The Lightstone Letter — May 2026

What Holds Together

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"The rules of economics are not working in quite the way they used to." That was Arthur Burns, Federal Reserve chairman from 1970 to 1978, writing in the mid-1970s as U.S. inflation refused to behave the way the textbooks said it should. "Despite extensive unemployment in our country, wage rate increases have not moderated. Despite much idle industrial capacity, commodity prices continue to rise rapidly." Burns's frustration is the sound of a central banker watching his frame collapse in real time. He was, it turns out, looking in the wrong place.

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In a February 2026 paper for the Dallas Fed, the economist Lutz Kilian argues that what actually destabilized inflation in the 1970s was not the oil shocks Burns and his contemporaries kept citing (inflation was already running near 7% before the first oil crisis in October 1973), but the unprecedented U.S. monetary expansion that began in 1971 after the collapse of Bretton Woods. The Fed, Kilian writes, had a habit of explaining inflation in terms of "special factors," namely: unions, food, and oil. The deeper cause it kept overlooking was the monetary environment it had created.

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That does not mean the next phase of the cycle will rhyme with the 1970s. Today's inflation prints come with explanations. This one was energy, the last was services, and the one before that was supply chains or tariffs. They have a familiar shape. Each story is plausible on its own. The risk isn't that any individual explanation is wrong. It is owning a portfolio that needs each of them, in turn, to be correct. That portfolio requires inflation to moderate in a textbook manner when the current special factor passes, and the next, and the next. In the 1970s, that bet was wrong for the better part of two decades.

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The Fed without a clean path

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The U.S. economy is not in recessionary trouble in any immediate, obvious sense. It is, however, putting the central bank in a more constrained position than it was even a few months ago:

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• Real GDP increased at a 2.0% annualized rate in Q1 2026, but the PCE price index rose at a 4.5% annualized pace, with core PCE up 4.3%.
• April payrolls rose by 115,000, the unemployment rate held at 4.3%, and, per the Bureau of Labor Statistics, payroll employment shows “little net change” over the prior twelve months.
• April CPI rose 0.6% month-over-month and 3.8% year-over-year, after March’s 0.9% monthly increase. Energy rose another 3.8% in April and accounted for more than 40% of the monthly CPI increase; core CPI rose 0.4% month-over-month and 2.8% year-over-year.
• The Fed’s April 29 FOMC statement described economic activity as expanding at a solid pace, job gains as low on average, inflation as elevated partly because of global energy prices, and developments in the Middle East as contributing to a high level of uncertainty.

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The Fed cannot cut aggressively without risking a reacceleration of inflation that has already proved sticky. It cannot stay restrictive without further softening a labor market that has cooled but has not gone cold. 

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The Iran-Hormuz crisis is the live manifestation. Shipping through Hormuz has been severely restricted, with Iran permitting only selected vessels through, and the U.S. blockade focused on Iranian ports and oil shipments. Before U.S. and Israeli operations began, roughly 130 ships transited the Strait each day; by early May, a much lower number was risking passage.

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The market is no longer repricing around a single oil-price level so much as around each new escalation, peace proposal, and reopening headline. The EIA now assumes the Strait remains effectively closed through late May, with flows beginning to resume in late May or June, and that most pre-conflict production and trade patterns will not normalize until late 2026 or early 2027. 

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This is the price of daily liquidity. But the deeper issue, for portfolios built on beta, the unspoken assumption that the market will, given enough time, cooperate, is that a cross-pressured regime can undermine conventional diversification. In 2022, the standard 60/40 portfolio fell roughly 17%, its worst year since 1937, as stocks and bonds posted simultaneous declines for the first time since 1969. "Stay the course through periodic turbulence" is durable advice when the turbulence is genuinely periodic. This philosophy doesn’t hold when turbulence is a core feature of a regime. 

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The portfolio question changes

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In a clean expansion, the question is "what goes up most?" In a clean recession, "where do I hide?" Both presume the market is heading somewhere identifiable. The harder question, when the macro is cross-pressured, is more modest. What holds together? When the rules of economics don’t work quite like they used to, which asset classes (and what portfolio allocation) gives you the best shot?

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The alternatives an accredited investor is weighing today are not equally exposed to that question. Public equities will keep moving with sentiment about the next print or the next FOMC meeting. Semi-liquid private REITs offered an attractive blend of scale and periodic liquidity through the easy years. The 2022–2024 redemption cycle was a useful case study: when sentiment turns, redemption mechanics dictate investor outcomes to a greater degree. It becomes less about the underlying values, more about gates that cap how much you can take out, NAVs that may not have caught up to those values. A liquidity feature, after all, is only as good as it is on the day it is needed. Bonds at current yields are doing some of the “counter-weighting” that bonds are supposed to do, but their forward returns are largely a rate-path story. Cash is sensible at the margin but not a strategy in itself.

