The multifamily real estate market is experiencing a significant shift as years of development projects reach completion simultaneously, creating oversupply conditions in key markets across North America. This convergence of new inventory is forcing investors, lenders, and property managers to reassess their strategies and adapt to rapidly changing market dynamics.
Dr. Jennifer Salisbury, host of the “My Life As A Landlord” podcast and a seasoned real estate investor with properties spanning from Texas to British Columbia, has witnessed these changes firsthand. Her perspective offers valuable insights into how market participants are navigating this challenging environment.
The current oversupply situation stems from development timelines that began years ago under different market conditions. “Five, six years ago, they applied for permits, and they got into these business plans,” Dr. Jennifer Salisbury explains. “They probably pushed the Go button and started two, three years ago, and once you start construction, you can’t stop. You have to keep going.”
This timing mismatch has created particularly acute challenges in markets like San Antonio, where Dr. Salisbury recently observed the completion of hundreds of new apartment units within a five-mile radius. The impact on existing properties has been immediate and severe: “We’re looking at this going okay, so there’s oversupply. People like me were going in and buying apartment complexes like the ones right around the corner here, and now they’re upside down. Their note is more than their worth because of the influx of all of these new units coming online.”
The situation extends beyond simple supply and demand imbalances. In many cases, the new supply doesn’t match market needs. “There’s oversupply of the wrong layout,” Dr. Salisbury notes, citing examples of unit types that don’t serve young families with children. This mismatch between available inventory and actual housing needs compounds the challenges facing property owners.
As property values decline below outstanding loan amounts, lenders are making strategic decisions to minimize their exposure. Rather than becoming reluctant property managers, many are accepting significant losses to avoid operational responsibilities.
“Lenders do not want to become property owners, so lenders are now making concessions,” Dr. Salisbury observes. “If a note on something is $10 million but I underwrite it, and it’ll work for me at $8 million, some of those lenders are deciding to take a $2 million loss so that they don’t have to be a property owner.”
This approach represents a pragmatic response to market realities. Lenders realize that managing distressed properties requires expertise and resources they typically don’t possess, making negotiated settlements more attractive than foreclosure.
While some attribute current challenges to inexperienced investors making overly optimistic projections, Dr. Salisbury offers a more nuanced perspective. She emphasizes that even seasoned investors with institutional backing couldn’t have predicted all current market conditions.
“These multifamily owners who’ve owned the property for three or four years, have repositioned the property – they weren’t anticipating when they bought it three, four years ago, the neighboring apartment complexes weren’t even on the radar. That wasn’t on City Council’s public hearing agenda,” she explains.
The comparison to unforeseen events like COVID-19 underscores how external factors can dramatically alter investment outcomes regardless of experience level. “Just like COVID was not part of any of our forecasts, you don’t know what’s going to happen.”
For investors facing challenging situations, Dr. Salisbury advocates for direct communication and transparency with stakeholders. Her approach involves immediate contact with lenders, insurers, and other parties to discuss issues openly before they escalate.
“When I get into weird situations, I pick up the phone and I have the most awkward conversation that you can have,” she says. “I go, ‘Okay, hi, it’s Jen calling. We’ve got to have an awkward conversation. Here’s the situation. I want you to hear it right from me.'”
Options for distressed multifamily properties include margin calls to existing investors, negotiated settlements with lenders, strategic rent adjustments to maintain occupancy, and in some cases, voluntary surrender. The key is maintaining open communication and making decisions based on comprehensive analysis rather than emotional attachment.
Concurrent with oversupply issues, many markets are experiencing a “quiet crisis” in rental payments. Rising living costs have created financial stress for tenants, leading to increased delinquencies and additional pressure on property owners.
“The cost of living has just gotten so expensive. People are living on credit cards out of survival. There’s no savings out of survival,” Dr. Salisbury notes. “At some point the rent is going to fall short. The rent is going to be late, probably consecutively.”
This creates a cascading effect where property owners must cover mortgage payments themselves, potentially leading to their own financial stress. The situation is particularly challenging for smaller investors who may lack the reserves to weather extended periods of reduced cash flow.
In response to current market conditions, successful investors are adjusting their acquisition criteria and operational strategies. Dr. Salisbury’s approach focuses on identifying underperforming properties in stable neighborhoods, typically seeking 50-200 unit properties with clear value-add opportunities.
“We’re looking for distressed property in a good neighborhood,” she explains. “But if the building I’m looking at is boarded up, and everything else is boarded up, and we’ve got a $1.5 million capex, I’m not going to overbuild the neighborhood.”
This strategy emphasizes the importance of neighborhood analysis and ensuring planned improvements align with local market conditions. The goal is to identify properties where strategic investments can justify rent increases without exceeding local market capacity.
Current market conditions have highlighted the importance of geographic diversification and thorough due diligence. Dr. Salisbury’s investments span multiple markets, including Texas, Tennessee, North Carolina, and British Columbia, allowing for risk distribution across different economic conditions.
She emphasizes that remote investing requires strong local teams and comprehensive market knowledge. “How do I know what’s good and what’s bad? It all goes down to your team, and at the end of the day, it all goes back to the human factor.”
The emphasis on local partnerships becomes particularly important when evaluating opportunities in unfamiliar markets or during periods of rapid change.
The current market underscores the importance of stress testing investment assumptions and preparing for various scenarios. Dr. Salisbury notes that Canadian lending practices, which routinely stress test loans for interest rate increases and expense growth, provide a model for robust underwriting.
“In Canada, any loan that gets underwritten for any property is they’re going to stress test it. They’re going to go, ‘Okay, what happens if the interest rate goes up? What happens if expenses go up?’ and they stress test it and make sure that your income flow, your debt to value ratio is still going to work.”
For investors navigating current challenges, the key principle is maintaining the ability to sleep at night. “You have to be able to sleep at night. If this is going to stress you out, you either need to sell the property or hire a property manager, get some better team members, change up how you’re doing it.”
The current multifamily market presents both significant challenges and opportunities. While oversupply and rental payment pressures create stress for many owners, these same conditions may present acquisition opportunities for investors with available capital and operational capabilities.
Success requires realistic assessment of market conditions, transparent communication with all stakeholders, and the flexibility to adapt strategies as conditions evolve. As Dr. Salisbury notes, “No situation is permanent, it’s all temporary. How do you get through the next bit? And then how long will it last?”
For real estate professionals and investors, the current market serves as a reminder of the importance of conservative underwriting, adequate reserves, and the value of experienced local partnerships in navigating challenging market conditions.
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