Institutional Capital Takes a Harder Look at Multifamily

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Institutional multifamily investors are entering a period in which disciplined underwriting may matter as much as property fundamentals. Rising financing costs, a widening range of regulatory obligations and uneven market conditions are reshaping where capital can be deployed and at what price.

Those crosscurrents will be at the center of Horizon Scanning: Unpacking the Institutional Landscape, a session at GlobeSt.com's Multifamily Owners Forum being held in San Diego next month.

The session will feature Rory Ingels, director of U.S. real estate asset management at BlackRock; Michael Johnson, managing director at PCCP; Marc Renard, executive vice chair at Cushman & Wakefield; and Philip Campbell, executive director at PGIM Real Estate. They will examine the forces influencing institutional decision-making in the multifamily sector.

GlobeSt.com spoke with Ingels for an early look at the institutional trends shaping the discussion.

Regulation Moves Into The Underwriting

For Ingels, the growing volume and variety of regulations are central to evaluating a prospective acquisition. Institutional investors must increasingly determine not only whether an asset and its market offer compelling fundamentals, but also whether the operating and compliance burden can be effectively underwritten, she told us.

"One of the things that I would say concerns me, and that we usually spend a lot of time digging into on a new acquisition, is just all the regulatory requirements that continue to grow and expand," Ingels said.

"How we can effectively underwrite around those and determine which markets that we want to invest in or may not want to invest in because of those."

Rent regulations are one concern, but Ingels pointed to a wider group of requirements that can affect a property's cost structure and day-to-day management. New rules governing security deposits and fees, as well as requirements such as balcony inspections in California, add obligations that take both time and money to administer.

That places added emphasis on the capabilities of third-party property managers. Institutional owners commonly outsource daily management, Ingels said, but they still need confidence that the managers they select understand the evolving rules and can operate assets in compliance with them.

The issue can affect market selection as much as individual property operations, especially when investors weigh markets with very different regulatory environments.

Debt Is Available But Pricing Is Difficult

Capital availability is not necessarily the defining problem in the current multifamily market, according to Ingels. Debt remains available. The challenge is the cost of that capital and the uncertainty it creates for acquisition underwriting.

"The capital is available. That's not the issue. It is the price," Ingels said. "The price at which it's available is making it really hard to underwrite."

Higher interest rates have changed transaction economics and, in some cases, interrupted deals already in the market. Ingels said BlackRock had a deal that was retraded because of interest rates. She expects cap rates to rise, which could again widen the gap between what buyers can justify paying and what sellers are willing to accept.

That gap may become more pronounced as owners confront refinancing needs, development obligations or other pressures that leave them with less flexibility. Ingels expects forced sellers to take substantial price reductions, while owners that are not compelled to transact may choose to wait for greater clarity on interest rates and cap rates.

A Split Market Is Taking Shape

The distinction between compelled and patient capital could become one of the most consequential features of the next phase of the cycle. Investors that acquired or developed assets during a period of exceptionally low cap rates may have to recalibrate assumptions if financing costs remain elevated and exit pricing resets.

For buyers, that environment calls for a sharper focus on basis, debt costs and an asset's ability to withstand changing operating conditions. For sellers, it raises the question of whether to transact at today's pricing or hold until borrowing costs and valuation expectations find a more stable footing.

"Those that are forced to sell will have to sell, and they're going to have to take a big haircut on pricing," Ingels said. "Those that are not forced to sell will hold on to see where interest rates go, and to see if cap rates will decline."

The broader market is also far from uniform. Ingels said Class A multifamily fundamentals remain strong overall, although Sun Belt markets and other areas that experienced substantial overbuilding have shown weakness. That unevenness reinforces the need for market-by-market analysis rather than treating multifamily as a single investment story.

Supply Pullback Could Improve The Outlook

Despite the current friction in the capital markets, Ingels sees a more constructive longer-term setup in markets where supply pressures begin to ease. Construction is already pulling back, she said, even as recently completed properties continue to lease up and create near-term pressure in some markets.

BlackRock is seeing rent reversals and positive lease trade-outs in certain more distressed markets, including Austin and Denver, Ingels said. She also noted that rent-to-income ratios remain relatively low within the firm's portfolio, leaving potential room for rent recovery as conditions improve.

Ingels expects rent growth to return to more typical levels in 2027 and 2028, with the possibility of outsized growth if the reduction in new construction meaningfully tightens supply. The path will likely be uneven, but the combination of stronger Class A fundamentals, a shrinking development pipeline and improving leasing trends could create opportunities for investors who can navigate today's pricing and regulatory challenges.