Demand Update & Annual Budget Reviews

release edition [046]

read time [8 minutes]

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Today at a Glance:

Demand: Low vs High Supply
Budgets: My Review Process
Weekly Listen: TreppWire

Demand

The Summer 2025 leasing season was brutal, and now, as we enter what is typically a slower Winter leasing season, Multifamily operators in higher supply markets are still searching for ways to generate additional qualified leasing traffic.

But, it's proving to be incredibly difficult.

As a result, I believe that 2H 2025 will show a shift from 1H 2025 in terms of absorption, demand, and overall sector strength.

For example, in TMD 019 on May 10th 2025, I wrote the following about 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.

Below is a slide from the Newmark 3Q25 Multifamily report showing that concessions have risen for four consecutive quarters (left graph).

The right graph shows that elevated supply markets in the South & West are experiencing the highest percentage of concessions for newer vintage assets.

To emphasize this point, the RealPage chart below shows that demand fell well short of supply in the third quarter.

The combination of (a) slowing demand and (b) the overhang of new supply in higher supply markets is putting downward pressure on rents.

This downward pressure leads to a soft market for new leases, and results in lower rents and/or elevated concessions, combined with far less aggressive renewals.

As shown in the graph below from the Newmark 3Q25 Multifamily report, rent and occupancy growth correlate with lower supply. I recognize this is a proverbial dead horse, but it's a dead horse worth beating heading into 2026.

It's almost always easier (and preferred) to retain a resident than to have a resident leave, pay unit turn costs, pay for vacancy with economic loss, and exercise the leasing team with tours and administrative work to secure a new resident.

The graph below from Newmark shows exactly this, as renewal lease rate growth outpaced new lease trade-outs by 6.1% on a 12-month rolling average, the widest gap in favor of renewals since the first quarter of 2010.

As I wrote about here on LinkedIn this week, the strongest performing markets have the lowest growth of new supply, and the worst performing markets have the fastest growth of new supply.

Many will point to strong occupancy to demonstrate that Multifamily fundamentals are still strong, which makes sense intuitively, but there's a much more complex situation unfolding beneath the surface.

The only way that occupancy can maintain or improve when supply outpaces demand is through lower prices or heavier incentives, or both.

RealPage data backs this up, too, when they wrote the following in this blog post earlier this month:

As occupancy faded, effective asking rent cuts intensified in the past few months. Prices fell 0.7% year-over-year across the U.S. as of October. This was the nation’s deepest annual rent cut since March 2021.

Either the 1H 2025 narrative of "record absorption" was overstated, or it overshadowed what I called "incentivized demand" in TMD 033 in August.

In it, I wrote the following:

From what I've seen, heard, and experienced as an active market participant, concessions are prevalent today across most markets and asset classes (i.e. A-, B-, and C-Class), and show no signs of receding.

Yes, strong demand is great, but there's a counter-argument to be made that this demand should be asterisked, as it is *incentivized demand*.

I know I've written much about concessions, softening markets, and the bumpy road ahead for much of the Multifamily sector, but it's for good reason.

We are living through an unprecedented time for Multifamily operators where cracks are emerging across the sector.

On one hand, the demand story makes sense on paper; homes are hanging onto record high prices, the renter pool has demographic depth, and the job market is still relatively strong (though cracks are emerging, but that's for another day).

On the other hand, the supply story is crushing operators and developers across the country; prospects are pickier and more patient than ever, residents are aggressively negotiating their lease renewals, and operating expenses continue to climb.

The outcome is the stark reality that NOI is moving in the wrong direction, and it's unclear when a reversal may occur.

Keep an eye on asking rents and concessions in your market(s).

If you don't already, consider tracking rents across the competitive sets on a weekly or bi-weekly basis so you can see trends unfolding in real-time.

This analysis will empower you to adjust rents quickly, as needed, to preserve NOI until the market bounces back.

Budgets

2026 budget season is in full swing for those of us on the ownership side of the business.

For many, this time can be filled with stress and scrutiny.

Even so, I do my best to approach budget season through an objective lens.

After several years of budget reviews, I've come to learn that budgets are more like guidelines than anything else (yes, that was a Captain Jack Sparrow reference for those that caught it).

My process is simple, thorough, and efficient.

Typically, I review draft budgets from my third party property managers in three phases:

Income
Expenses
Below the line

Income

I first look at the YoY GPR and NRI growth to see if the growth assumptions are defensible or not.

The last thing I want to do is present something to my institutional equity partner that is arbitrary or indefensible.

Then, I'll evaluate the economic vacancy to determine how the property manager thinks the property will operate in the year ahead.

This section of the budget can tell you a lot about how the management company views the road ahead.

If economic vacancy (that is, concessions, vacancy, and rental loss) are up YoY then the management company is either sand bagging the budget to set themselves up to outperform, or, they think a bumpy road lies ahead.

This allows me to ask a simple but powerful question: "Why is economic vacancy projected to rise YoY?"

Again, their answer will be telling, so pay attention.

The last piece of income is the Other Income section (including RUBS).

Review this carefully, because these fees add up, and there can be a ton of opportunity in here.

For example, can you increase pet fees or parking fees slightly YoY to capture some relatively easy EGI growth?

Also, make note of what I call "false positive" income items, such as late fees, damage fees, NSF fees, and legal fees.

These items are booked as income, but they are actually negative indicators when it comes to the financial health of the property.

Expenses

I typically review these category by category first (i.e. marketing, turnover, payroll, etc.), and then drill down to line items in the categories with the largest YoY changes (good or bad).

Similar to income, I want to make sure there's a defensible story to tell for each line item that's growing YoY.

For example, if payroll is increasing, what's driving the increase? New headcount? Raises? New payroll taxes? A combination thereof?

I want to make sure that I can tell the story behind the numbers because these are how our performance as the operator will be measured by our institutional equity partner on an annual basis.

Below The Line

These items typically include the debt service, partnership expenses, and Capital Expenditures.

Debt service is often known and knowable (i.e. fixed rate loan), but it's important to confirm these figures are accurate.

Partnership expenses include things like T&E, accounting, audits, and the like.

Like debt service, these should be easy to quantify but are still worth reviewing to make sure they make sense.

Lastly, and certainly not least, are the Capital Expenditures.

As a matter of philosophy, many operators will book as much of the Turnover and Repairs & Maintenance costs to this section in an effort to preserve NOI.

During my review, I like to understand if a particular line item expense is truly a Capital Expenditure item.

If so, how was the figure chosen, and can the project be done (a) more efficiently, (b) at a lower cost, and/or (c) later in the business plan to save money in the budget.

Summary

I've learned not to get overly stressed about budgets, since an asset's performance in any given year is largely unpredictable.

Instead, I prefer to stay focused on the terminal NOI.

Are we on track to hit the exit NOI sooner or later than originally underwritten, and why?

This figure, after all, should be the North star for any business plan, in my opinion.

Weekly Listen

This week's listen is the Treppwire podcast Ep. 365 titled, "Cooling, Not Crashing".

In this episode, Lonnie and Stephen provide a quick macroeconomic update on where things stand as we head into the holiday and discuss how it all ties back to commercial real estate (CRE). Other topics include things they're thankful for in 2025, the stabilization of interest rates, and a 101 segment on Ground Leases, explaining what they are, why they exist, the risks, and a real-world case study.

You can listen to the full episode here.