Feedback from the Pipeline
By Hunter Graul
The multifamily real estate markets in Texas, Colorado, and Utah are currently exhibiting a range of pipeline dynamics, each shaped by unique local factors.
In Austin and San Antonio, we’ve observed a significant contraction in transaction pipelines. The surge in new supply has led to negative rent trends, causing liquidity to dry up. Deals, especially in the Class B and C segments, are scarce and seldom reach closing. This slowdown is largely attributed to the record levels of new construction saturating the market, leading to an oversupply that suppresses rental growth and investor interest. The limited activity that does occur is primarily confined to newer property transactions, with older assets struggling to attract attention.
Conversely, Dallas maintains a stable flow of opportunities. Although it’s a supply-heavy market, the proportionate increase relative to existing housing stock is more moderate compared to Austin and San Antonio. This balance has resulted in consistent investment activity, with transactions continuing at a steady pace. The market’s resilience can be attributed to its diversified economy and steady population growth, which continue to drive demand for multifamily housing. Investors find Dallas appealing due to its relative stability and the ongoing opportunities for both acquisition and development.
In Denver, the market presents a steady pipeline encompassing both older and newer properties. Assets predating the 1990s face liquidity challenges and infrequent closures, whereas properties from the 1990s onward encounter a competitive landscape. The city’s strong economic fundamentals and quality of life continue to attract residents, sustaining demand for multifamily housing. However, the older stock’s liquidity issues highlight a broader trend of investor preference for newer, lower-risk assets in uncertain times.
Salt Lake City, however, is experiencing a sluggish pipeline, with only a handful of deals under observation. The absence of a significant surge during 2021 and 2022 suggests that this market may experience limited distress moving forward. The city’s steady economic performance and controlled development pipeline have resulted in a more balanced market, with less volatility and fewer distressed opportunities compared to more rapidly expanding metros.
Overall, there’s a noticeable increase in distressed opportunities, though not in overwhelming numbers. A significant challenge within this segment is the disparity between property values and distressed loan amounts, leading to lender reluctance in accepting losses. This situation often results in a stalemate, despite active pursuit of these opportunities. The gridlock in the distressed market underscores the complexities of navigating workouts and restructurings in the current environment.
Valuation metrics indicate that transactions are generally occurring at capitalization rates in the low to mid-5% range. However, data on post-1990s vintages is limited, rendering the cap rate landscape for 1980s properties relatively opaque. Moreover, assets from the 1980s and earlier are approaching a state of illiquidity in the current market. This trend reflects investor caution and a flight to quality, with capital gravitating towards newer, more resilient assets that are better positioned to withstand economic fluctuations.
In summary, while certain markets exhibit resilience and ongoing activity, others face significant slowdowns. The rise in distressed assets presents potential opportunities, yet challenges persist due to valuation disparities and lender positions. A nuanced understanding of each market’s unique conditions remains essential for strategic investment decisions. Investors must remain vigilant, adapting their strategies to the evolving landscape to identify and capitalize on opportunities that align with their risk tolerance and return objectives.