release edition [040]

read time [7 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:

• Value-Add: The Math in 2025
• GTL: The Falling Knife
• Yardi: September Update
• Weekly Listen: Dr. Peter Linneman

Value-Add

Buying existing value-add Multifamily properties in 2025 has been a challenging proposition.

Many buyers (myself included) have barely fallen short of the Seller's expectations on more than just a few occasions.

To that end, I would say that my team has been within 5% of the Seller's strike price on more than a dozen properties in 2025 with almost nothing to show for it.

But, the "almost" is what keeps us all coming back to the plate.

Fortunately, we do have a few acquisitions under contract that I'm excited to share more about once they're closed.

For now, I'd like to share my strategy for finding existing value-add Multifamily properties in 2025.

There are several factors that must be considered in order for the math to pencil, and today I want to explore three of the biggest factors: Cap rates, Supply, and Loss to Lease.

Cap Rates

Every seller wants to sell their property to a buyer that's willing to pay a below-market cap rate, and I don't blame them.

Paying cap rates that were at or below interest rates (widely referenced as "negative leverage") on value-add acquisitions become customary during the peak years of the most recent cycle (2019-2022).

But, the investing environment in 2019-2022 was one of yield-seeking amid extraordinary inflationary rent growth, which gave buyers motivation (and conviction) to pay extremely aggressive cap rates for those purchases.

Fast forward to today, and most Sellers still want the same thing: An aggressive buyer that's willing to pay an aggressive negative-leverage cap rate.

The good news?

It is possible to make these deals pencil, even in 2025. In fact, we're buying a few of them right now.

Here's the setup that I look for:

• Long term owner
• Incomes far below market
• Significant deferred maintenance
• Clean but outdated unit interiors

This can create the perfect setup for paying an aggressive cap rate and still making money as a buyer; a true win-win.

Let's look at an example to bring this to life.

Suppose a Seller has owned their property for 30+ years and the total incomes (rent + RUBS + other income) are significantly below market.

Now, let's assume that current monthly incomes are $1,000 and market is $1,500 (inclusive of RUBS + other income). Now, assume that unlocking this $500 income delta can only be done by spending $25,000 on renovations.

Quick math: $500 x 12 months = $6,000 increase, divided by $25,000 = 24% return on cost, which is excellent.

Lastly, let's suppose that the going-in cap rate, because the total income is so low, is just 5.00%.

Any reasonable Seller in 2025 should be thrilled about a 5.00% cap offer for an older value-add property.

(And if they're not interested in an offer with a cap rate that's 50-150 bps below market then they're not a market seller).

Supply

The second critical variable to consider is Supply.

Many value-add business plans have been derailed due to elevated new supply over the past few years.

This is because the rent spreads between Class-A and Class-C properties have compressed significantly.

If in 2019 Class-A rents were $400 - $600 higher than Class-C properties, today they might be just $100 - $200 more in higher supply markets when accounting for the net effective rent inclusive of concessions.

This creates a scenario in which Class-C properties must compete with Class-A properties, which is incredibly difficult to impossible.

However, value-add executions still work today in markets with relatively tight new supply.

This is because Class-A rents have not collapsed like they have in higher supply markets (think Austin or Phoenix).

The takeaway?

Look for value-add opportunities in tighter supply markets.

(My rule of thumb for "tighter supply markets" is <3% of stock currently under construction).

Loss to Lease

The last factor that I want to explore today is the concept of loss to lease. I mentioned it above, so let's unpack it more below.

Loss to lease, or LTL, is the mark-to-market spread in rents based on a competitive set.

For example, if markets rents are $1,500 and in-place rents at a property are $1,200, then there's said to be a $300 LTL, all else equal.

Caveat: Now, the tricky part is that all else usually is not equal, so determining the true LTL is nuanced and takes precision. But, directionally confirming if LTL exists is fairly simple.

When it comes to underwriting against the competitive set, it's important to focus on both the rents and the total income burden (rent + RUBS + other income).

Here's why: Let's say that the subject property is master metered, where as the competitive set of properties are all separately metered.

