Multifamily Market Insights: Q2 2025

Hear from our team of experts as they share their insights and analysis on the multifamily market in the Midwest, including what we're seeing from buyers and sellers, the impact of interest rates, rent growth, and market conditions on investment opportunities.

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Transcript

SPEAKER_00: 0:00

This is Behind Closed Deals.

SPEAKER_01: 0:09

We'll be chatting with multifamily maestros.

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Uncovering their strategies.

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And unraveling the latest market happenings.

SPEAKER_00: 0:20

Bringing you Intel you can't buy. Welcome. This is Hannah Ott from CBRE. I'm joined today with Cameron Benz and George Tickajon. And of course, we have Christine Nelis, our marketing wizard, who is in the background making sure that everything goes as planned. And we're excited to give you a short podcast. This will be just about 10 minutes. And it's just going to be a quick overview, a quick overview from our perspective on what the first half of the year has looked like for multifamily in the Midwest. So we're based here in Indianapolis. But we do sell property all through Indiana. We also work with our partners in other markets in the Midwest. So we have a really good, we have a good exposure. So we're going to give you sort of the nitty gritty today, the good, the bad, and the ugly. So I am an eternal optimist. I just can't help it. So I'm going to start with the good. But don't worry, I'm going to ask George questions and Cameron, who's usually somewhere in the middle. And we're going to get a little bit of a quick snippet of what is happening in the market today. So I'm going to start with the good. So our team has had, if you're watching this on video, hopefully you can see a little snippet of our year, and this will be announced later today. But we've had a very busy first half of the year. We've closed 22 properties. We have several additional closings this week. We've sold 3,500 units, over half a billion dollars of product. We have 19 deals pending right now, which is almost another$600 million of product, which represents a about 4,500 units. And we have 20 properties either available or coming to the market soon, which is actually close to about another billion dollars of product. We have some big deals coming or available right now. So that sounds good. It sounds like that's been a good year. We've also sent already this year, 277 BOVs. Unfortunately though, we have not listed 277 properties. And it used to be that our BO to listing range was somewhere between 20 and 30%. It's significantly less than that right now. George, why is that?

SPEAKER_01: 2:36

Well, we disappointed some owners with our pricing. We've continued to adjust pricing to reflect realities in the market. So a lot of the BOVs we are doing are for people that are trying to discover price before putting a property on the market. And since we do market and sell so many properties, we have a pretty good idea of pricing. So we adjust our underwriting and pricing in our BOVs. And as I've said, that's been creeping down the last six, 12 months. So our BOVs have come in at lower numbers than a lot of owners either need or want. And I'd say a good percentage of the BOVs we are doing are for people who are who need to do some sort of recapitalization, whether it's sell, refinance, or recapitalize. So the ones that are saleable, we put on the market. The ones that aren't saleable, the owners are going to have to figure out some other method of recapitalizing.

SPEAKER_00: 3:49

Cameron, what are some of the headwinds that we're seeing in our BOVs, why we're not getting to the price that sellers are not happy with?

SPEAKER_02: 3:57

It's a few things, right? Some of it is that maybe on a new construction property, owners are having to give concessions to lease up. And it used to be you could wipe those away and say, yep, year one, when we take over, there's no more upfront concessions. There's no more recurring concessions. There's more concern about that now because of the number of properties that are still being built. in certain submarkets that they may need to give another month free for a year or they won't have rent growth year one. And on older properties, the concern is CapEx to fix up any deferred maintenance. What are the rent bumps on renovation? And then what does it cost to actually staff a property today? What does it cost to maintain a property today or turnover? People are just more conservative on those expenses.

SPEAKER_01: 4:43

What about real estate taxes? I was going to say, we have also seen more We've seen larger changes in real estate taxes, and we're talking about Indiana in particular. There have been a number of changes to real estate tax law or protocol here in the state. We won't get into those details today, but it has caused some, sometimes down, but more often larger increases in real estate taxes than people are expecting. And we're not really talking about properties. that sell, it's all property. So it's not as a result of the sale. We'll get into that in maybe our next podcast. The other thing we're seeing, it's harder to raise equity and investors, sponsors need to give investors cash flow day one. They're still IRR investors and they're focused on IRR, but there are even more investors that need to pay a dividend right away. So back to Cam's comment about, well, we'll just assume the concession's going to burn off. Well, that's fine, but if we can't give a dividend in the first year because we've got to offer more concessions, then they're not going to be able to get to the price that was expected initially.

