Not every commercial real estate acquisition that may have been labeled a good deal a year ago is a good deal today.
Multifamily real estate continues to be supported by favorable long-term fundamentals, yet the segment is facing near-term crosscurrents as market participants seek more clarity around economic conditions.
How is Trion Properties approaching this crosscurrent environment? By deploying a diligent methodology developed, and fine-tuned during our decades of experience spanning the full spectrum of market conditions – both good and challenging. Very challenging.
We’re certainly not relegating ourselves to the sidelines. Now is the time to be especially analytical while maintaining the conviction to act where and when it makes sense. This has always been our way, but now its value seems more sage than ever.
Is this a soft landing?
One year ago, economic experts were practically unanimous in their predictions for a US recession. Today, the picture is quite different as calls for a recession are quickly fading. In the latest quarterly survey by The Wall Street Journal, economists lowered recession probability below 50%.[1] Driving the optimism for a soft landing are three key factors: the continuing decline in inflation, the belief the Federal Reserve (Fed) is done hiking rates, and surprising strength in the labor market.
While many components of the macro picture are supportive of the multifamily market, potential challenges still loom. First, the Fed’s rate increases are beginning to be felt more intensely by average US consumers. The resumption of student loan repayments could also dent household budgets.
Second, supply-demand dynamics are creating headwinds in certain submarkets. In areas where new units are coming online, vacancy rates have ticked up and rent growth has declined. Notably, this is largely seen as a near-term problem. From 4Q22 to 3Q23, new multifamily starts have dropped by more than 50%.[2]
Looking further ahead to projects not yet started, developers are citing the inability to secure financing and economic infeasibility for delays in construction, leading analysts to predict a considerable pullback in 2025-2026 apartment deliveries.[3] We tend to agree with the team at Yardi Matrix, who note the supply “will take some time to get absorbed, but that is not an indication of weakness—those markets are merely catching up in their efforts to meet the unexpected surge in demand brought during the pandemic, and operators are competing with each other to fill new units by trying to offer comparatively more attractive prices.”[4]
Overall, long-term fundamentals for multifamily remain positive. Occupancy rates remain strong, and the US continues to struggle with a severe housing shortage. Rent growth has declined from the red-hot levels seen during the COVID mini-cycle. Some operators are focusing on retaining renters and shoring up occupancy versus implementing larger rent increases. In our view, today’s more normalized pace of rent growth still offers compelling opportunities.
Diligence Plus: Our strategy for success
Our rigorous investment approach is designed to meet our long-term objective of delivering outsized returns without taking outsized risks. It starts with identifying target markets: Urban and suburban population centers in high-performing markets where we can successfully operate throughout the real estate cycle, not just when times are good. This means focusing our efforts on areas with sustainable growth supported by a diverse set of strong economic drivers and favorable supply-demand dynamics.
Importantly, we take a hands-on approach to due diligence, which involves inspecting every unit and building a granular knowledge of the surrounding area. A broker or seller may paint a rosy picture—but we want to form our own opinion.
We’re also focused on achieving favorable entry prices. We believe the ultimate success of any of our investments is dictated in large part by the purchase price. Our ability to capture favorable entry prices is driven by our team’s exceptional skill in sourcing off-market deals. We draw on our trusted reputation and deep network to secure attractive acquisition valuations and actively circumvent competition. This is particularly advantageous in the current environment, where deal volume is relatively muted.
In a shifting environment like today’s, we benefit from our expertise in modeling potential investments. We extensively plan and budget rehabilitation and development strategies before underwriting. Our detailed models include highly accurate budgets backed by years of hands-on experience; final project costs typically land within a few percentage points of our initial budgets.
Lastly, we’re concentrating on maximizing value with efficient property management. In the past several years, we’ve had very strong rent growth and appreciation—but as the landscape normalizes, property management and expenses will become an increasingly important part of the equation. As a vertically integrated firm, we strive to keep all functions in-house, including property management, construction, and project management. The result: better control of quality and costs, including capital expenditures and operating expenses.
The current market is challenging for both buyers and sellers. We’ve been in business long enough to know you can’t hit a home run at every at-bat—but if you don’t strike out, you’ll stay in the game. We are confident in our team’s experience and ability to acquire sound investments through the highs and lows of the market cycle without overextending our assets. As the market journeys toward normalcy, we believe our proven strategy will continue to serve our investors well as we take a smart, diligent approach to getting deals done.
[1] “A Recession Is No Longer the Consensus” by Harriet Torry and Anthony DeBarros, The Wall Street Journal, October 15, 2023, https://www.wsj.com/economy/a-recession-is-no-longer-the-consensus-3ad0c3a3
[2] “Is Now the Time to Buy Multifamily?” Marcus & Millichap Research Video, October 12, 2023, https://www.marcusmillichap.com/research/videos/is-now-the-time-to-buy-multifamily
[3] “2024 U.S. Apartment Market Forecast” by Carl Whitaker, RealPage Analytics, October 11, 2023, https://www.realpage.com/analytics/apartment-forecast-3rd-quarter-2023/
[4] “Multifamily Rent Forecast Update” by Jeff Adler, Andrew Semmes, and Doug Ressler, Yardi Matrix, October 10, 2023, https://www.yardimatrix.com/publications/download/file/4628-MatrixBulletin-MultifamilyForecast-September2023