release edition [004] read time [13 minutes] Welcome to The Multifamily Download, a weekly newsletter where I provide institutional insights to help you build an exceptional career in Real Estate. Today at a Glance:
Unlock Valuable CRE Insights:DemandIf you are investing in Multifamily in 2025, then it's because you believe that an increasingly favorable supply-demand dynamic will continue to unfold in the years ahead. This section of today's newsletter will attempt to diagnose the demand side of the equation, both by looking back at 2024 and looking ahead to 2025. 2024Remarkably strong demand saved Multifamily in 2024. Despite near-record deliveries, absorption managed to outpace supply according to RealPage. More specifically, there were anywhere between 557k (CoStar) to 667k (RealPage) net new apartment renter households created in 2024. Thanks to real wage growth (i.e. wage growth > inflation) over the past 24 months (exhibit A), renters are in a stronger financial position today than several years ago. You can see evidence of this improvement in relative affordability for apartment renters in exhibit B, which shows that median rent-to-income ratios approached pre-pandemic levels in 2024. This improving renter affordability, combined with (a) fierce competition by developers to lease-up Class-A new construction assets in high-supply areas, and (b) the record gap between the median cost of homeownership versus the cost of renting (exhibit C), led to strong incentives to rent instead of buy. Additionally, total SFR sales in 2024 were historically low (exhibit D). Prices continued to rise in most markets despite 20+ year high mortgage rates. (side note: if you were Real Estate investing in 2007 then you've heard this story before...) SFR sales in 2024 matched the 1995 total sales, when the US had about 70 million fewer people. While sales volume declined, the median sale price climbed 6% over the past 12 months to $404,400, reflecting more sales activity in the upper end of the market. That helped propel prices for the entire year to a record. The result: Just 24% of home buyers were first-time buyers, the lowest figure on record according to the NAR. Generally speaking, a healthy housing market is a tide that lifts all ships, including Multifamily. As Multifamily supply begins to decline gradually (and then suddenly) in 2025, investors should hope for a healthier housing market for one simple reason: A healthy housing market reflects a healthy economy. People are willing to buy homes when they're financially secure today and optimistic about tomorrow. Keep an eye on Q1 2025 SFR sales figures. 2025As of the end of Q3 2024, Realpage reported that fewer than 40,000 Multifamily units got underway in 3rd quarter 2024, translating to fewer than 210,000 units to deliver in 2027. There are specific markets that are positioned for outsized renter demand, including those in which the prime renter demographic (aged 25-34) will continue to grow. Due to the wacky SFR market dynamics mentioned above, an ever-increasing cohort of potential home-buyers are being priced out from buying a home, either overtly or electively. Another driving factor of growth in 2025 will be the timing in which supply peaks. The graph below is CBRE's estimate for several markets across the country. Assuming this data is accurately represented, markets such as Riverside, CA*; Salt Lake City, UT; Fort Worth, TX; and Orlando, FL can expect some positive rent growth in 2025. *Note that Riverside is a drastically undersupplied market, which is why CBRE predicts positive rent growth well before it reaches peak annual deliveries. Yet another demand driver is, well, you guessed it: Job growth. According to WalletHub, exhibit G shows the top-12 best cities to find a job in 2025. Markets with low unemployment rates, strong internship or entry-level employment opportunities, robust median household incomes, recreation, schools, and safe communities are poised to continue attracting new residents. Simply overlaying the data above, Orlando appears poised for outperformance in 2025 relative to other U.S. cities, and Phoenix in 2026 (which generally includes Scottsdale and Tempe). Conducting this type of data-driven reflection and projections are why professional Real Estate investors are able to consistently deliver outsized returns to their investors. Spend 20-30 hours doing research if you intend to buy Multifamily in 2025. The ROI on this time investment could be life-changing. If you're looking for a good CRE research starting point, check out the CRE Research Vault. It's only $25, and it will save you dozens of hours searching for data-driven research reports and resources. EconomyThis section of today's newsletter is a close examination of what's happening in today's economy. My hope in sharing the below information is to both challenge conventional headlines and inspire you to formulate your own opinion. Full disclaimer: I'm not an Economist, and I don't pretend to have all the answers. Here's what we know in 2025: Trump is fighting the Fed. The Fed is fighting the market. The market is fighting Trump. Nobody knows exactly what is going to happen. So, assuming all else equal, let's focus on the data. Before we begin, I'd like to share one observation. A flaw of our modern economy is that people and companies share headlines that are in their own best interests. This concept is called "talking your book", and everyone is guilty of it to some degree. Below I will make an objective case for what's happening just beneath the surface of the economy. News headlines may publicize that everything is rosy, but what does the data say? To begin, read the post below from Peter Schiff on X. Although he's not my favorite economist, he presents objective data that leads him to his conclusion. My hope is that the graphs and commentary below help you do the same. P.S. This will likely be my longest newsletter of 2025, so hang in there. I think you'll enjoy reading it!
