Thoughts from PCC’s CIO

By Darren Hulick

As of Q3 2024, we have reached an inflection point in our focus markets—Austin, San Antonio, Dallas, Denver, and Salt Lake City—where projected unit deliveries over the next 12 months are below units delivered over the trailing 12 months. Below is the information on unit deliveries over the previous 12 months vs. expected unit deliveries over the next 12 months, according to RealPage’s Q4 2024 Apartments Market Reports:

• Austin – 31,305 units delivered over the last 12 months vs. 18,883 units expected in the next 12 months
• San Antonio – 12,543 units delivered over the last 12 months vs. 6,247 units expected in the next 12 months
• Dallas – 44,218 units delivered over the last 12 months vs. 32,736 expected in the next 12 months
• Denver – 19,937 units delivered over the last 12 months vs. 11,100 expected in the next 12 months
• Salt Lake City – 6,730 units over the last 12 months vs. 5,907 expected in the next 12 months

The strong supply pipeline over the last 12-18 months has introduced several challenges for owners and operators, including lower occupancy, declining rents, increased concessions on stabilized properties, shifting tenant demographics and, as a result, rising bad debt.

The issue of shifting tenant demographics warrants further discussion. As the increase in supply has led to decreasing rents and increased concessions, this has allowed renters of class C assets to move up to class B assets, renters of class B assets to move up to class A, and renters of class A assets to move into brand new, state of the art class A+ assets. This migration has led to an increase in bad debt, particularly within workforce housing, as tenants who previously may not have qualified under higher rent-to-income ratios now qualify under lower rent levels. This shift has made tenant screening and creditworthiness more important than ever and a key focus for us.

Over the past 12 months, rent growth in our markets has ranged from -2.2% in Salt Lake City to -7.1% in Austin. Despite declining rents, occupancy has increased by a modest 0.3% to 0.8%, with current rates ranging between 92.0% and 94.3%, which is well below peak occupancy levels in mid-year 2022. There is a notable correlation between negative rent growth and the percentage of new inventory added—markets with higher inventory increases have experienced more pronounced rent declines. However, as mentioned earlier, the data is telling us we are past peak supply in these markets. Absorption is still very strong in these markets and barring any kind of black swan event, we believe we have likely seen peak negative rent growth and are looking for rent growth to move closer to zero or slightly positive in the next 12 months, depending on the market.

Given these trends, how are we adjusting our underwriting based on both short-term supply and demand projections as well as longer-term market outlooks? Generally, we are still marking rents to market based on comparable properties if we see an opportunity for a value-add business plan, though usually favoring a more moderate scope in order to keep our basis low, but we are underwriting zero rent growth (or slightly negative depending on the market) in year one with an expectation of getting back towards a long-term average of 3% rent growth in year two. Additionally, we are underwriting lower occupancy for the next 12-24 months, higher concessions, and higher bad debt, at varying levels depending on the market.  This is based on what we are actually seeing in our markets today as we expect the next 12 months to be similar to the previous 12 months based on the forward looking supply pipeline.  Looking further ahead, we anticipate rent growth will likely exceed 3% in 2026 and 2027, as construction starts peaked in late 2022 and early 2023, and permitting activity has since dropped significantly across all of our markets and nationwide.  Having said that, we are hyperfocused on untrended yield on cost to ensure that our analysis makes sense based on today’s rents and not due to expected future rent growth trends.  

Lastly, due to the elevated supply pipelines in our markets and the uncertainty it causes, we are generally underwriting low leverage with agency loans on stabilized properties and capping value-add business plans at 60% loan-to-cost (we will consider 65% loan-to-cost for relatively light value-add business plans). I once read somewhere that the use of leverage magnifies returns for equity in good times, but it also narrows the range of possible outcomes that a leveraged asset can withstand in bad times.  I think this statement is particularly valid in today’s market. Given the uncertainty caused by the robust supply pipelines in some markets, limiting leverage on future acquisitions will allow these properties to withstand a larger range of possible outcomes and maximize the probability of success.

By Brennen Degner

The real estate landscape has experienced seismic shifts in recent years. Reflecting on the past year, it’s evident that transaction volumes remain muted, leaving investors to reassess strategies amid persistent uncertainty. The anticipation of a return to ultra-low interest rates has waned, forcing market participants to adapt to a new reality.

This shift marks a pivotal moment for real estate private equity, multifamily investments, and institutional investors. With 2025 shaping up as a year of recalibration, how can you identify enduring value in a complex and evolving market? This post explores the challenges, opportunities, and strategies that can help you thrive.

A New Era of Real Estate Investment

The era of near-zero interest rates is conclusively behind us. Investors must now operate in an environment where higher interest rates are the norm, creating ripple effects across the real estate sector. While there’s optimism that supply fundamentals could improve by 2026, forecasting population growth, absorption rates, and other key variables remains fraught with uncertainty.

A striking observation from the past few years is the critical importance of humility in underwriting assumptions. As one of my esteemed professors often said, “The only certainty in any underwriting is its inaccuracy; the further out the projection, the greater the potential deviation.” Prudent investors must rigorously analyze long-term projections and question aggressive growth assumptions.

