Thoughts from PCC’s CIO

By Darren Hulick

It is no secret that a surge in new apartment construction across supply-heavy markets has placed significant downward pressure on rents over the past 12 to 24 months. While declining rents have broadly affected the multifamily sector, the impact has been most pronounced among older, vintage communities. The combination of the “filtering effect,” which I will discuss further, and falling rental rates has created increasing distress for many of these assets.

However, as we have underwritten a number of 1980s-vintage properties that are not formally classified as distressed, we are observing several less obvious, yet meaningful, consequences of this new supply environment.

Although some of these communities continue to meet their debt service and AP obligations, declining rents paired with rising bad debt and operating expenses have caused these properties to shift to survival mode for the last 24-36 months (depending on the market). This shift has led to the disappearance of spending on deferred maintenance. On the surface, these properties may present well during broker-led tours, but during physical due diligence it quickly becomes evident that capital expenditures have been limited to only the most essential items required to maintain occupancy. Deferred maintenance has accumulated in areas such as landscaping, irrigation, parking lots, pool upkeep, plumbing, HVAC systems, wood rot, fencing, stair treads/stringers/landings and balconies.

Across the broader inventory of older multifamily assets, we are finding that items previously classified as deferred maintenance are now being treated as discretionary expenses—meaning that if something is technically functional, even if visibly deteriorated, it is often left unaddressed. This dynamic is creating a growing backlog of deferred maintenance that will ultimately need to be remedied by a new buyer.

Another underappreciated consequence of increased new supply is the rise in bad debt across existing assets. This is, again, a function of the “filtering effect.” As rents and concessions have made newly delivered Class A+ apartments more attainable, tenants from traditional Class A properties have moved up, Class B tenants have moved into Class A assets, and Class C tenants have upgraded into Class B units. As a result, many owners, particularly those operating at the lower end of the quality spectrum, are now serving a tenant base with weaker credit profiles and less stable income. In an effort to preserve occupancy, some of these operators are accepting residents with marginal qualifications, leading to higher costs related to evictions, unit damages, and bad debt.

While we anticipate that both of these trends—rising deferred maintenance and elevated bad debt—will ultimately reverse, the recovery is expected to be gradual and will likely lag behind the broader rebalancing of occupancy in oversupplied markets. In response, we have adjusted our underwriting assumptions to reflect higher capital expenditure requirements and more conservative bad debt expectations, particularly for older vintage assets.

Our disciplined approach and attention to these evolving dynamics position us to identify opportunities that others may overlook—and to deploy capital prudently as the multifamily sector transitions into its next phase of equilibrium.