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The asset class we keep coming back to is multifamily housing, and the case is narrower than "real estate."

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Multifamily, narrowly defined

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Renter household formation has been the strongest part of an otherwise constrained U.S. housing market. 

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The Census Bureau's Q1 2026 Housing Vacancy Survey, released April 28, put the count of renter-occupied housing units in the U.S. at approximately 46.4 million, an increase of roughly 570,000 from the prior quarter, with the renter share of total housing inventory rising to 31.2% and the homeownership rate remaining historically constrained at 65.3% (just 240 basis points from the all-time low). 

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The composition of that demand is also shifting. Per Harvard's Joint Center for Housing Studies' America's Rental Housing 2026, the number of renter households earning $75,000 or more grew by 1.7 million between 2021 and 2024, meaning the renters entering the pool are increasingly the same households that, in a more normal homeownership market, would have transitioned into buying. Homeownership remains constrained by elevated prices and financing costs, as well as less obvious inflationary deterrents like rising home insurance costs. Renter household formation soldiers on. Stabilized occupancy has held high through what was, by some measures, the largest apartment delivery cycle in forty years.

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Some telling stats from RealPage's Q1 2026 update:

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• Approximately 93,300 apartments absorbed in Q1: one of the strongest first-quarter figures of the past decade
• Annual new supply down to roughly 367,000 units, from a peak above 589,000 in late 2024
• Stabilized occupancy at 94.9%; effective asking rents still 0.5% below year-earlier levels

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That is a market in transition. The supply wave is still being digested, but new starts have collapsed because the unit economics no longer support delivery at today's costs. The forward setup looks better than the trailing one, assuming an investor owns (or can buy) the right thing.

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The listed apartment REITs broadly support this narrower reading of the market. Their results have not suggested a frictionless recovery; new supply has mattered, and new-lease growth has been uneven. But the recurring pattern — resilient occupancy, healthier retention, positive renewal spreads, and a forward decline in deliveries — is consistent with a market moving from supply digestion toward operating recovery.

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The most interesting segment, in our view, is workforce-oriented Class B: older stabilized assets in markets with structural undersupply at the workforce price point. New Class A development does not compete with Class B in any direct sense, and new Class B construction in most markets is essentially zero, because today's costs do not support delivery at the rents the segment supports. The gap between in-place Class B values and replacement cost is substantial, and that gap insulates the segment's pricing from the broader supply story. It is also a segment where operator execution — renovations, utility billbacks, insurance procurement, lease management, collections, financing structure — drives a meaningful share of returns, in a way it could not when cap rate compression was the engine from 2010 to 2021.

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That operating leverage shows up in our own first-party data. As of March, 2026:

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• Lightstone’s multifamily portfolio (well over 20K units) saw rents up 2.3% year-over-year
• Collections loss down 33%, and NOI up roughly 4% year-over-year (a little more than 2% ahead of budget). 
• Physical occupancy averaged 94.4% in Q1 and rose to 94.8% in April
• Revenue per unit was up roughly 4% versus Q1 2025
• Renewal retention improved to 54.5% in Q1 and 60.1% in April; and renewal increases remained in the mid-single digits. 
• New-lease replacement rents were still slightly negative in Q1, but turned positive in April, which is the kind of gradual, operator-driven improvement we would expect in a market still digesting supply. 

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The Lightstone DIRECT Position

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Investors do not need to predict every Fed move, every inflation print, or the next leg of the public-market cycle in order to build a portfolio for the years ahead. However they may want to own assets whose returns do not require textbook inflation dynamics to play out. That is the case for workforce multifamily today: necessity-based demand, supply that has already turned, and a basis potentially well-below replacement cost. 

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The right portfolio for this environment is not the one that wins if the macro turns out the way you expected. It is the one that does not need you to be right.

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Sources: Lutz Kilian, Lessons from the destabilization of inflation in the 1970s, Dallas Fed Economics, Feb. 17, 2026; Burns quotation from his Reflections of a Policy Maker (1978), as cited in Kilian (2026); BEA Q1 2026 GDP; BLS March 2026 CPI; BLS April 2026 Employment Situation; Federal Reserve April 29, 2026 FOMC statement; RealPage Q1 2026 Apartment Market Update; Jason Ma, Markets sell off as U.S.-Iran ceasefire plans go nowhere…, Fortune, May 10, 2026; Morningstar, The 60/40 Portfolio: A 150-Year Markets Stress Test; U.S. Census Bureau, Q1 2026 Housing Vacancy Survey (April 28, 2026); Harvard Joint Center for Housing Studies, America's Rental Housing 2026. Lightstone portfolio metrics as of Q1 2025 from internal data. Past performance is not indicative of future results.

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