Multifamily State of the Market: "Finding Value in the Workforce Housing 'Flea Market'"
Q3'25 State of the Market: "Finding Value in the Workforce Housing 'Flea Market'"
Written by SPI Co-Founder & Principal, Michael Becker
Q3 2025 Newsletter
Hi, Michael Becker Here...
A quick housekeeping note before we dive in: This quarter’s newsletter will be briefer than usual, featuring two articles: my State of the Market article and Jennifer’s Investing Insights. Our Marketing Manager, Lily, has departed for business school in Europe, and we wish her the absolute best in her studies. Until we fill her position, our presentation may be a bit less polished, but I wanted to ensure I stayed consistent with our regular updates.
Sometimes, I can’t tell if I work in the real estate market or a flea market. That feeling perfectly captures today's environment, which brings to mind the famed investor Baron Rothschild's quote: "The time to buy is when there's blood in the streets." That quote precisely describes today’s workforce housing market.
The Opportunity is Now
For years, I have been contemplating the right moment to make selective bets in the Dallas-Fort Worth workforce housing segment—the very asset class that is at the root of our company’s origin. While Class A and A- properties are trading for tight cap rates, making it tricky to pick the right opportunity, the workforce housing segment is finally in a position for SPI to take advantage. We continue to like and will continue to buy nicer, newer vintage assets as we find attractive deals, but the distress in workforce housing is today's compelling story, especially those distressed opportunities in better locations.
Ever since the market dislocation began in late 2022, I've been patiently watching for the ideal entry point in the workforce segment. Fifteen months ago, in our Q2 2024 newsletter, I wrote about the onset of capitulation in this segment. At that time, the market was still largely frozen, with sellers unwilling to meet the market and lenders not yet forcing the issue.
Today, that has changed dramatically. We are now seeing a significant increase in the volume of workforce housing owners who are either willing or forced to sell at today's lower values. The time is officially upon us. The market is currently full of distressed and unsophisticated sellers, with only a handful of sharp-eyed buyers willing to look at these deals. But that is where we believe the greatest opportunity lies right now. We are seeing three key factors that make this moment so compelling:
- Positive Leverage: For the first time in years, we can acquire well-located, renovated 1980s properties at high cap rates, allowing us to secure debt in the low 5% range and achieve significant positive leverage from day one.
- Suppressed Rents: Current valuations are based on suppressed rental rates, which are 10-20% below their recent peaks due to the recent surge in broader multifamily supply.
- Property Tax Advantage: Nearly every property in this segment is valued by the county tax rolls at a price significantly higher than its purchase price. In Texas, it's a slam dunk to underwrite property taxes at 100% of the purchase price, which can result in a 20%+ reduction in taxes compared to what the seller will pay in 2025.
This combination creates a powerful setup for future profits as the market stabilizes, the supply/demand imbalance normalizes, and rents rebound.
Our Investment Blueprint: A Disciplined Approach
While the opportunity is clear, we will be very particular about the deals we pursue, but the time is upon us to start making selective bets in the 1980’s vintage space. Our strategy is focused on a specific set of characteristics to maximize returns and mitigate risk.
Target Asset Profile
- Location: The property must be in a good location with well-rated schools, near employment centers, and quality lifestyle retail (chain restaurants and big-box retail). Absolutely no high-crime areas, period.
- Basis: We aim to buy at a very attractive "per pound" basis. Typically, the story starts with the seller—who likely purchased between 2020-2022—losing most, if not all, of their equity in the deal. In many cases, the prior owner has spent a considerable amount of capital improving the property from a physical standpoint and is unable to reap the benefits of owning it much longer due to either structural headwinds or an upcoming loan maturity requiring a large cash-in refinance relative to acquisition.
- Physical Condition: We strongly prefer properties with attractive features for today’s renter, like washer/dryer connections in the majority of units. In addition, concrete parking lots and masonry retaining walls are also strongly preferred, as an example.
The Renovation Edge
Counterintuitively, our preference is for properties that have already undergone a large-scale renovation by the previous owner to the amenities, common areas, and unit interiors to some extent. In most cases, sellers are not getting paid for the capital improvements they’ve made, which allows us to operate more smoothly in the first few years. As counterintuitive as it is, the more renovated the property, the less competitive the current buyer pool is, as buyers can’t underwrite as much near-term upside in rents, causing these deals to sell at even higher cap rates. Market consensus is to pay up with a lower cap rate for lower quality properties and with overly-aggressive upside assumptions — I want to be out of consensus on that bet, and this is an inefficiency we are eager to exploit.
That said, we are certainly open to properties that have had fewer upgrades, but we would need to be smart about how much and when we deploy that capital. In today’s environment, it’s harder to push rents in the workforce segment, at least for the first year or so. A lack of upgrades must translate to a lower price for us to be interested, which, again, is out of the current market consensus.
Financial Structure & Exit Strategy
- Financing: We will focus on properties that qualify for high-leverage financing from Fannie Mae and Freddie Mac, who have much stricter, no-BS underwriting standards. Not that we would necessarily take full leverage, but a property that qualifies for 75-80% LTV with an agency loan is a good sign, historically, that we are buying at an attractive basis.
- CapEx: We will ensure we are fully capitalized upfront for all the CapEx needed after a detailed inspection and underwrite realistic replacement reserves for the older vintage deals, as they are older and stuff breaks more frequently here. The more renovated deals will hedge this risk vs. the less renovated deals, hence another reason why I lean that way.
- Debt: To avoid the multi-million dollar prepayment penalties we faced in the past, we will match the debt to the business plan, focusing on 5-year fixed-rate debt or Freddie Floaters with sufficient reserves for rate cap purchases and their required escrows. On the fixed-rate side, a 5-year term greatly mitigates the yield maintenance risk.
- Hold Period: We will sell at the first opportunity when we have an acceptable profit. No need to hold out for every dollar as, in my view, deals like these are closer to a trading vehicle. You get in, take advantage of the dislocation, and get out — not looking for exceptionally longer term holds, with 3-5 years generally being the target. We would much rather hold longer a newer, nicer deal than a 1980’s deal. If we miss some upside by selling a bit earlier, that is fine by me.
The SPI Advantage
I have been beating the drum for over a year now that it’s a great time to buy. Now with 100% Bonus Depreciation back, coupled with the recent decline in interest rates, it makes it even more advantageous than this time last year, specifically in the workforce segment. Class A and A- properties are trading for significantly tighter cap rates, which makes it a bit tricky to pick the right opportunity. However, we continue to like and will continue to buy nicer, newer vintage assets as we find attractive opportunities. But, market sentiment for the workforce segment is terrible right now, and a buyer group with a strong profile like ours at SPI is going to win our unfair share of deals and take advantage of opportunities. In this environment, I believe we will win 9 out of 10 jump balls against the current buyer pool because of our relationships and track record. As I’ve said for years, this is a completely unfair business, and it's good to be on the right side of that.
To wrap up, I'm a fan of country witticisms for their ability to distill complex concepts into simple sayings. Here are a few that I think perfectly sum up what today’s workforce housing sellers are telling themselves:
- "Better to sell at a loss than to lose it all."
- "I'm about to sell it for whatever it'll fetch."
- "We're selling it for 'don't-have-to-look-at-it-anymore' money."
If you aren’t on our investor list and want to see upcoming investment opportunities, please click the link to join our database. We have an attractive offering we are about to release for investment soon. See our Investing Insights article for actions you can take to prepare for the offering.
Cheers,
Read Michael Becker's Previous Articles:
