The Iron Law of Supply

Why real estate markets that can’t build more are built to last

Most of the greatest real estate fortunes — in history — were made by owning what others couldn’t obtain but desperately wanted.

Not by chasing growth.
Not by getting early to the next boomtown.

But by owning scarce, irreplaceable assets in cities where supply couldn’t scale.

Think: Manhattan. San Francisco. Paris. London.
Places where red tape, land constraints, and regulatory drag don’t just slow development — they protect pricing power.

Meanwhile, cities like Austin, Phoenix, and Tampa exploded during COVID… and then gave much of it back.

This piece explores why supply constraints drive long-term wealth - even in stagnant markets - and presents a data-backed framework comparing constrained vs. elastic cities across 13 years of rent data.

We’ll also pull from history - from Imperial Rome to modern-day Paris - to show why scarcity, not just demand, is the most predictable source of enduring returns.

Because you can’t compound what anyone can easily copy.

Zoom out and think of it this way:

There are two drivers of price growth - rising demand or limited supply.
You can bet on demand if you want. But it’s a bet.
Supply constraints? Those are structural. Predictable. Durable.

In many urban-core, blue-state markets, that scarcity is all but guaranteed — enforced by regressive local politics and chronic underdevelopment.

The Supply Gap Is Real (And Growing)

Start with the basics: how much housing is built per capita. As of the latest data, 2025, here’s a good cross-section comparison of housing permits per 1000 people.¹

Now, the first thing to note is that both Phoenix and Austin are well ahead of either of the more classically supply-constrained markets (Seattle & San Francisco).

A wise observer might say - well, that’s fair because Phoenix and Austin are also experiencing greater population growth. So, as a result, they should build more in anticipation of said growth.

Now compare that to:

It gets worse when you factor in population growth. As of 2025:

• Seattle is about 71,060 housing units short

• San Francisco Bay Area is ~51,000 homes short

• Portland is ~45,000 homes short

The takeaway is clear: the entire West Coast — and core cities like Manhattan and Miami — remain deeply undersupplied.

These shortages persist because building new housing in these markets is hard by design: zoning restrictions, height limits, CEQA reviews, neighborhood opposition, urban growth boundaries — take your pick. These cities have created real estate bottlenecks. And when demand keeps growing while supply stays flat, rents and values have only one direction to go.

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What This Means for Rents and Prices

Okay - so you might say - what’s your point? People are making money in “over-supplied” markets too.

While supply-constrained markets don’t always have the highest rent growth, they offer more durable and predictable growth — which may matter more over time.:²

• Seattle rents grew ~4.97% annually (2012–2025)

• San Francisco ~3.90%

• Portland ~4.97%

Compare that to more elastic cities, where rent growth is more volatile:

• Phoenix surged in the 2020s but is now softening under new supply (annualized rate since 2012 is 4.69%)

• Austin boomed during COVID, then corrected as vacancies rose (2023 -2.1% estimated, 2024 -4.3% estimated, and 2025 so far -2.3%)

• Tucson remains relatively affordable, with slower rent growth

For some further data, consider this. In 2023, Phoenix issued 20,837 multifamily permits (4th highest nationally) and 24,810 single-family permits (3rd highest) despite an 8% year-over-year decline in housing activity. As of early 2024, the Phoenix-Mesa-Chandler area was on track to approve over 58,000 residential building permits- a 23% increase over its three-year average pace.³

Consider how serious this elasticity situation is. The building of new housing was in response to soaring demand. But what if the demand drops? By contrast, many of the coastal blue-state markets might have growing demand but a relatively inelastic supply of new housing - meaning rents stick.

But here’s where things get interesting. You see, it’s not just rent growth (or housing price growth) but the volatility of said growth.

Here’s why. Supply constrained markets tend to deliver less volatile rent growth over time. Why does that matter? Because timing your entry into these markets is less impactful.

For instance - Austin rents spiked 14% and then 46.9% during COVID. See below.

That level of volatility is genuinely wild. And imagine you invested in Austin at the end of 2022. You probably massively overpaid for the property and then walked into three consecutive years of rent losses.

Timing really matters.

I took the Rent CAGR 2012 - 2025 for various cities and then we determined the rent growth volatility classic example (Standard Deviation %).

To my knowledge, this may be the first direct comparison of rent CAGR and volatility across major U.S. metros — and it reveals some powerful implications.

To be fair, some of Austin’s volatility reflects its extraordinary COVID-era population boom. But that’s the point: these growth stories often hinge on timing.

The story is still relevant because a lot of the arguments around Sunbelt real estate focus a LOT on population growth. Not supply constraint. Population growth is decelerating in many Sunbelt markets, reducing the margin for error that investors came to expect during COVID’s surge.

Below, we’ve taken the annualized rent growth from 2012 to 2025, determined the standard deviation of said growth, and then backed into what we call the Sharpe Ratio in the stock market. I call it “Growth for Risk” below.

The closer you get to 1, the better your ride should be (in theory).

