Multifamily's Missing Ingredient, 5 Must-Know Metrics, & More

release edition [054]

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

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Today at a Glance:

• Recovery: A Missing Ingredient
• Equity: 5 Must-Know Metrics
• NMHC: Preview & Predictions
• Weekly Listen: Carl Whitaker

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Recovery

Multifamily investors were hopeful that 2024 would be a rebound year after a challenging 2023.

It wasn't.

Then, Multifamily investors were hopeful that 2025 would be the rebound year.

It wasn't.

So, will 2026 be the rebound year?

While this rhetorical question remains to be answered, I'd like to share some historical perspective that could be helpful for market participants (myself included).

For those of you that were active during the GFC era, this section should be a quick stroll down memory lane.

But, for those of us that weren't, it's important to realize that market recoveries often take longer than expected.

Prior to the GFC, the Federal Reserve began hiking interest rates in June of 2004, and they did so 17 consecutive times, raising the benchmark Fed Funds Rate ("FFR") from 1.0% to 5.25% by June of 2006.

Even so, the market kept climbing.

In fact, stocks didn't peak until October of 2007, overlapping the Fed's easing cycle by one month after the Fed began easing rates in September of 2007.

Then, one full year later, Lehman Brothers collapsed on September 15th, 2008, even as the Fed was nearly finished with it's easing cycle, which concluded in December 2008 after reaching the target rate of 0% - 0.25%.

Notably, 51 months passed between the Fed's hiking cycle commencing and Lehman's 2008 collapse.

By comparison, the Fed's post-COVID rate hiking cycle began 46 months ago in March of 2022.

Why am I opening the history books?

Because timelines are easy to forget, and because history often rhymes.

Distressed Multifamily properties (REO, Short Sales, and Foreclosures) were still being acquired in 2013 and early 2014, nearly 10 years after the Fed began it's hiking cycle in June of 2004.

Recoveries are like a slow motion train wreck; what's coming is obvious, it's captivating, but it's glacially slow.

The upcoming recovery of Multifamily may resemble the post-GFC recovery, but there are several dynamics at play that have Multifamily poised for a much more rapid rebound.

1. Technology will likely aid in an accelerated recovery as compared to the 10 year recovery mentioned above.

2. Credit is healthy. This isn't guaranteed to persist, but for now, debt markets are frothy, spreads are tight, and lenders are aggressively seeking opportunities to lend.

3. Equity is plentiful. Dry powder is ready, investors want Multifamily exposure at structurally lower reset prices, and the narrative for aggressively deploying capital is taking shape.

4. Operators are optimistic. Generally speaking, Multifamily fundamentals are healthy thanks to a relatively resilient job market providing real wage growth. New supply is leveling off or falling. Rents are nearing the bottom or bottoming.

But, one key ingredient is still missing:

Deal flow.

After record investment sales volume in 2021 and 2022, volume has been at or below historical norms for the past few years.

The makes logical sense, as potential Sellers have seen their property values erode significantly in a short time period.

Specifically, the bid-ask pricing spread has been a world apart, and this has led to a challenging investment sales environment.

Additionally, lenders have afforded borrowers more time through generous extensions and supportive modifications.

Perception is reality, and first mover hesitation is real, as lenders don't want to risk being perceived as "predatory".

Even so, as one or two big lenders choose to become more aggressive, it's likely that more will fast-follow and broader lender sentiment could shift quickly.

Extend and pretend will not last forever, and when it ends, I expect sales volume to increase as Seller pricing expectations continue to adjust.

I don't have a crystal ball, but I do understand psychology and the concept of "market makers".

It only takes a few lenders to shift the market sentiment and begin a potential cascade of REOs, short sales, or foreclosures that could structurally reset the market (i.e. cap rates widening as prices finally bottom).

As this occurs, it will mark the beginning of the next up-cycle for Multifamily investors.

So, will 2026 be the elusive rebound year?

Only time will tell.

Equity

If you're raising equity in 2026, here are 5 must-know metrics.

1. Yield on Cost

The Yield on Cost ("YOC"), is the current NOI divided by the total project cost to date.

Unlike the cap rate, which doesn't contemplate additional capital infusion beyond the purchase price, the YOC measures overall return including renovation project costs.

The YOC must stabilize above the prevailing market cap rate (more on this below).

2. Return on Cost

Each capital project must be justified, and the best way to justify interior unit renovations is through a return on cost ("ROC") calculation.

