Q1 2025 Quarterly Newsletter: "The Market Doesn't Care What You Need"
Q2'25 State of the Market: "The Market Doesn't Care What You Need"
Written by SPI Co-Founder & Principal, Michael Becker
Q2 2025 Newsletter
Hi, Michael Becker Here...
As Q2 2025 comes to a close, I've observed several consistent trends emerging in the Texas Multifamily market.
Rent Growth on Hold for Now
Heading into the 2025 leasing season, which typically runs from March 1st through Labor Day in Texas, I anticipated seeing modest rent growth in DFW, flat rates in San Antonio, and less severe declines in Austin, with lease trade-outs nearing zero. My thesis is that Austin lags DFW by approximately six months operationally, meaning Austin will likely see rent growth about six months after DFW sees rent growth.
As of the end of Q2, both DFW and San Antonio are experiencing flat trade-outs. Renewals are generally slightly positive, while new leases are slightly negative (when concessions are included), resulting in a flat net effect. In both DFW and San Antonio, newer vintage properties are generally outperforming the workforce segment. Austin, however, is still seeing rents trade out at approximately 5-6% lower than prior rental rates, with renewals performing better than new leases and concessions being common across the market.
Barring a significant recession, I believe DFW and San Antonio are very close to seeing positive new lease trade-out rents on average across the market, which I still expect to happen in 2025. We are a few quarters past peak deliveries, so recently delivered deals are nearing stabilization, which should reduce concessions and drive rent increases. In Austin, my current view is that we will need to wait until spring 2026 to see rents first stabilize and then turn positive. Again, I feel it lags DFW by about six months on this front.
Investment Sales Activity Has Picked Up Dramatically
We've seen a material uptick in deal flow during Q2, encompassing both on- and off-market opportunities. There's a significant disparity in what we're observing, indicating the market is very much in price discovery mode. Below are my general observations on the three markets we participate in:
Dallas-Fort Worth
Class A: High-quality properties in prime locations are highly competitive. Major institutions are aggressively bidding against each other, paying up to win. We're generally seeing year 1 cap rates in the 4.50-4.75% range, with many all-cash buyers, as this represents negative leverage at these cap rates. Generic merchant-built Class A properties in the suburbs are trading in the 5.00-5.25% cap rate range. Far northern suburban deals are more likely trading on a "per pound" basis, roughly 10% below current replacement cost, making trailing cap rate metrics less relevant. Buyers are tolerating eight weeks of concessions, betting on future rent growth as supply mostly recedes, and they're getting a discount to what a builder could construct today. I personally like this strategy, but the first 12-24 months of operations will be volatile.
Class A-: These 10-25 year-old properties with 9ft ceilings are trading at 5.00-5.25% trailing caps, generally with upside through renovations to boost stabilized post-renovation metrics. Demand is robust, with ample liquidity. The highest-quality locations in this group can command a sub-5% cap rate into the high 4s.
Class B: 1980s vintage 8ft ceiling properties are trading at 5.50-5.75%, also generally with proforma upside being pitched. Demand is lower than a few years ago, but this segment of the market still has significant liquidity. For smaller deals (sub-$40M), the buyer pool remains reasonably deep. However, for larger check size deals, the buyer pool shrinks considerably. Buyers in this segment are concerned about their ability to raise equity, leading to increased bidding on smaller deals and larger deals falling through the cracks more often.
Class C: This is the most disparate segment of the market. Deals are generally trading in the high 6s to low 7s from a cap rate perspective, often with a few stabilized assumptions factored into those with operational distress. There aren't many trades to establish market consensus on cap rate and per-unit metrics. Operations vary widely, and this is where most ownership stress is concentrated, with underwater values relative to debt being commonplace.
Austin
Austin is not a market trading on trailing cap rates; everything is trading on a "per pound" basis. Suburban new deals are generally in the $180-210K per door range, with limited trades in this segment.
There haven't been any significant trades of more in-town, high density properties, so this segment is essentially frozen. Development costs are so far above what a willing buyer would pay that virtually no seller has attempted to sell.
Austin doesn't have many 1970s or 1980s vintage deals, so we don't focus on that segment. In my limited view, these ‘70s and ‘80s deals are also on a "per pound" basis, broadly trading at a proforma stabilized 6.0-6.5% cap rate. In-place cap rate metrics don’t matter as much, and price per door varies dramatically. However, today’s values represent a significant discount to the 2022 peak.
