Capital Arrives in the Sunbelt for the Right Multifamily Deals

For the past two years, the multifamily market in the Sunbelt states has struggled with record unit deliveries, rising interest rates and softening rent growth. While those factors remain in play, many investors are starting to see opportunities amid supply overhang and sluggish rent growth.

Rather than avoiding the region, capital is moving toward well-located properties backed by experienced sponsors and realistic underwriting. Industry experts told Connect CRE that the conversation is shifting from whether to invest in the Sunbelt to where, and at what price.

“The market has become much more disciplined,” said North River Partners’ Managing Partner Jeff Rosenfeld. “Investors and lenders are taking a much closer look at fundamentals than they did several years ago.”

Buying versus Building

Multifamily properties built post-pandemic are generally trading at values below what it would cost to build that same product today. This can provide a basis for patient investors who support a post-demand story.

But there’s more involved than buying below replacement costs.

“It’s buying below replacement cost in a market that can recover,” Rosenfeld said.

Investors have been showing interest in Sunbelt assets over the past two years. However, they aren’t going on buying sprees.

“Investors are continuing to be selective, and I expect that stance to hold until early next year,” said Garrett Karam, Chief Investment Officer with EMBREY.

Capital is Selective

The experts said that debt and equity are available for multifamily acquisitions and developments, but it’s undergoing more scrutiny than during the post-pandemic boom.

On the equity side, investors are typically contributing larger amounts of capital as loan proceeds decline. According to a Northmarq analysis, transactions that don’t consider today’s financing environment, replacement costs or exit risks can struggle to attract investment.

Likewise, deals purchased at prices that don’t reflect current cap rates have become more difficult to finance.

Debt underwriting has also evolved.

“Gone are the days of underwriting based on aggressive projected rent growth,” Rosenfeld said.

Instead, lenders are placing greater emphasis on submarket supply, lease-up assumptions, concessions, sponsor strength and projected exit cap rates.

“You are seeing lower leverage, more scrutiny around rent growth assumptions and a greater focus on sponsorship and liquidity,” Rosenfeld said.

That conservative approach is evident in markets that continue to absorb large numbers of new apartment deliveries. Lenders want confidence that borrowers have sufficient liquidity to weather a slower lease-up or an extended period of flat rents.

Caution Replaces Exuberance

Today’s lending environment isn’t about a lack of capital as much as it reflects prudence.

“Lenders are a bit stricter because they’re more concerned about owning bad real estate than they were in years prior,” said Benjamin Gutkin, Principal with JAG Development. “However, you can find more flexible lenders. There are still all sorts of avenues for capital.”

Instead of relying on optimistic assumptions, investors are spending more time evaluating neighborhood-level supply pipelines, employment growth and long-term demand drivers before committing capital.

So, deals are getting done. But only when the fundamentals are in the right place.

Looking Beyond Today’s Supply Wave

While oversupply remains a near-term challenge across several Sunbelt metros, many investors believe the imbalance will eventually correct itself as new construction slows, population growth continues, and other factors support a healthy multifamily narrative.

With apartment construction expected to moderate over the next several years, some believe today’s environment presents an attractive entry point for long-term owners.

“In five years, I’m expecting strong asset performance and value creation,” Karam said. “I believe investors who commit to new projects now will be glad they did.”

For many multifamily investors, the question is no longer whether the Sunbelt will recover. Instead, the focus has shifted to identifying the markets, assets and sponsors best positioned to benefit when the current supply wave recedes.

This article was previously published on ApartmentBuildings.com.