5 of My Principles for Market Selection

release edition [085]

read time [6 minutes]

Welcome to The Multifamily Download, a weekly newsletter where I provide institutional insights to help you build an exceptional Multifamily career.

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Today at a Glance:

• Introducing: MultiScreen
• Markets: 5 Key Principles
• Weekly Listen: The Multifamily Dispatch

Introducing MultiScreen

Today, I'm introducing MultiScreen, the premier technology platform for multifamily acquisitions professionals.

Every acquisitions person reading this knows the Thursday afternoon fire drill. A broker sends over an OM, a T12, and a rent roll, and needs an LOI by Friday morning before they meet the Seller for breakfast.

So the night gets spent retyping someone else's PDF into an Excel model before an opinion can be formed about the deal.

I built MultiScreen because I knew there had to be a better way.

MultiScreen reads & parses the OM, the T12, and the rent roll, and then it gives you the ability to confirm or adjust all key assumptions so you can pressure-test any deal before you ever open Excel.

MultiScreen opens to the public next week and the waitlist is still open. Join the waitlist for the following:

First access: Waitlist members get the launch link before it goes to other TMD readers or the public more broadly.

Founding Member pricing: Preferred pricing for the first 12 months, whether you select the monthly or annual plan. Prices will go up once the Founding Member slots are taken.

Direct access: I'll be working closely with the Founding Member group to ensure they receive a white glove experience, and to implement their feedback into MultiScreen to make it even better as time goes on.

MultiScreen is not my attempt to takeover the Real Estate tech industry. I'm an operator and a deal guy at heart.

But underwriting, analyzing, tracking, and communicating deals to stakeholders with MultiScreen now happens faster, better, and with more detail than ever before.

Market Selection

Investing in Multifamily in today's "higher for longer" environment is tricky.

Supply has been elevated at record levels for the past few years, and is only now beginning to recede more broadly.

As a result, rent growth has been minimal, non-existent, or negative.

And to put a cherry on top, operating expenses have continued to rise. This one-two punch has put immense downward pressure on property NOIs.

Unfortunately, this NOI pressure has also been paired with an expansionary cap rate environment that is having a severely negative impact on property values.

Let's looks at some numbers to drive this point home.

Suppose a property's NOI was $1M in 2021 and traded at a 4% cap rate for $25M.

Now let's assume that the NOI has eroded to $800K in 2026 due to multiple years of negative rent growth, double-digit negative trade outs, and operating expense inflation. As a result of these poor operational fundamentals, today's market pricing for the same asset has widened from a 4% to a 6% cap rate.

The resulting value on today's $800K NOI at a 6% cap rate is just $13.3M. The equity is almost certainly wiped out today on paper.

The reality is that this dynamic is unfolding right now across many markets, but it's largely happening beneath the surface and only on balance sheets.

So, as an investor or steward of capital, how does one evaluate investing in Multifamily on a go-forward?

On one hand, investors should look for downside protection to mitigate risk, which looks like investing in lower supply markets with potentially slower growth.

On the other hand, investors also want to be positioned to benefit from future growth, which means investing in markets that have potential for future rent growth outperformance.

If you're an active Multifamily investor today, how do you reconcile these two somewhat opposing market dynamics?

Here are five key principles that I think about when selecting markets and forming an investment thesis in today's environment.

1/ Affordability gap

What’s the monthly spread between owning a home and renting an apartment?

If a prospective renter has the ability or optionality to purchase a home at their income level in a given market or submarket then there's always back door risk to exit the renter pool and become a homeowner if home prices fall, interest rates fall, or wages rise further.

Takeaway: The wider the gap, the more structural the renter demand, all else equal.

2/ Low Supply

What is the current and historical new supply as a % of total stock delivered annually?

With respect to downside protection, investing in lower supply markets removes one of the key structural variables that is almost always an impediment to future rent growth.

Now, low supply does not always equal strong demand and growth, however, high supply almost always means the absence of growth at any amount of demand in the short term. We've witnessed this phenomenon recently in strong growth markets like Austin and Phoenix as they've had several years of negative rent growth.

Takeaway: The lower the better, as it reduces supply risk in the near to mid term.

3/ Known Policy

What are the state and local policies that can impact landlord rights and subsequent property values?

Investors searching for growth often avoid markets with less favorable landlord dynamics due to more legislation.

However, these markets are often harder to build and therefore have lower supply pipelines, which creates a structural setup for potential outperformance.

On the contrary, growth markets incentivize new development when they begin to boom, which brings that boom to a screeching halt due to the new supply.

There's a balance here, for sure, but redlining markets simply because they have tough legislation eliminates many strong markets across the country.

Takeaway: All else equal, known and/or recently passed legislation can be more favorable than unknown.

4/ Liquidity

What is the liquidity in the market, both from a sales volume and number of transactions perspective?

Secondary and tertiary market investing has its place in every portfolio, however, there is something to be said for primary market investing due to the liquidity and exit optionality that this liquidity offres.

Liquidity has a meaningful impact not only on the investment sales velocity (i.e. the ability to sell at anytime) but also on both debt and equity capital markets from a debt pricing and equity conviction perspective.

Takeaway: More liquidity is always better, as it will compress cap rates lower faster in an upcycle, and the it will offer exit optionality in flat or tougher markets.

5/ GDP Growth

What is the state level GDP growth, and what are the underlying drivers of that growth?

This principle is perhaps more macro focused than the other ones above, but it's still one to keep an eye on.

Understanding how state and local economies are performing can provide an insight into how the future may unfold in that market from a growth perspective.

Takeaway: Higher is better, as it means the economic engine of that state is producing useful and meaningful goods & services in the local economies.

Summary

Great investors know how to skate where the puck is going before it gets there. From what I've learned and witnessed during my time in the housing sector, the best way to do this is by objectively and obsessively analyzing market data and trends.

Actionable Takeaway

Spend the time to study market data and trends. Quantify what is happening where, and why, and then compare the data across markets to select where you or your team's time should be prioritized. Good deals exist in every market, but not all markets are created equally.

Weekly Listen

This week's listen is the most recent episode of The Multifamily Dispatch by J+G Companies titled "Trends and Technology for Multifamily Investors", hosted by Matt Bastnagel and Dan Gable, and featuring yours truly as the guest.

I haven't guest appeared on any podcasts since 2024, and recording this episode was a blast. We discussed where the market is heading, what many investors are overlooking today, and one surprising area that I think Real Estate professionals are over-indexing. This was a great conversation that covered a wide breadth of topics in less than 40 minutes.

You can listen to the full episode here.

Wrap Up

That's it for today. I hope you found this edition of The Multifamily Download insightful.

Consider sharing this link to The Multifamily Download with a friend or colleague.

Your feedback is appreciated, so feel free to reply anytime.

Thanks for reading. See you next week!

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