To begin, let's start at 30,000 feet. Apollo, a global Private Equity Firm with $2tn AUM, titled their 2025 Economic Outlook: "Firing on All Cylinders". Apollo writes, "The outlook for the US economy remains strong with no signs of a major slowdown going into 2025", and they cite six key reasons why:
Using these six positive growth drivers as our foundation, let's explore them further and examine what the data says. 1. Elevated GDP growthHistorically, roughly 67% of GDP comes from consumer spending. When consumers are confident and strong, GDP grows. However, weakness leads to GDP contracting. For example, in 2009 the US GDP growth rate was -2.5% and consumer spending was down -2.8% year-over-year. The natural question then becomes: Do consumers have money to spend, and if so, are they still willing to spend it? Yesterday the University of Michigan released their latest consumer survey, and it was not good. Consumer sentiment fell for the first time in six months and year-ahead inflation expectations soared from 2.8% last month to 3.3% this month. The current reading is the highest since May 2024. Consumers continued to spontaneously express motives for buying-in-advance to avoid future price increases, and robust auto and retail sales data suggest that consumers are indeed acting on these views. The graph and excerpts below are from Apollo, and highlight the shockwaves that are rumbling under the Economy's surface currently: Lower income households are struggling mightily, and upper income households are flourishing. "As shown in Exhibit 22, low-income households have aggregate savings that are lower than where they were in 2019. On the other hand, those households at the top of the income distribution are benefiting from increases in both stock prices and home prices. On top of that, high-income households that own fixed income instruments—both public and private—are also benefitting from rising cash flows due to high interest rates. Considering that the top 20% of incomes account for 40% of consumer spending, it’s no surprise that the economy is holding up well." "As we continue to watch the incoming data, we see that households to the right are still dominating in the economy, outweighing the negative distress that you’re seeing for the households to the left. All-told, consumer spending grew 3.7% in the third quarter of 2024, consumer confidence remains healthy, and expectations remain well above levels that typically point to recession. We expect consumer spending to moderate in 2025, with 2.0% growth for the year." 2. Strong EmploymentThe University of Michigan also recently released the below graph showing the respondents expected change in unemployment during the next 12 months. Despite reporting stronger incomes this month, concerns about unemployment rose; about 47% of consumers expect unemployment to rise in the year ahead, the highest since the pandemic recession. If you follow the data, you could make the argument that much of the reported job data over the past few years has been flawed. In fact, the chart below shows that 2024 had 7 downside revisions to the jobs reports. It was also widely publicize that the BLS revised the jobs figures downward by 818,000 for the 12-month period through March 2024, which was the second largest annual revision for this time period since 2003. While jobs figures are being revised downward at a near-record scale, the number of multiple job holders with a primary full time job plus a secondary part time job reached all-time highs in 2024. According to exhibit M below, more than 581K tech layoffs have occurred over the past three years. If the economy is doing so well, why do consumers think unemployment is going to rise, why are job numbers being overstated and revised downward, why are fully employed workers getting second jobs, and why are tech companies with record-high valuations conducting mass layoffs? 3. Tamed InflationAs I wrote about last week, the Fed's 2.0% target is just that -- a target. It's unlikely that inflation will reach 2.0% anytime soon. Even so, the consensus heading into the September 2024 FOMC meeting was that inflation was trending downward at a healthy pace. Unfortunately, that trend seems to have reversed. As shown below, the ISM Services Price Paid index is rebounding upwards. After the December economic data was released, rumblings of no rate cuts or even rate hikes in 2025 began to emerge. Excess Government spending is what causes inflation because in America, all government spending is taxation. It's either direct through income taxes, or indirect due to increasing money supply. "Inflation is taxation without legislation" - Milton Friedman Take exhibit O below for example. More than half of the 2024 Q3 GDP came from government and healthcare spending. America must focus on creating real economic growth from production of goods and services. Inflation is complicated, so I wan't spend too much time here, but inflation will be a hot topic in 2025 as President Trump begins to enact the policies that got him elected for a second term. 4. Easing Monetary PolicyI touched on this above, but market sentiment has shifted drastically and rapidly since the Fed's first rate cut in September of 2024. This sentiment led to a strong Bond sell-off to end 2024, driving the 10yr Treasury up 100bps since then. Not only has this move by the 10yr Treasury been drastic, it's truly historic, as shown below in exhibit Q. One theory could be that Bonds sold-off in anticipation of a Trump victory due to the