SPEAKER_00: 6:10

Cameron, what's the cap rate on a 1960s or 70s built property that you need to be able to communicate to get buyers engaged today?

SPEAKER_02: 6:18

It's a high six to a seven cap on real numbers, right? It's not a seven cap with a very low repairs and maintenance number or an understaffed property. It's a seven cap on the in-place rent roll and stabilized expenses.

SPEAKER_01: 6:40

pricing by Fannie and Freddie for mission or more affordable properties, there's actually cash flow at that number, even without necessarily having interest only. So we've come to the point where it's got to be leverage positive, which we have not seen for much of the last five years. It's got to be leverage positive and cash flow, day one, unless it's a deep value add. And then the buyer is going to be buying it on what we call basis. So they're going to want to buy it on a cheap per unit basis if it's not going to deliver cash flow right away.

SPEAKER_00: 7:24

What happens when we put a property on the market that's priced appropriately, the returns are there, and it's a good opportunity? I mean, Cameron, you've got an example of a property we sold in West Lafayette where you priced it exactly right. What happened in that situation?

SPEAKER_02: 7:39

Right. The benefit we had there is it's an awesome location and it's the right vintage. It was a newer vintage than 1980. We got a ton of activity. A lot of people actually were willing to fly out and see the property, even though it was in West Lafayette, not Indianapolis. And we got early offers, but the CA counts were where we wanted to see we had tours, we had people interested versus we've had some other deals that were pushed on pricing before we went out and they were a little bit overpriced and people just don't want to spend time on it. There's other deals out there that are appropriately priced and they're like, we're going to allocate our time to something that we actually are willing to buy.

SPEAKER_00: 8:14

So you were out on that West Lafayette deal on pricing to price a BOV.

SPEAKER_02: 8:20

Our guidance was$19 million. We made a deal at$19 of the half million with a buyer who signed the contract immediately, hard, and closed in 30 days. This is unheard of, right?

SPEAKER_00: 8:30

Yeah, in today's market, yeah.

SPEAKER_01: 8:34

George, I talked to everybody. I was just going to say a warning. The market is constantly moving and you can't price properties based on 6, 12, 24 months ago. And we're seeing competitors doing that. We're seeing other people doing that. You've got to be reflective of the market today, both higher and lower.

UNKNOWN: 9:01

Yeah.

SPEAKER_00: 9:02

That's right. So we are having a lot of success on listings that we take to market where the sellers take our recommendation on pricing. We are having a lot of headwinds on properties that we take to market that we don't stick to our guns, are pushing, and we're pushing too hard. And another nuance, and Georgie said this is a great segue into this, is that you have to be looking at where the market is today and And how many deals are out there? How many buyers are out there? So I'm going to share my screen again. And for those who are looking at this on video, this is CBRE. So the world's largest commercial brokerage. And this is the deals that we have launched nationally as a platform in all asset classes. And of course, we're focused on multifamily only. So if you look to the far right, there's a graph here that looks at launches of numbers of deals. on a year-to-date basis looking at the same time period. So in 2023, which is here in the green, at this time on a year-to-date basis, CBRE had launched 387 deals. This time last year, the platform had launched 455 deals. At the time this year, we've launched 550 deals, which means there are 21% more deals on the market than there were last year. There's more on the market. And there is significantly more on the market today than there was in 2023. There was a time period early in 23 and at some point in 20, excuse me, late in 23 and early in 24 when we talked about a scarcity premium. And that was true. There was less on the market. It's not true anymore. There's more on the market both nationally and in the Midwest than there was last year and the year before, we're hearing from buyers that unless a deal is compelling, there's a lot on the market. And so they're looking at a lot of opportunities. And so we share this today, not to be negative, but to be real.

