Beneath the Headlines – Part 2

In Part 1 of our conversation last week, Greg and I explored the macroeconomic forces reshaping multifamily. We unpacked the growing wealth divide among renters, the impact of persistent inflation, and why the middle-market consumer is feeling the financial squeeze. In Part 2, we pivot to what comes next: the potential catalysts for recovery, the shifting transaction market, and how operators are navigating margin compression through technology and scale.

Janine: Greg, what could happen to meaningfully improve the fundamentals near term?

Greg: Anything that would help consumer household finances improve would be a plus. The most obvious one is bringing down the cost of energy. It’s not just how much we’re paying for gas. It drives up the costs of everything we buy. If we could have a magic fix to the ongoing turmoil in the Middle East, it would make a big difference.

Janine: What about the political climate?

Greg: I don’t see a solution for the day-to-day uncertainty. When you don’t know what comes next, you can’t make long-term decisions. Business leaders can’t predict the state of the world two to three years from now. I don’t see that changing anytime soon.

There’s uncertainty among consumers, not just businesses, which often makes people stay in place, meaning less turnover for properties. Resident retention is at all-time highs and renewal rent growth is holding steady, even though renewal leases are priced higher than new move-ins in some properties.

Janine: That may be true for now, but I’m hearing from industry leaders that renters are increasingly expecting renewal concessions, which could show up in the data soon. Something to keep an eye on. What if the House or Senate flip? What would you expect the impact to be on our industry?

Greg: Who’s in charge probably won’t impact the level of uncertainty and day-to-day chaos that we’re experiencing. Everything will continue to be messy. What’s maybe unknown is the list of priorities as we move ahead. Where do we rank the economy and business practices, including the big-picture role of the housing sector and housing affordability challenges?

Janine: Affordability is clearly a stated priority for both parties right now, and housing has been an important focus. Thus far, the effort has been invested in legislation that would make it easier to build new housing, which we know takes years to have an impact.

Greg: There’s no quick fix to affordability. It will take time to resolve regardless of who’s in office. The ROAD Act should have a positive impact, but not right away. When people think about affordability, they don’t solely consider how much prices are going up today. They also think about how much they went up compared to historical levels. Big price reductions actually would be an indicator of some significant underlying problems.

Janine: Blackstone just reported valuation declines in their opportunistic real estate funds. CBRE announced an expected slowdown in transaction activity. With interest rates and the 10-year treasury where they are, I’m seeing a decline in optimism from developers. It’s become muddy enough to hit the pause button on deals that were already in the works.

Greg: Completion levels are stabilizing for the next couple of years, but we need to watch what happens to starts in the short term. We have opposing forces. Deals are ready to go. The land has been secured. The design plans are done, building approvals are in place in many cases. All that’s left is for the capital to line up. Looking at past cycles, the return of rent growth at the top end would open the door for capital flows to increase. But if you look at what’s happening with interest rates and all the other downside risks we discussed, capital availability certainly isn’t a sure thing.

Janine: Let’s pivot from downside risk and talk about the upside, because it’s there. The industry has been investing heavily in technology. Do you think it’s paying off?

Greg: Data-driven decision making has a lot of upside potential. Our ability to respond with precision to opportunity is better than it’s ever been. Look at how many different markets flipped to rent growth all at once. That would suggest data was available to find signals and respond to opportunity faster.

Janine: The rent growth trend is encouraging, yet we’re expecting another year of expense growth outpacing revenue growth. Every major operating cost grew faster than rents last year. Managing operating costs continues to be essential and a priority. I’m starting to see AI having a real impact in this area.

Greg: AI is changing the property and renter experience. That doesn’t mean you pull back on headcount, but you can contain expense growth by getting more efficient and achieving more with the same people. In theory, properties can reduce the cost of customer acquisition while also improving customer experience.

Janine: With margin pressures lingering for 5 years now, most operators may not have the funds to invest in AI. Private equity is investing in multifamily by consolidating property management platforms. The thesis is that only at scale can an operator finance real innovation in this climate.

Greg: Consolidation is a natural response to the economic environment. When top-line revenue growth is constrained and expenses keep rising, operational efficiency becomes the primary lever to protect NOI. Institutional capital and private equity bring the resources to centralize operations, deploy sophisticated tools, and optimize processes. Smaller operators may find it increasingly difficult to compete with that level of technology and efficiency. Scale may become a requirement, rather than just an advantage.

The Bottom Line? Market conditions appear to be improving. Underlying signals suggest that momentum will continue, but at a slower, more measured pace than we’ve experienced in past cycles. Lingering macroeconomic headwinds – from the polarized political climate and unpredictable interest rates to stubborn inflationary pressures – will continue to challenge the industry.

Operations, however, are not without leverage. These pressures can be effectively offset by a relentless focus on technology, operational efficiency, and the strategic advantages of scale. Companies that successfully optimize their platforms to navigate today’s margin compression will be the ones best positioned to thrive as our market cycle continues to take shape.