Master metered buildings have elevated utility costs, so the RUBS charges are also higher. These are real dollars that are part of the monthly resident burden, so they must be accounted for when underwriting the subject property versus the competitive set.

In this case, because the subject property RUBS charges are higher than the competitive set, the subject rents should not be compared to the competitive property rents, and must be adjusted downward to account for the total monthly burden.

The above scenario aside, value-add business plans only work when there's a defensible and predictable way to grow NOI and increase the yield-on-cost, or YOC.

New construction development today is being underwritten to an untrended (i.e. no income growth) 6.00% - 6.50% in most markets to account for an elevated cost of capital and cap rate uncertainty.

Therefore, value-add business plans, in order to be compelling to an institutional investor, must underwrite to an untrended 6.50%+ YOC in today's market environment.

Buying an in-place 5% cap today only works if there's an ability to grow NOI to a stabilized untrended YOC of 6.50% or more. (trending with 3.00% annual growth on a 5-year hold typically equates to another ~100-120 bps of stabilized YOC).

Institutional investors today are only excited about value-add opportunities if the spread of a stabilized trended YOC over a market cap rate is 150bps or more. (This would mean stabilizing at a 7.50% YOC or greater in a 6.00% cap rate environment).

Focusing on defensible and reasonable assumptions, buying at the appropriate cost basis, and identifying a predictable path to NOI growth will insulate value-add investors from the external risks (new supply, renter demand, Capital Markets, etc) that exist in today's uncertain environment.

Gain To Lease

Now let's explore the other side of the coin: gain-to-lease, or GTL.

Also known as "catching the falling knife", GTL is often overlooked and misunderstood by many investors that don't fully understand or appreciate the implications of an in-place GTL.

I hope this section sheds some light on what is a largely forgotten but important variable in Multifamily investing.

Positive rent growth environments almost always lead to in-place LTL because renewal increases often don't keep up with lease trade outs at the prevailing higher market rents.

However, the equal-opposite is also true in a negative rent growth environment.

In a negative rent growth market, renewal rates generally remain higher than lease trade outs at prevailing market rates.

Today, many properties acquired in 2021-2022 with a value-add business plan purchased are going to have in-place GTL where their in-place rents are higher than today's current market rents.

This becomes problematic for a Buyer because it means that the NOI is going to decrease until either (a) the rent roll turns over and all rents are marked-to-market at today's lower asking rents, or (b) rent growth returns and effectively burns off the in-place GTL.

The challenge today is that Buyers are underwriting scenario (a) and Sellers are hoping for scenario (b).

This creates dislocation in the bid-ask spread, and is yet another headwind to transaction volume increasing in the short term.

As an active buyer that has underwritten value-add opportunities in higher supply markets, I can tell you that a negative NOI in year-1 is extremely problematic for generating appropriate investor-level returns.

In fact, the first two years of a value-add business plan can determine if it's a success or failure.

Flat or negative growth in the first 24 months creates return headwinds due to the time-based component of the IRR calculation, the lost benefit of compounding growth, and in most cases, an accruing preferred return.

If you're underwriting new investment opportunities today, make sure to confirm if there's an in-place GTL, and if so, determine the path for getting out from under it.

There are far too many great investment opportunities on the horizon to get stuck buying a property today that experiences flat or negative NOI growth in the first few years.

Yardi

This week Yardi released their U.S. National Multifamily Update for September 2025.

There's some eye-catching data that is worth reviewing. Here's one excerpt from the report:

You can download the report here or read my summary on LinkedIn here.

How do you think Q4 will look compared to the sluggish summer?

Weekly Listen

This week's listen is one of my recurring favorites. Willy Walker hosted Dr. Peter Linneman on the Walker Webcast for their 23rd discussion.

In it, Dr. Linneman shared his perspective on the forces shaping today’s economy, including GDP growth, hidden weakness in the labor market, Fed rate cut predictions, whether deficits and government shutdowns really matter, the housing market, oil prices, and what the uneven real estate recovery means for investors across all asset classes.

You can listen to the full episode here.

Wrap Up

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