- Rental Housing Economics with Jay Parsons
- Posts
- Takeaways from NMHC's Annual Meeting
Takeaways from NMHC's Annual Meeting
Here are 21 things I took away from the multifamily investment industry's biggest event
Jay Parsons
January 30, 2025
Sponsored by: Madera Residential
I’ve been wrestling with how to describe the mood this week at NMHC’s Annual Meeting – the industry’s biggest gathering of apartment investors, lenders and dealmakers. “Waiting game” comes to mind. It’s like everyone is waiting for the gates to open, but unsure when exactly that’ll happen – or what exactly awaits them on the other side. Short-term uncertainty is very real, but it’s matched (if not topped) by real optimism and conviction on the mid- and long-term multifamily outlook.
And that short-term uncertainty is almost ALL about interest rates (and by extension: debt costs, values and return targets). Not about fundamentals.
21 Takeaways from NMHC
On the plus side: There’s wide consensus that fundamentals are improving. Supply – the big headwind of 2023-24 – has peaked and is trending downward with little chance of rapid re-acceleration. Still plenty to work through, but there’s now light at the end of the tunnel for operators crushed by lease-up competition these last couple years. Apartment demand is strong, and most believe rents have bottomed. There’s a real possibility that rent growth flips positive this year even in many high-supplied markets.
At this time last year, the industry consensus was that we’d see accelerated deal flow in the second half of 2024. Then that window was pushed to early 2025 – and for a hot second a few months ago when the 10-year treasury yield dipped into the 3s, that appeared quite likely. But the unexpected jump in treasuries killed that enthusiasm. Now the hope is for momentum in the second half of 2025. The challenge is that sellers are generally holding firm on pricing, and would rather hold than sell at the discounts buyers need for deals to pencil out with higher debt costs.
Sobering reality: It feels like everyone wants to be a net buyer, but at prices that don’t exist and for assets that aren’t on the market – at least not at any scale.
Investors and brokers are resigned to seeing an extended lull in deal flow until one of the following happens: a) interest rates fall or at least stabilize, b) sellers get more motivated to return/recycle some capital, c) lenders lose patience and push some exits or d) rents rebound and NOI improves.
Lots of groups raised capital targeting newer assets well below replacement cost, and as much as that strategy looks good on paper, it’s proven (so far) very difficult to execute at any scale. There’s little of it on the market, and the discounts aren’t that big (especially in suburbs) unless you’re buying in less-favored, high-risk markets like Los Angeles or Oakland.
There remains a wide gap (as expected) between what capital is chasing and where distress is concentrated. Institutional capital (either GP or LP) wants high-quality, newer vintage assets in top-tier markets. There’s a lot of demand for those assets, but little of it on the market, so that’s pushed cap rates well into the 4s. The distress is generally older assets in less desirable submarkets, often with heavy cap ex needs and economic occupancy challenges. There’s little appetite for that product, and potentially deeper price correction to come to create a market for it.
Fundraising is tough right now, but there’s still a lot of dry powder on the sidelines – some of it raised during the peak – and needing to get deployed. So I think we’re seeing buy boxes widen somewhat to include more Class B (“True Bs,” not Cs), value-add and new development … but with very well-defined boundary lines.
What is attractive for value-add right now? Location and vintage matter a lot. The institutional groups I spoke with are targeting 20- to 40-year-old assets in high-quality, upper-income suburbs with good school districts and demand drivers.
New construction is getting interesting again too. I highly doubt we’ll see a big flurry of new starts, but more institutions are kicking the tires on new development – looking for diamonds in the rough that can pencil out. Typically, that means lower-cost suburban garden product. You got to get construction costs down for projects to pencil out at today’s rents and capital costs. Implication: Larger builders will likely gain market share (in an industry that traditionally has been very fragmented and localized) as they’ve all put intense focus on efficiencies that can only be achieved with scale – in-house trades, bulk material purchases, reusable floor plans, and new technologies that help expedite construction timelines.
Banks are back! (Not that they were ever really gone, but many banks backed off quite a bit in past couple years.) Construction loan terms are getting more favorable (though not crazy), with loan-to-cost ratios sometimes returning to the 60-65% range after previously dipping in the 50-55% range. Why? Because as today’s massive supply wave completes and refinances out of construction loans and onto permanent debt, many banks have little in the pipeline. A couple large developers said they were told to spell out their proposed terms (within reason) for banks to consider. The real challenge for developers is equity, not debt.
Regulatory risk is much bigger variable than ever, and it’s not just rent control but also a broader cocktail of local policies (screening, evictions, etc.) that challenge economic occupancy and revenue. Some groups are even trying to figure out how to model future regulatory risk that could torpedo pro formas and exit strategies as occurred in places like St. Paul, MN, and Montgomery County, MD.
