For the past couple of years, the prevailing sentiment in multifamily has been that better times are only six months away. Transaction volume was expected to rebound, driven by the looming maturity of high-leverage bridge loans made in 2021 and early 2022, coupled with surpassing “peak supply” in most markets, leading to a tailwind in operations.
That optimism hasn’t quite matched reality—yet. But the underlying thesis remains intact: Both capital markets and fundamentals will improve. The real question is: When?
Holes in the “Wall of Debt Maturities”: As we experienced during and after the Great Financial Crisis, loan maturities can be fungible during times of economic or capital market distress. Borrowers want to hold onto assets as long as possible in hopes of a market correction, and most lenders are not desirous, or appropriately staffed, to take back assets when values are at or near the trough. The bottom line is that no party is eager to post a loss, which leads to extensions and loan modifications. However, just as corn doesn’t grow to the sky, loans will not be extended into perpetuity, and many of the 2021-2022 vintage acquisitions will be exited in the next year or two.
Supply Delays Are Dampening Recovery: One of the easiest components to track and make near-term predictions about in multifamily is new supply. However, deliveries often arrive slower than expected. That’s especially true recently, as supply-chain issues, some driven by tariff policy, have further delayed timelines. The net effect has been a delayed peak in many markets, which has served as a wet blanket on property-level performance.
Slow, Uneven Improvement in Property Performance: Despite what feels like a recessionary environment in the interest-rate-sensitive industries, the macro-economy has been resilient overall. As a result, renter demand has remained relatively strong and steady. However, the timing of new supply deliveries has prevented a more linear improvement in property-level performance. Early in 2024, we saw the first “green shoots” in our broader Sun Belt portfolio as weighted average lease trade-outs turned positive. Disappointingly, the positive momentum stagnated in the second quarter of 2024, a period where we typically see acceleration in performance, as the delayed peak occurred for some MSAs and submarkets. Looking ahead, we anticipate rent growth will remain in the very low single digits for the remainder of the year and remain optimistic that we return to historical average levels by mid-2026 as supply/demand reaches balance.
Where Is the Distress?
With the exception of some highly leveraged acquisitions made just before the height of asset values in 2022, distressed exits in the Class A/B space for multifamily have been very limited. That doesn’t mean asset owners haven’t needed to inject additional capital to buy more time or take various measures in how the properties are operated. Still, so far, the investment opportunities in that buy box have been very limited.
Recaps and Preferred Equity to the Rescue: The “soup du jour” for many capital providers since 2022 has been equity recapitalizations and preferred equity positions, which have provided the breathing room necessary for sponsors/owners to avoid sales at inopportune times.
Not So Rosy for Class C Product: On the other hand, values for Class C assets fell further than Class A/B due to deeper operational issues, primarily related to bad debt, and investors raising return expectations to take on the additional risk inherent in this segment. The combination of impaired property-level net operating incomes (NOIs) and higher cap rates makes much of this segment virtually illiquid until lenders take complete control. Lender-controlled sales are becoming more common, but it appears to still be in early stages and we expect more shoes to drop in that space.
Market Selection—Buy the Dip or Take the Safer Bet?
For the remainder of the year and likely into 2026, markets fall into two broad categories—the high-growth MSAs experiencing weaker operating performance (much of the Sun Belt) and the established, low or national average growth cities with a more balanced supply/demand picture (Midwest and coastal cities). A case can be made to invest in either, but eyes must be wide open to the different risk factors for each.
Buy the Balanced Markets (Midwest/Coastal): Slow-and-steady cities are winning on near-term performance. By most performance metrics, both in recent history and near-term projections, the best asset-level fundamentals remain in the slow and steady cities. Fogelman has long had a presence in some of the Midwest markets that fall into this category, with Kansas City, Missouri, being one of our largest by unit count, and these areas continue to outperform most of our Sun Belt territory.
We expect these markets to continue to grow rents and maintain occupancy at a superior level for the next couple of years, albeit far from the incredible performance level we’ve seen in the Sun Belt pre-2022. On the downside, more investment capital has migrated to these once-sleepy markets, and, because of increased competition in the buyer pool, investors should not expect to find bargains in these cities.
Make a Bet on Post-Peak Supply in Higher Job/Population Growth MSAs (Sun Belt): Despite the recent and future near-term expected underperformance of most Sun Belt MSAs, the underlying factors that supported outsize growth in the past still exist today—migration patterns have slowed to pre-COVID levels but still clearly favor the Sun Belt cities. Employment continues to grow above the national average as companies seek skilled labor, but at a lower cost and in a more business-friendly legal environment. A compelling argument can be made that NOI is only temporarily depressed in these markets and should return to above-average growth once the supply wave has cleared. The drawback to this investment profile is that going-in yields remain low in the growth markets, and performance is likely to stagnate or slowly recover in the first couple of years, so patient capital is needed.
The Alternative? Sit on the Sidelines: Not all that long ago, the total return (often measured in internal rate of return) for buying an apartment community was relatively balanced in terms of return derived from cash flow during the hold versus return derived from appreciation. As more capital migrated into apartments, cap rates drifted downward and the typical 50/50 split shifted to heavier reliance on appreciation than cash flow. Today, many assets are trading at negative or neutral leverage, with returns heavily dependent on exit valuation. For some, that’s reason enough to pause. But as history has shown, some of the best multifamily buys happen in exactly this type of environment, when fundamentals are temporarily dislocated, but the long-term story remains intact.
The fundamentals behind multifamily remain strong, but the road back will take time. Capital markets are still unsettled, new supply is slow to clear, and performance will likely stay uneven over the next 12 to 18 months.
That doesn’t mean opportunity isn’t there. It just means being selective on markets, on deal structure, and on timing. The recovery isn’t a moment; it’s a process. And those who stay focused and disciplined through the noise will be in the best position when conditions normalize.
