'So Much Appetite': Reasons To Be Bullish On Multifamily

It wasn’t quite the year in commercial real estate that he and others had expected, but Jay Parsons, principal and head of innovation strategy for Texas-based property investment company Madera Residential, remains optimistic about the multifamily market.

Fresh from attending the National Multifamily Housing Council’s annual meeting in early 2024, Parsons posted on LinkedIn that “Optimism is back. Much different from this time last year.”

Nine months later, appearing on this week’s Walker Webcast, host and Walker & Dunlop Chairman and CEO Willy Walker asked Parsons about his forecast. Walker said that despite the optimistic beginning of the year, apartment sales fell in 2024 to their lowest level in 10 years.

“Why haven’t transaction volumes kicked in in 2024 like projected?” Walker asked.

Parsons, a former chief economist with RealPage, said he remains “bullish” on the multifamily market due to continuing demand. It is the supply side that hasn't met expectations, he said.

“People want to buy. My company wants to buy, everybody wants to buy, but there's just not a lot of sellers,” Parsons said. “I think a lot of it stems from the fact that we're not seeing the distressed, kind of forced sales we expected to see so far this year, and because of that, we're seeing a lot of downward pressure on cap rates, and it's a seller's market.”

Nevertheless, Parsons said 2024 is expected to be the second-best year for absorption in more than three decades. He also predicted that sales volumes will begin to pick up.

“There's so much appetite for housing, both multifamily and for single-family rental and build-to-rent,” he said. “I think you're going to see more capital start to move in that direction.”

Parsons said the highly anticipated interest rate cuts began later in the year than many people expected, which slowed the CRE recovery. Further rate reductions will serve as a catalyst, he said, predicting that the rate eventually will drop below 4%.

“The Treasury is still a little bit sticky, but I think as that happens, supply goes down,” he said. “We still see great demand. The fundamental story is there. I'm still pretty bullish on the overall direction.”

Also contributing to low sales volume is the absence of the “value-add guys” who normally would buy, fix up and then flip properties, Parsons said. Instead, much of the focus this year has been on Class-A and B-plus properties, although Parsons said increased activity in Class-C “will be a big story next year.”

In a process called “filtering,” he said the addition of new Class-A properties eventually increases vacancies in Class-B and C properties, resulting in greater availability of more affordable housing.

“When you build a new [Class-A] apartment building, that pulls higher-income renters out of A-minus and B-plus,” he said. “The result is other renters are moving upmarket because all of a sudden they can rent something nicer, newer and better at a similar or slightly higher rent. [Landlords] have to cut their rents to get to people who couldn't previously afford any kind of market-rate rental.”

Overall, Parsons said he is approaching the new year with confidence, but he said certain factors could limit the growth of multifamily in 2025. These include the risk of recession or the potential impact of higher tariffs, a favorite talking point of the incoming Trump administration.

“If all of these tariffs go through, that's going to put more pressure on construction, which could then put upward pressure on rents and an inflationary environment that creates more challenges,” he said.

However, Parsons said the “biggest structural threat” to rental housing is regulatory. This could include uncertainty over Trump’s pick for Treasury secretary or the potential effects of Fannie Mae and Freddie Mac coming out of conservatorship.

At the local level, obstacles to growth include the risk of more municipalities adopting what Parsons called the “tragedy of St. Paul.” A couple of years ago, the Minnesota city enacted rent caps that essentially stalled new multifamily development. 

“St. Paul completely took themselves out of the biggest building boom in a generation, which is the ultimate way to drive affordability and availability for renters,” he said. “It was a real tragedy, and [the city since has] tried to unwind some of that.”

Parsons said he remains optimistic about the resiliency of the multifamily sector, with special attention given to larger Sun Belt markets. 

“The great demand story is going to be there [because] you have lower regulatory risk and lesser supply going forward,” he said. “It's going to be more Class-A and B-minus, where you have healthier financial dynamics among your tenant base. On the workforce side, if you can build at middle-market rents where you're competing with properties 10 or 15 years older, I think that's a great strategy, too, and that's what Madera will be chasing.”

Subscribe to get invites, replays and articles for new Walker Webcast episodes every week.

This article was produced in collaboration between Studio B and Walker & Dunlop. Bisnow news staff was not involved in the production of this content.

Studio B is Bisnow’s in-house content and design studio. To learn more about how Studio B can help your team, reach out to studio@bisnow.com.