population is projected to grow 3.5% for the next 5 years.

Reasons to Love Multifamily


  • Currently the most tax-favored asset class.

  • Historically proven to be a hedge against economic volatility and inflation.

  • Recessions only increase rental demand.

  • Property value is not economy-dependent: experienced operators can push value upward in any economic environment through increased rents, adding streams of income (storage, laundry, parking), and reducing expenses. These strategies “force” appreciation upward in good economies and even hostile ones.

  • Multiple engines of growth work simultaneously: rent growth, appreciation, loan paydown, depreciation tax benefit, value-add improvements.

  • Intelligent use of leverage then magnifies this growth.

Forbes, 9/17/18:


Six Fundamentals of Supply and Demand That Multifamily Investors Should Know

“The Urban Institute declared, “We are not prepared for the growth in rental demand.” The research indicated that from 2010 to 2030 for every three new homeowners, there would be five new renters. And in 2017, the National Multifamily Housing Council (NMHC) and the National Apartment Association (NAA) weighed in: 325,000 new units, on average, are needed each year through 2030, yet an average of only 244,000 new units came online annually from 2012-2016.”

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