By Mitch Faccio, senior vice president, MLG Capital
Texas’ multifamily market is at a unique inflection point.
After several years of historic levels of new construction and softening fundamentals, conditions are shifting in ways that may benefit current owners and new investors. Slowing development, sustained population growth and the widening affordability gap between renting and owning are creating conditions that seem to favor existing assets.
A Market Reset After Record Construction
Over the last several years, multifamily development surged in Texas. Dallas-Fort Worth, Houston, San Antonio and other metros all experienced a wave of new supply that outpaced demand. By 2023 and 2024, this boom in development had led to softer occupancies, higher concessions and flat or even declining rents. Net operating income (NOI) growth slowed as the market absorbed this record wave of deliveries, according to data from CoStar Group and RealPage.
Now, that dynamic seems to be shifting. Construction costs have risen faster than achievable rents, making new developments financially difficult to justify, according to data from RealPage and the 2024 Turner Construction Index. In fact, multifamily starts in many Texas metros are down significantly from recent peaks. As a result, many planned projects have stalled, and the supply pipeline is contracting. Existing properties stand to benefit as new competition slows while demand persists. The third-quarter report from the U.S. Census Bureau shows that the overall U.S. housing market remains vastly undersupplied.
Interest Rates, Shifts in Capital
Interest rates have also shaped this transition. According to data from RealPage and Federal Reserve Economic Database, the peak of multifamily pricing occurred in early 2022. Rapid rate increases — jumping 100 to 300 basis points in a short window — contributed to meaningful property value declines.
At the same time, we have seen some of the institutional capital retreat. Non-traded REIT equity is down upwards of 80 percent from 2021 levels, according to research from Stranger Investment Banking. Today, a large portion of the activity in Texas comes from private investment groups and syndicators with established investor networks.
But it’s important to note that sidelined equity may be waiting for interest-rate clarity. Once that emerges, competition for quality Texas multifamily assets is likely to increase again, making today’s market an attractive entry point.
Renting vs. Owning: A Growing Affordability Gap
Another trend shaping the market is the widening cost difference between renting and owning a home. Fourth-quarter 2024 data from RealPage and the Atlanta Federal Reserve shows that nationally, it is now roughly 64 percent more expensive to own a home than to rent.
In Texas, the “starter home” may have disappeared, particularly in desirable submarkets. Rising construction costs, labor shortages and the lock-in effect of historically low mortgage rates mean that homeowners are incentivized to stay put longer. This has kept resale supply tight and making homeownership less attainable for many.
For multifamily, we have seen this translate into stickier tenants and reduced turnover risk. Residents are extending their leases and seeking communities that replicate the experience of homeownership. Townhome-style units, larger floor plans, attached garages and activated community spaces — all these features are increasingly attractive.
What to Look for in Properties
In this environment, we believe careful asset selection is key. At MLG Capital, a few things we focus on include:
- Locations with low supply and population growth. High in-migration, quality school districts, increased corporate relocations and limited new construction are indicators of strong submarkets.
- Product that feels like a starter home. Townhome-style units, lower-density garden communities and properties with extra land or extra space provide the flexibility and lifestyle renters are seeking.
- Operational flexibility. Land, or additional open space, allows owners to evolve amenities to things like pickleball courts, coworking spaces and outdoor kitchens. This flexibility helps properties stay aligned with resident expectations while also protecting long-term NOI.
Key Considerations for Investors
Investors should factor in operating costs when evaluating deals. In recent years, insurance premiums in Texas have increased as carriers pulled back after hurricanes, hail and tornadoes. As risk levels stabilize, we expect insurers to gradually re-enter the market, which could help moderate costs.
Property taxes remain a significant expense, but Texas owners often have the ability to contest assessments each year, making a clear tax strategy critical to protecting net operating income. Staying informed on legislative developments can provide investors with an important edge.
Looking ahead, technology — artificial intelligence (AI) in particular — is beginning to reshape multifamily operations. AI tools are already helping management teams respond instantly to resident and prospect inquiries, reducing missed opportunities and easing staff pressure.
We believe the benefits go beyond faster response times. By improving lead conversion, enhancing resident engagement and reducing the risk of human error, AI has the potential to lower operating costs and improve operating income over time. Early adopters may gain a meaningful advantage, while late adopters could struggle to keep pace in an increasingly competitive market. That being said, due to the lack of operational experience with AI, the risk and pitfalls related to implementation of such technology are yet unknown.
Why This Moment Matters
We believe Texas multifamily is entering a new phase — one defined by constrained new supply, enduring population growth and a rental market strengthened by the rising cost of homeownership. However, challenges remain, including interest rate volatility and increasing operating expenses, but the long-term fundamentals point to opportunity.
For investors evaluating opportunities today, focusing on location, product type and operational strategy can position portfolios to benefit as fundamentals stabilize and recover. We believe the current market represents a rare chance to acquire quality assets below replacement cost, at a time when the competition is lighter and the upside potential is building.
Put simply: we feel that the next 12 to 24 months may be a critical moment for entry into the market.
This article (“presentation”) and associated materials are being presented for informational purposes only and is not an offer to sell interests in a security. A private real estate investment is subject to risks and uncertainty many of which are not outlined herein including, without limitation, risks involved in the real estate industry such as market, operational, interest rate, occupancy, inflationary, natural disasters, capitalization rate, regulatory, tax and other risks which may or may not be able to be identified at this time and may result in actual results differing from expected. Private investments are highly speculative, illiquid, may involve a complete loss of capital, and are not suitable for all investors. Prospective investors should conduct their own due diligence and are encouraged to consult with a financial advisor, attorney, accountant, and any other professional that can help them to understand and assess the risks associated with any investment opportunity. Securities offered through North Capital Private Securities, Member FINRA/SIPC. Its Form CRS may be found here and its BrokerCheck profile may be found here. NCPS does not make investment recommendations and no communication, through this website or in any other medium, should be construed as a recommendation for any security offered on or off this investment platform. Advisory services offered through MLG Fund Manager LLC, an investment adviser registered with U.S. Securities & Exchange Commission.