powerful combination of (a) expected inflation resulting from Tariffs and (b) improved growth prospects for other assets (Equities and Alternatives). I wrote about this in Edition 002, but many of the recession indicators (inverted yield curve; Sahm rule) are going off. If (when?) a recession becomes imminent, expect to see the Bond market rally and Treasury yields drop as capital flocks to safety. This is why I wrote the following in Edition 002: "There are only a few scenarios in which the yield curve will drop precipitously on both the front and long end. One such scenario includes a complete economic shock or meltdown akin to the 2008 Great Financial Crisis." The S&P is extremely top heavy (exhibit R), and that overweight allocation is unlikely to change given the bet on business-friendly growth under President Trump's administration. Overall, the Magnificent Seven stocks drove more than half of the S&P 500’s returns in 2024. “The S&P 500 just registered two 20%+ years in a row, something which occurred just ten times since 1871. Only during the 1990’s bull market and the Roaring Twenties did the good times continue for another two years.” - Michael Cembalest, J.P Morgan 5. Robust Consumer SpendingAmericans are consumers, and real wages are growing again, but that growth has come at a cost. Prices of goods and services are up drastically since 2020 because of M2 expansion (exhibit S) that resulted from the COVID-19 response. Now, to quell that inflation, rates are up dramatically, especially on the front end of the curve. The double-whammy effect of M2 expansion + higher rates have crushed the moderate- and low-income earner in America over the past 24 months. Despite rosy headlines and strong retail spending figures, the underlying data is quite dire. Credit card debts have reached all-time highs (exhibit T), and they continue to climb. Credit card balances have risen by $396 billion since the first quarter of 2021, a 51% increase in three-and-a-half years. Also noteworthy, Auto-loan 60+ day delinquencies (exhibit U) continue to trend upward beyond 6%, well beyond the 5% levels seen during the GFC. If these debtors could pay their auto loans, they would, but they can't, so they aren't. Economic optimists will immediately counter the above Credit Card debt outstanding by pointing to the 50-year low household debt-to-wealth ratio (exhibit V), but the logic in doing so seems flawed for a few reasons. First, household debt-to-asset ratios are historically low because assets are historically high. The P/E ratio of the S&P is at 30.5, nearly double the historical average, and the CAPE ratio is approaching all-time highs. Asset owners borrowed against their assets in the low interest rate environment of 2020-2022 to buy more assets that have since outperformed inflation and produced real returns in excess of their debt service obligations. Hence, the falling trend since the GFC shown in the graph below. Second, credit cards are inherently punitive. Consumers do not use credit cards and willingly pay 20%+ interest if they can avoid doing so. Americans with credit card debt have it because they need it despite being unable to afford it, where as non-credit card debt holders can afford credit card debt, but instead benefit from not having by investing in assets. Debt is problematic at any level: individual, corporate, or governmental. Credit card debt will worth keeping an eye on in 2025. 6. Corporate SpendingThis is this is an area that I think Apollo got right in their 2025 Outlook. President Trump has already announced his intention to reduce corporate taxes from 21% to 15%. This, combined with tariffs abroad, will incentivize companies to redomicile jobs back into the U.S., which should lead to increased investment domestically, both in infrastructure and people. ConclusionTo me, it appears that America has an increasingly bifurcated K-economy:
The bottom 50% are getting left behind as shown in Exhibit W below. I don't know how long the top 10% of U.S. household wealth holders can continue to effectively prop up the economy, but, it seems like those predicting 2025 to be smooth sailing are betting on this trend continuing, and it may, but I'm not convinced. I suppose only time will tell. Now that you've seen some of the data, I'm curious: What do you think of the current state of the U.S. Economy? Reply to this email and let me know. P.S. If you've made it this far and you want access to research like this, you can find it inside The CRE Research Vault. Weekly ListenThe Weekly Take by CBRE publishes a weekly podcast, and this week I listened to the January 6th episode that featured the CBRE Global Chief Economist Richard Barkham and CoreLogic Chief Economist Selma Hepp. Their conversation was insightful and flowed nicely, though I don't fully agree with the fairly rosy outlook that they suggested. Nonetheless, I thought it was an interesting conversation that you may enjoy. You can listen to the full episode here. Wrap UpThat's it for this week. I hope you found this edition of The Multifamily Download insightful and enjoyable. If so, would you consider sharing it with a friend or colleague? Simply send them this link. I always welcome your feedback. Reply and let me know what you'd like to see in the future. Thanks for reading. See you next week! Forwarded this email? Sign up here. Join me on LinkedIn | Twitter | Website |
The Multifamily Download · January 25, 2025
Multifamily Demand, The K-Economy, & More
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