So there are a couple of things you can take from this. Higher standard deviation can mean a lot of things - it can mean rents shot up, over and over again, and had massive gains. It can mean huge volatility. I think, generally speaking, it implies volatility - both up and down. Which means you have to get your timing right.

And timing - unlike scarcity - is not something you can systematize.

Volatility isn’t always a problem — if you’re a long-term holder with ample liquidity. But for most real estate investors, especially those on 5-year business plans, it creates real timing risk.

Now, it’s essential to caveat all of this. Rent growth alone doesn’t mean a lot. It’s relevant but not the only factor. What you’re buying for matters, too. What your cap rate is matters. What your interest rate is matters. But this attempts to cut through the noise and extrapolate some relevant information - volatility does matter.

Yield vs. Scarcity: Why Cap Rates Differ

Supply constraints show up in investor behavior. Cap rates in constrained markets are consistently lower but for structurally different reasons.

Major Coastal cities (Seattle, San Francisco, Manhattan, etc.) have historically received lower cap rates. The reasons are many. They’re highly in demand (generally). They have strong business growth (historically). They were (historically) a great place for international investors to park capital, and major institutions favored them. All of that conspired to drive down cap rates and kept them low.

I would argue that these structural reasons still exist (albeit we don’t have quite the same inflows of foreign capital today that we had during the 2010-2020 period.

In elastic markets, by contrast, cap rates compress when investors extrapolate growth. That’s fine — until supply floods in and those assumptions break. Volatile markets reward timing. Constrained markets reward patience.

At times (like in 2021-2022), cap rates compressed across the board, and investors were paying 4% in Phoenix — essentially betting on growth. But those moments don’t last. Imagine betting on growth for the market, then seeing record high production of new housing, and then population growth dips. Because that’s basically what happened.

When supply comes online, rents level off, and yields reset. In SF and Seattle, supply simply can’t respond that fast.

So the rent gains, even modest ones, stick.

The Role of Policy and Politics

Markets like SF, Portland, and Seattle don’t underproduce by accident. Policy choices make it happen:

• San Francisco: Avg. entitlement time ~523 days + 605 days for permits

• Portland: Urban Growth Boundary blocks sprawl

• Seattle: Until recently, ~81% of residential land was zoned single-family despite record housing shortages

Meanwhile:

• Austin: Permissive zoning, explosive suburban growth, weak environmental review

• Phoenix/Tucson: Rapid annexation, favorable zoning, Prop 207 limits regulation

These policies have consequences. In SF, the city added just 2,807 homes in 2022 — a fraction of what's needed. Portland’s UGB has barely moved in decades while its population surged. Seattle’s new zoning reforms may help, but it will take years to unlock meaningful supply.

Or consider Portland - our home base. I’ve shared this chart before, but it’s worth highlighting (again). Portland forced Inclusionary Zoning rules that made new development unprofitable. The net result was that larger multifamily buildings are no longer being built at the same level. We have a proliferation of smaller buildings getting built to get under the IZ rules - which is not efficient. But it’s good if you’re an asset owner.

What History Teaches Us: Paris, Rome, and Beyond

This isn’t a new phenomenon. History is full of cities where housing scarcity created long-term pricing power:

• Ancient Rome had severe rental shortages and enacted early rent controls. Multi-story insulae were built to cram people into limited space. Scarcity was so acute that emperors subsidized housing to avoid unrest.

• Paris has faced strict height limits, preservation rules, and tight municipal boundaries. As a result, housing production has lagged behind demand for decades, leading to a sharp rise in rents and prices. Paris real estate is now considered a global safe asset — not despite its constraints, but because of them.

• Postwar cities like London and Berlin saw affordability erode after years of suppressed supply. In Vienna, the city responded by directly building social housing. But where the market was left to itself — and building was restricted — prices rose, and access fell.

In all these cases, scarcity drove value — and created long-term advantages for those who owned the existing stock.

The Investor’s Takeaway

There’s no question that supply constraints contribute to housing unaffordability. But if you’re an investor, they also represent a structural edge.

When it’s hard to build:

• Rent increases are more durable

• Cap rates compress (increasing valuations)

• New competition is rare

• Demand shocks (like tech booms) translate quickly into pricing power

Sure, you’ll have to navigate political risk: rent control, regulation, local hostility to landlords. But over 20+ years, constrained markets have delivered outsized returns — not because they’re easy, but because they’re hard to replicate.

If real estate is a game of location and leverage, scarcity is your moat.

There’s a reason the world’s great fortunes were built on land. Not just because of what land is — but because of where it is, how it’s governed, and how hard it is to duplicate. In a financialized age, true scarcity is rare. But in real estate, it’s still the moat that matters.

Act well. Think wisely. Build something Timeless.

1. Annualized from January 2025 data via FRED

2. Data from 2012 to 2019 are sourced from the U.S. Census Bureau’s American Community Survey. Figures for 2020 to 2025 are estimates based on available reports and market analyses.

3. U.S. Census Bureau, New Private Housing Structures Authorized by Building Permits for Phoenix-Mesa-Chandler, AZ (MSA) [PHOE004BPPRIVSA], retrieved from FRED, Federal Reserve Bank of St. Louis