Overall, the market hasn't reached a consensus on per-unit or cap rate metrics in Austin. We will need to see more trading volume to establish consensus.
San Antonio
Class A: Deals are starting to trade here in the $160-190K range, generally in the 5% cap range. Of note, there have been virtually no new multifamily units started in 2025 through two quarters. This is after 2024 saw an 80% decrease in starts compared to 2023; 2024 had the lowest annual starts since 2009. This is clearly setting the market up to be significantly undersupplied in the coming years.
Class A- (10-25 years old): Trades are beginning to occur in the 5.0-5.5% range or $120-140K per door range, with proforma upside through operational and renovation improvements.
Workforce Class B & C: The 1970s and 1980s workforce segment is starting to see deals clear the market at scale. We have never owned workforce housing in San Antonio, but it's beginning to pique my interest, and I'm spending time understanding this segment. We're seeing deals trade from the $50-80K per door range. Almost all of them have ownership, operational, and physical issues, making them very much "per pound" transactions. Lenders are generally forcing these sales. Stabilized cap rates are underwriting to 7-10% ranges, but it will require significant effort and capital to reach proforma, so buyers are ensuring they are compensated for that risk.
Of note, the lesser submarkets are currently in a race to the bottom. The Castle Hills submarket just west of the airport particularly stands out to me. It must be the densest submarket in San Antonio, with numerous old, low-quality apartments, one after another, all looking basically the same… what I would call a "Sea of Cs." There must be 15 deals in a three-mile radius currently for sale at-or-below their debt basis. This really highlights the benefits of staying disciplined about owning in quality locations. While you might get away with buying in a pocket like this in an up market, when the market turns, it quickly becomes a problem. Your neighbors' problems will affect you, and you alone cannot turn around an entire submarket, no matter how well you run your property.
The Market Doesn't Care What You Need
I've been spending a considerable amount of time so far in 2025 examining the workforce housing segment, as I believe it's either the right time or very close for SPI to selectively pivot back downstream and acquire the best parts of the workforce housing segment (properties with better locations, demographics, and physical characteristics). As part of this process, I've underwritten and toured numerous 1970s and 1980s deals to gain a clearer understanding of the market's current state, which helps me identify relative value as we look to buy.
As I've spoken with my investment sales broker friends, one phrase consistently comes up when discussing potential properties for sale: "The seller needs $xx to be able to sell." Usually, that value represents the loan balance plus closing costs, as the seller is trying to clear debt and avoid foreclosure. However, when I hear that phrase, I almost always mentally disengage, as I don't believe the seller is willing or able to close the deal at a market price. Frankly, no one cares what you need; it's a challenging environment out there right now.
I say all of that to emphasize that there will still be considerable volatility in the lower segments of the market for the next year or two as we continue to recover. Class A will lead the recovery, with Class B following. The worst Class C deals will take a while to clear, as current owners are unwilling to accept today's values at scale, and their lenders will require a process to accept that their debt is impaired and they must either take a loss or operate the asset themselves, which includes injecting additional capital. There are many different types of lenders out there; most are not set up for the challenging work, but some are, so results will vary greatly.
At SPI, we remain focused on acquiring what we believe are the best relative-valued deals at any point in the market. This means we still favor the Class A & A- segment, if we find a good entry point for the basis. However, we are also beginning to strongly focus on the workforce 8-foot ceiling product, which is currently out of favor in the general market. We believe there will be some good entry points in the next year or two where we hope to buy, reposition, and trade out in a few years to capitalize on the current market dislocation.
In times of market uncertainty like these, it's often those who exhibit decisiveness and conviction who are ultimately rewarded. While many sit on the sidelines awaiting perfect clarity, the proactive investor who accurately identifies emerging trends and acts swiftly to capitalize on mispricings or dislocations will buy the most compelling opportunities. The market doesn't wait for consensus; rather, it often favors the bold who are willing to navigate volatility with a clear strategy and a willingness to execute, even when others hesitate. We at SPI Advisory continue to remain active and expect to have multiple opportunities available for investment between now and year's end. Ensure you're one of the first to be notified of one of these upcoming offerings.
Cheers,
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