This evolving market context also fosters the emergence of “once-in-a-cycle” buying opportunities. However, not all prospects are created equal. Investments that hinge on overly aggressive projections or exit capitalization rates misaligned with current market realities may pose significant risks. For savvy investors, disciplined underwriting and caution are paramount.

The Case for Untrended Return on Cost (ROC)

At Platte Canyon Capital, our investment strategy remains grounded in fundamentals. A critical metric we evaluate is the untrended return on cost (ROC), which provides a clear view of intrinsic value, independent of overly optimistic projections. This disciplined approach shields us from relying on uncertain market fluctuations to meet return targets.

Key Considerations for Untrended ROC:

• Multifamily Acquisitions: Considering current cap rate trends, we maintain a minimum threshold of 6.5% or higher for value-add multifamily acquisitions. This ensures that returns remain well-aligned with both risk profiles and prevailing market conditions.
• Older Assets: For properties predating the 1990s, we target a minimum untrended ROC of 7%+, factoring in additional adjustments for risks and complexities.
• Location and Condition: Assets in less favorable locations or with more challenging conditions require stricter return thresholds to balance potential downsides.

This approach serves as a reliable compass, allowing us to focus on genuine value while mitigating exposure to precarious assumptions.

Where Opportunities Are Emerging

Despite subdued transaction volumes, certain types of opportunities are beginning to materialize. Our analyses indicate that older asset classes—particularly in B and C property segments—are offering the most promising prospects. Navigating these opportunities, however, requires balancing multiple factors.

Key Conditions for Success in Target Markets:

1. Realistic Valuation Adjustments: Lenders need to recognize the decline in asset values and be open to selling at a discount or offering accommodative structures for new buyers. Without this flexibility, transaction activity will remain stagnant, creating a gridlock in deal flow. 
2. Opportunities in Older Assets: Limited competition from sophisticated capital for properties built before 1990 has led to steeper valuation declines in older assets. This creates an opportunity to acquire these assets at a deeper discount compared to newer properties, which face more competition and higher valuations. Successful execution of this strategy requires contrarian investors willing to navigate and invest in older properties.

When both conditions align, the market could deliver genuinely unique, once-in-a-cycle buying prospects. However, patience and discipline will be essential to take full advantage of these dynamics.

Why Disciplined Underwriting Matters

Recent feedback from bidding processes reveals a worrisome trend. Some competitors incorporate aggressive rent growth rates and project exit cap rates that fall below acquisition levels. While these strategies might seem appealing on paper, they are often fraught with excessive optimism and fail to account for market uncertainties.

The lesson is simple but vital for real estate investors: disciplined underwriting wins the day. By focusing on fundamentals, scrutinizing assumptions, and avoiding overreliance on favorable external conditions, you reduce risks and increase the likelihood of sustainable returns.

Multifamily Investments in 2025

Multifamily real estate remains a stalwart investment vehicle in the current landscape. While some investors shy away due to escalating risks and market shifts, others recognize the enduring potential of well-positioned multifamily investments. Why?

1. Supply-Demand Imbalance: The persistent housing shortage in many markets ensures demand for multifamily units remains robust, even in a higher interest rate environment.
2. Operational Efficiencies: Multifamily properties continue to offer opportunities for value creation through operational improvements and targeted renovations.
3. Resilience to Market Cycles: Historically, multifamily assets have demonstrated resilience during both economic expansions and contractions, making them a valuable diversification tool.

Investors in this segment must remain vigilant, ensuring that strategies are grounded in data-driven insights and aligned with existing market conditions.

Are Market Fundamentals Shifting?

Leading into 2026, there is optimism that supply fundamentals will improve. However, reliance on future adjustments to supply-demand dynamics is risky. Investors should treat growth forecasts with caution and avoid overestimating demographics or over-relying on favorable absorption trends.

Instead, a pragmatic approach involves leveraging detailed market analyses and identifying opportunities that align with today’s realities, rather than tomorrow’s uncertainties.

Strategic Questions to Ask:

• Are your assumptions backed by robust data?
• How exposed is your portfolio to downside risks if projections deviate from expectations?
• Are you aligning your acquisition strategies with realistic, not optimistic, cap rate scenarios?

By answering these questions and embedding humility into underwriting, you can build portfolios better equipped to weather future shifts.

Building Resilience in Real Estate Portfolios

Resilience in real estate portfolios is no longer optional—it’s a necessity. Adopting a disciplined, fundamentals-driven approach enables investors to stay grounded amid a dynamic market. At Platte Canyon Capital, this philosophy is at the core of our investment strategy.

By focusing on assets with clear intrinsic value and long-term viability, you can capitalize on emerging opportunities without overleveraging or relying on speculative assumptions.

Navigating Real Estate in 2025 and Beyond

The challenges facing multifamily investments are undeniable. Yet, with challenges come opportunities for disciplined investors who combine insight, diligence, and adaptability.

From emphasizing untrended ROC to building resilience through value-driven strategies, the keys to success lie in prudence and preparation. Investors must evolve with the market, fostering strategies that prioritize long-term sustainability over short-term wins.

At Platte Canyon Capital, we believe in engaging constructively and sharing strategic insights to foster growth. If you are interested in discussing this further—or perhaps debating alternative perspectives on today’s market realities—reach out to us directly. After all, navigating this complex landscape is better done together.