By Danny Fishman, CEO, co-founder, GAIA Real Estate
The country’s broader middle class is facing a housing crisis: a growing gap in available, high-quality rental options.
High-demand markets like Miami and New York City are now appearing in headlines on two lists at once. Miami is called out as oversupplied but is also pointed to as one of the least affordable rental markets in the country. New York City has a supply shortage with population decreasing in recent years, and still rents go up.
The new supply of rental units flooding Sun Belt markets are mostly in Class A buildings with full amenities. Therefore, less quality options are available to middle-income renters. Much of the industry is shying away from this gap, but it’s crucial that developers, cities and states start pushing toward it.
Major institutional investors have historically chased luxury or affordable housing at the extremes, partially due to the real estate market’s — both private and public sectors — failure to foresee the widening income gap. As the economy split, households got pushed toward the higher and lower ends, while the middle thinned out.
At the same time, renters and buyers were looking for apartments with nice finishes and state-of-the-art amenities. To meet these demands, and to cover the high costs of construction that requires high rents to get needed returns, developers built for the top, since that’s who can afford the price point. Creating and running buildings for those in the middle range didn’t make economic sense without city or state incentives.
It’s difficult to deliver a genuinely affordable unit to a middle-income renter. Even with a lack of amenities and basic finishes, construction costs are still too high to charge middle-income rents while keeping operating costs low. We cannot solely build our way out of the middle-income housing gap, but we can reposition assets that have already been built as a partial solution to this crisis.
In other words, the supply of homes needed for this population already exists, but the buildings need to be updated. Efforts can include renovating units, modernizing mechanical and utility systems and hiring new management. The goal is to raise quality without layering on additional luxury finishes and resort-level amenities that would price the middle renters out. Done correctly, this ensures genuinely good housing for the middle-market.
The initial evaluation process for any repositioning is interesting, because it’s impossible to fully predict how an adaptive reuse will unfold until teams are actually in the building. Usually, developers can start with a pilot to see whether a small batch of improved units lease up at the projected rents and costs. Based on this assessment, they can instead decide whether or not to roll out these updates across the whole property.
When the pilot works, the full process from acquisition of the current building to stabilization of the new and improved units usually takes around two to three years but can extend beyond that based on the property. Throughout repositioning, the goal is to match the level of investment to that of the local market, and most importantly, to what prospective tenants can afford. Pouring luxury finishes and building best in-class amenities into a building with middle-income tenants is a mistake, because those renters cannot pay for those features.
A successful repositioning calibrates upgrades to fit the customer, striking the correct balance between making meaningful quality improvements to a property while keeping rents accessible to middle-income renters. It’s always tempting to continue additions that would make the building the best it can be while assuming the market will pay for it. But this is exactly how the middle-market renters get priced out.
It makes the most sense to start in the opposite direction and work backwards. Set rents that are realistic for middle-income households in the specific market that you are building in and develop the rest of the renovation budget from there. Adding luxury finishes and dozens of amenities with realistic rents for middle-income homes to then pray the market follows will lead to an unsuccessful repositioning. In a successful process, it’s important to discern what people can actually afford and design the improvement of the building to fit that price.
In today’s macroeconomic environment, it’s important for developers to keep all of this in mind throughout their projects. This philosophy explains why we’ve kept leverage low at GAIA Real Estate during the stretch of rising interest rates. With elevated borrowing costs, steep construction pricing and the markets’ baseline expectations of luxury finishes and full amenities, low rent is almost inconceivable. Many firms throughout the country are shying away from this market, seeing these barriers as a wall. For us, it’s an opening.
Developers can and should grow their market-rate multifamily portfolios and continue working to serve the housing needs of America’s middle class. With expensive capital and the majority of big players retreating to the top of the market as it stands, staying disciplined, keeping leverage modest and working to reposition existing stock to the best of your ability will lead to success.
Cities and states need to stop treating multifamily as an ATM for their spending and waste, because the costs don’t stay with the owner. They get filtered back to the residents through rent. The best way for rent to decrease is for taxes in this asset category to go down, and the process for permitting and inspections to speed up. This approach may do less for the lower income housing supply, but the gap can be closed in other ways. For the overall success of a city, servicing the middle-income renter is crucial.
It’s also important for developers to understand who our middle-market renter is in each city. A middle-income household in Houston looks nothing like one in New York, and citywide figures can be misleading, even within a single market. There are obvious differences between two completely different cities, but the gap between two neighborhoods in the same city can be just as wide. The only way to set a realistic rent target is to look at the macro market of the city, its micro submarket and the micro-micro area, or the neighboring blocks surrounding the building.
As 2026 unfolds, the direction the multifamily industry will take is almost entirely dependent on location — and the micro-location within it. Holistically, the two segments working well right now are affordable housing built with state incentives and luxury product. Everything in between these two points is where the industry has continuously fallen short. This is the clearest signal of where opportunity lies and where help is needed. The number of middle-market renters is only going up, so the industry, as well as local cities and states, must build a bulletproof strategy around serving them.