SPEAKER_01: 11:18

Well, how about an explanation? So here's one explanation. There are more deals on the market because there are more owners of properties that have run out of time with their debt. Maybe their loan matured in 2024 and their lender gave them an extension because we were all hoping that rates would be down in 2025. So a lot of properties got extensions. And the general attitude in the market is we can't count on interest rates being lower in the near term future. So we've reached a point now where lenders and owners and a capital partners are saying it's time to sell and pay off the loan or return capital. So that's one reason we're seeing more properties on the market.

SPEAKER_00: 12:13

So what really is... What's that, Gert?

SPEAKER_01: 12:17

Are there reasons, guys, that we're seeing more on the market?

SPEAKER_00: 12:22

What's the third page of acceptance? I think it's grief. Or what's the third page of grief? I think it's acceptance. Owners are accepting the fact of where pricing is. And so they're like, all right, go for it.

SPEAKER_02: 12:34

The other thing that I think about is when two years ago, there were so many buyers for every single listing that we would go out with the 60s and 70s property. We had people lining up to buy it. Maybe they were down in Atlanta and they're getting priced out of those deals. They come to Indianapolis. Today, it's really hard to sell those deals, right? It's a tough market for them. There's just less equity with so many more properties being out on the market. If you have one that's priced appropriately and one that's not, they're just going to They really like the other deal, but the expectations are there and you lose your only buyer, your best buyer, because you came out over Christ. We have this on certain listings right now where it's like our best buyer is like, I like this deal, but the other deal is just so much better, so I'm not going to spend time on your other listing. It's such a different world.

SPEAKER_00: 13:26

That's right. And we have both ends of the spectrum. When we sell a lot of properties, probably sell 50 properties this year, we have a number of clients that take a recommendation on pricing and we have a number that don't. And so it's a balancing act for us to, because we of course want to sell everything. It's a balancing act of knowing when, how much, and we're always aggressive of how much is being aggressive and how much is being unrealistic. And so I think the main sentiment of the market looking at it over the first six months is that there are absolutely buyers. There are absolutely deals that are getting done and the deals that are getting done are the ones that are priced where a buyer can go raise equity for it because it provides a suitable return. And there's a story. Either it's a basis play, either it's a cash flow play, either it's an awesome location below replacement costs, but you must compel a buyer to an equity to take their money out of their pocket and give it to you because they have lots of options today. So I hope this was...

SPEAKER_01: 14:34

One more thing Adam Medley said this on prior podcasts. In my opinion, the best opportunity today are the older assets with a skill set in-house or with partners to do the physical upgrades necessary to eliminate the obsolescence that goes with those older assets. There's fewer buyers in that product. Those owners have fewer choices it is actually there's pretty good financing available for it if it's underwritten properly so that's where there's I think the most opportunities there are far more buyers looking for no you know no older than 10 or 20 year old vintage properties

SPEAKER_02: 15:24

that's right and you're you're getting a higher IRR a more conservative forecast you can price appropriately and you're not competing to like get pushed up on price at the end of the deal and you lose it And

SPEAKER_01: 15:35

there are more tenants out there who can pay the rents. We're seeing newer, more expensive properties having a harder time leasing because there's more competition on the upper end of the upper price level of rents.

SPEAKER_02: 15:53

That's right. That's the fear for these newer properties is that if rates come down, the tenants will leave to buy houses on the new stuff. On the older stuff, those people are living there out of necessity instead of rent by choice.

UNKNOWN: 16:04

Right.

SPEAKER_00: 16:04

Yep. Well, thank you guys for tuning in. I feel like this was a little bit of tough love maybe to the market or a little bit of tough truth. I think the one thing that our hope is that you take away from this is that whether we're in a pitch or we're at a property tour or we're in a podcast, we're going to shoot it to you straight. We're going to tell you what the data actually says. We're going to tell you what the active buyers are saying. We're going to tell you what the actual transactions are because we have that information and we have all those data points. And so we look forward to a podcast sometime in the future when we're talking about three-and-a-half calves. But that, unfortunately, is not today. And thank you again for joining. And as George says, you're only as good as your next deal.

SPEAKER_01: 16:47

Hi, everybody. Hi.

SPEAKER_00: 16:52

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