While the nomenclature hasn’t yet caught up, the reality is that many traditional “core” markets are just no longer “core” for multifamily investment due entirely to regulatory risk. That list includes Los Angeles, San Francisco, New York City, and DC’s Maryland suburbs. A lot of institutions have redlined those cities/counties (though they may still like adjacent markets/suburbs). Those that haven’t will typically tell you they’re making contrarian longer-term bets where they enter at discounted price points to bake in those risks. Isn’t any contrarian bet by definition at opportunistic investment, not a core investment? When asked if L.A. was still an institutional market (even prior to recent wildfires), one institutional investor quipped: “It is until I sell everything we have there, and then it isn’t.”
Operational efficiency remains big priority. More talk around centralization and AI-infused processes. These have been themes for a while, but the sense is that we’re getting closer to the point where these initiatives are leading to real efficiencies and cost reductions (or at least reduced cost pressures). Expense growth normalized significantly last year. But even more predictable, steady expense growth could top revenue growth again this year in many markets – putting pressure on operators to contain costs.
Insurance was a pleasant surprise in 2024 (with many owners seeing reduced or flat premiums), but there’s nervousness for 2025 insurance renewals given recent hurricanes plus the SoCal wildfires. Insurance costs have become as unpredictable as interest rates.
Big picture: The hunt for cost-saving efficiencies – both in development and operations – seems to heavily favor larger players with scale within a given market. Multifamily is one of the most highly fragmented industries in the U.S., but I’d be surprised if we don’t see some consolidation over the next few years.
Lots of chatter and speculation around the future of the GSEs, and whether the Trump administration takes them out of conservatorship. This was talked about during Trump’s first term, too, and obviously didn’t happen. So we’ll see how this plays out. No one really knows. In the meantime, the GSEs are very much in the game — representing half the nation’s multifamily debt, and with miniscule loan delinquency rates.
Large Sun Belt markets are still in favor. The research panel at the conference put together (with five researchers from different parts of country) put together a list of favored markets over the next 5 years, and all but two of their picks (Columbus and Boston) were Sun Belt. That list included Austin, Charlotte, Dallas/Fort Worth, Nashville, Orlando, Raleigh/Durham, Phoenix and Tampa. Investors expect 2025 to be another challenged year due to supply, but see potential outperformance beginning in 2026 when supply drops off but demand tailwinds remain intact.
Everyone loves DFW. Only market the research panel highlighted as outperformer in both the 3-year and 5-year outlook.
Carolinas still popular in the long-term outlook as supply subsides.
Florida might be in same category, but some investors still skittish over long-term insurance risks/costs.
Heard some renewed interest in Las Vegas, which wasn’t a favored institutional market in past couple cycles.
Houston got some shoutouts as potential outperformer in 2025 given reduced supply.
There’s also a group of markets that look attractive within certain submarkets, i.e. east side of Phoenix, suburban Nashville, northern Atlanta suburbs.
“Gateway adjacent” is a popular strategy these days, i.e. Northern New Jersey and suburban/exurban Bay Area.
San Diego is a favored pick in SoCal. As noted earlier, institutional capital is bearish on Los Angeles but still engaged in surrounding markets: San Diego, Orange County and Inland Empire. Key here is finding municipalities where political environment is stable and regulatory climate predictable.
As is suburban Gateway, especially Boston, Northern Virginia and east side of Seattle.
The Midwest never gets a ton of attention at national events like this, but you do hear about it more than in the past. As I’ve written previously, the big three in favor are Columbus, Indianapolis and Kansas City. Some are interested in Chicago again, especially suburban. As noted earlier, Columbus and Boston were the only non-Sun Belt markets picked by a research panel to be a top market over the next five years.
Lots of tech talk with the recent launch of Real Estate Technology & Transformation Center (RETTC), a new affiliate of NMHC.
— Now Spinning on The Rent Roll Podcast —
The Rent Roll with Jay Parsons podcast continues to rank in the Top 200 podcasts on Apple’s charts for investing-themed podcasts. Thank you for helping us grow so quickly after just 18 episodes!
Episode 19 dropped this morning, diving into rental housing demographics and the impact on apartments and single-family rentals. I’m joined by the guy who literally wrote the book on housing demographics, Chris Porter of John Burns Research & Consulting.
Episode 15: The 2025 Outlook for Multifamily and SFR with Berkadia CEO Justin Wheeler
Episode 16: Q1’25 U.S. Apartment Market Update with IPA Research Director Greg Willett
Episode 17: The Re-Rise of the Sun Belt with Knightvest Capital CEO David Moore
Episode 18: Build-to-Rent Update with the BTR King, Redwood Living CEO Steve Kimmelman
JUST RELEASED TODAY(1/30) Episode 19: How Demographic Shifts Impact Renting, with Chris Porter, SVP at JBREC.
Thank you to the sponsor of this newsletter, Madera Residential. Click the image above to learn more about Madera’s multifamily platform.