Feedback from the Capital Markets

By Nate Ricks

Multifamily real estate capital markets continue to experience notable shifts in investor preferences and funding dynamics. Allocators are increasingly focusing on newer vintage properties, particularly those built in the 1990s or later. This shift reflects a strategic move to balance risk and return by targeting properties that require fewer capital expenditures. Additionally, there is a continued emphasis on untrended yield on cost as a critical metric, underscoring investors’ desire for stable, immediate returns without relying on projected rent growth or market appreciation.

After speaking with several large institutional funds over the last quarter, many are targeting a minimum untrended yield on cost of ~6.5%. Moreover, these groups have indicated that for Core Plus projects, returns must reach mid-teens IRRs, and for more opportunistic deals, returns need to exceed 20% IRRs.

Equity investors are eager to deploy capital within these metrics. A recent shift from the first half of 2024 shows a stronger emphasis on underwriting submarket-specific growth metrics after 2025 rather than adhering to conservative 0% to 1% growth assumptions. This shift reflects data suggesting that much of the new supply coming to market in 2025 will be absorbed by 2026. This updated guidance is helping us refine both our target deals and our underwriting approaches.

On the financing front, the debt market remains challenging, especially for deals that don’t fit the conventional mold. Lenders are exhibiting caution, favoring “right down the fairway” transactions that present clear, manageable risks. This conservative stance makes it difficult for more complex or unconventional deals to secure debt financing. As a result, investors and developers may need to explore alternative financing structures or bring additional equity to the table to move projects forward in this constrained lending environment.