Market Update, Concessions, & Distress

release edition [019]

read time [5 minutes]

Welcome to The Multifamily Download, a weekly newsletter where I provide institutional insights to help you build an exceptional Multifamily career.

Today at a Glance:

Market Update: State of Multifamily
Concessions: An Emerging Theme
Distress: CredIQ Data
Weekly Listen: Chris Cassidy

Market Update

Now that the dust is settling on Q1 2025, I thought it would be meaningful to review some recent Multifamily specific data in an effort to better understand where the market might be headed for the remainder of the year.

Before we dive in, I will caveat the following by disclosing that my crystal ball has gone missing, so I certainly will not pretend to have all the answers.

That said, the Q1 data was generally positive for Multifamily (including the strongest Q1 absorption since 2000 per CBRE), which has many investors (myself included) feeling cautiously optimistic despite the more recent dim economic data (including the Fed's stagflation conundrum).

Below are several notable data points from the most recent Yardi national Multifamily report, which you can access here:

1. National occupancy declined slightly MoM to 94.4, the lowest in more than a decade

2. National rent growth was +0.9% YoY

3. National home prices continue to climb, with the S&P Core-Logic Case-Shiller Index showing a +3.9% increase in February

4. Existing home sales dropped -5.9% in March to a seasonally-adjusted rate of 4 million, the slowest pace since 2009

5. National delivery of new supply is expected to be down -31% in 2026 and -43% in 2027 when compared to 2024, translating to 3-4% annual rent growth from 2027 through 2030

Berkadia also published an excellent report recently, which you can download to read here.

If there's one graph to pay attention to, it's the one shown below.

This graph jumped out and grabbed my attention, because of the powerful underlying data being displayed.

As you can see, this graph shows the housing demand relative to supply for the year 2024.

To put it simply, when demand outpaces supply, prices (aka rents) increase.

If you want to benefit from the cresting supply wave, then make it your aim to invest where demand is already outpacing supply.

This is exactly what I'm doing, as our team has three properties under contract that are all in one of the top-10 markets below.

Savvy investing can be challenging at times. My encouragement would be to focus on controlling as much as you can control.

The best way to control the controllables?

Study and utilize as much data as possible.

If you want more data at your fingertips, check out the CRE Research Vault here.

Concessions

Concessions are prevalent in the market today, and I'm predicting that they will continue to persist throughout 2025.

In simple terms and for the context of this section, a concession is a discount offered to entice someone to rent or renew an apartment unit.

As you probably already know, concessions are a powerful tool for incentivizing action from a new prospect and/or resident whose unit is up for lease renewal.

Because of the combination of elevated new supply and a softening economy, concessions are popular (and in many cases, required) in today's market in order to maintain leasing velocity and to retain residents.

As I wrote about in TMD 017, there are both monetary concessions and non-monetary concessions.

Monetary

Offering a reduction of rent, move-in costs, waived application or administrative fees, or a combination thereof is a great way to motivate or incentivize decision making.

One of our properties is being challenged from an occupancy standpoint as it is downtown adjacent in a submarket with elevated new supply.

For example, prospective residents can rent a newly constructed unit in the downtown metro area for just $150-$200 more than our 1970s renovated garden style walk-up property.

Unfortunately, concessions are likely to remain prevalent so long as the rent spread between Class-A new construction and Class-B- or C+ value-add 1970s product is historically low (i.e. less than $300).

It's relatively easy for a prospect or existing resident to justify filtering up to Class-A for just a few hundred extra dollars per month on a net effective (or even gross) rent basis, especially if that Class-A product has historically been out of reach.

Non-Monetary

Rather than just offering financial incentives for a prospective resident or existing resident to sign a lease, non-monetary concessions can also be offered. This includes both time-based and item-based concessions.

For example, a monetary concession can be coupled with a time-based offer: "If you sign this new lease within 24 hours then we'll waive the $99 application fee".

Or, a non-monetary concession can be added to a renewal offer. For example: "If you renew your lease by x date then we'll give you a $250 gift card and a free carpet cleaning".

Believe it or not, there's a surprisingly high ROI when deciding to offer non-monetary concessions such as a free TV, free appliance, or gift card to prospective residents. These are typically cheaper than the dollar-for-dollar equivalent that would need to be offered with monetary concessions. Oddly enough, some prospects may value gifts more than dollars.

Regardless of how you think about concessions, or how you may be coupling monetary and non-monetary offers, the challenging reality is that concessions cannot be ignored today in most markets.

As unfortunate as it may be, concession wars are real and they can quickly cannibalize a submarket.

Make sure you're quick to react if concessions are implemented by competitor properties because lost traffic and elevated move-outs can create a vicious and expensive downward spiral.

CredIQ

The team at CredIQ publishes a number of blogs and articles that I enjoy reading.

One such article came out yesterday titled "Special Servicing Rate Reaches 9.9%".

Uh oh.

As you can see in the two graphs below, overall distress dropped by 30bps MoM (blue line), however delinquency ticked up from 7.9% to 8.0% (red line) and special servicing increased by 20bps to 9.9% (green line).

As shown in the graph below, just 15.7% of distressed loans are current, and just 32.3% are either current or performing matured.

Said differently, more than two-thirds of these loans are not in good standing currently.

I am not in the weeds enough to know how this compares on a trend basis, but at face value, this data was shocking to me and that's why I'm sharing it here.

If you've been following this trend more closely in the recent months then please reply to let me know what trend you're seeing.

Many were hopeful that 2024 would be the bottom of the CRE market, including Blackstone, however the data above and the data that I shared last week in TMD 018 regarding consumer sentiment tells a different story.

Remember, CRE is only valuable because of the underlying income stream.

This is why thoughtfully investing in assets that are in-demand (like Multifamily) can be a safe-harbor investment during times of elevated economic uncertainty, like today.

Weekly Listen

This week's listen is the Walker Webcast from a few weeks ago when Willy Walker was joined by Chris Cassidy, the CEO of the National Medal of Honor Museum.

Although this episode was not CRE related, I thoroughly enjoyed hearing Chris' career story, which included becoming a Navy Seal to later being selected as Chief Astronaut with Nasa. If you're looking for a reason to feel a little more patriotic then this is a great episode.

You can listen to the full episode here.