Also called ROI, this is a measure of how quickly costs will be recouped from the resulting increase of income.

For example, spending $15,000 to renovate a unit that generates an additional $250 per month is a 20% ROC. This is a worthwhile investment, as it is almost undoubtedly accretive to the overall capital stack.

3. Cap Rate Spread

The difference, or spread, between the stabilized YOC and the prevailing market cap rate is known as the cap rate spread.

This is difficult to predict, since future cap rates are unknown and unknowable, but it must be estimated with conviction based on the contemplated business plan and next-buyer analysis.

Equity investors, especially institutions, must have a high degree of certainty that the stabilized YOC will exceed the prevailing market cap rate by ~150 basis points (product quality and market dependent, of course) to have conviction in today's environment.

4. Exit Pricing

One of Stephen Covey's "7 Habits of Highly Effective People" is to begin with the end in mind.

The same is true when investing in Multifamily. Institutional equity investors today must believe that the underwritten ("Proforma") exit price, which would result in the projected returns, is achievable.

A savvy rule of thumb that I utilize today is to benchmark future exit pricing off of the previous peak prices from 2021-2022.

If the projected exit price is below (or ideally, well below) the previous peak prices then that's generally viewed as a defensible proposition when raising equity in today's environment.

5. Cash Yield

Last, and certainly not least, is the cash yield ("Cash on Cash return") that an investment is expected to generate during the hold period.

More specifically, the underlying assumptions that are generating the cash yield must be explainable and defensible for institutional equity investors to seriously consider investing.

As a rule of thumb in today's value-add investing environment, I like to see 35-50% or more of the total return from cash yield, which translates to a 7-10% annual average over a 5-year hold period.

Higher cash yield typically is the result of a more conservative purchase price and overall basis, which inherently translates to a higher likelihood of an investment achieving (or outperforming) the underwritten Proforma returns.

Summary

Presenting and defending these five metrics in a clear manner will greatly increase the odds that an investment opportunity gets capitalized from an institutional equity partner.

I know this to be true, because I recently helped lead a successful $30M+ equity fundraising effort from an institutional investor for early 80s vintage value-add Multifamily assets in the Western U.S.

Raising institutional equity today is difficult, but it's not impossible.

Which metrics are you focusing on today?

NMHC

The 2026 NMHC conference is being held this coming week in Las Vegas, Nevada.

Each year, thousands of Multifamily market participants gather to connect, network, and collaborate.

There are four topics that I'm curious to observe this year at the conference.

1. Sentiment

NMHC in 2024 in San Diego was full of cautious optimism, as everyone was looking for a reason to be excited coming off of a tough 2023. Vegas in 2025 was full of enthusiastic optimism. How will the sentiment be this year?

Prediction: Sentiment will be overwhelmingly bullish.

2. Opportunities

Investment Sales brokers love to launch their new listings at NMHC. Debt & equity brokers love to showcase their new(er) relationships. Equity providers love to learn about deal flow. How will the opportunity set look this year?

Prediction: Opportunities will abound.

3. Outlooks

NMHC is full of brilliant Multifamily professionals that are studious, informed, and inherently optimistic. Sometimes, the herd mentality can precipitate a self-fulfilling prophecy of more activity. How will everyone's outlook for 2026 look?

Prediction: Outlooks will be market-dependent.

4. Relationships

This will be my third NMHC since jumping to the owner/operator side of the Multifamily business. Last year, it was an interesting feeling getting stopped in the hallway by peers that know me from this platform. How can I cultivate new/more meaningful industry relationships in-person at NMHC this year?

Prediction: Many ad hoc meetings with familiar faces.

I'll report back on these topics (and more!) in next week's newsletter.

Weekly Listen

This week's listen is The Rent Roll podcast hosted by Jay Parsons with his esteemed guest Carl Whitaker, the Chief Economist at RealPage.

I've had the benefit of following and chatting with both Jay and Carl for several years, and they are as good as it gets. Tune into this episode to hear their take on the 2026 outlook for the U.S. Multifamily sector.

You can listen to the full episode here.

Wrap Up

That's it for today. I hope you found this edition of The Multifamily Download insightful.

Consider sharing this link to The Multifamily Download with a friend or colleague.

Your feedback is appreciated, so feel free to reply anytime.

Thanks for reading. See you next week!

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