EP#105 Grant Montgomery | Q4'26 Multifamily Update: Improving Fundamentals, Cooling Capital

Jay Parsons (0:02)

Welcome, welcome. It's episode number 105 of The Rent Roll, your podcast on all things, rental housing, apartments, build-to-rent and single-family rentals. And it is time for our quarterly state of the multifamily market. We got some fresh data covering Q3 in September. And so we're going to take a look at all that and what it means going forward as well. And so if I could succinctly summarize kind of where we are today, as simply as I can, this is what I would say. Fundamentals are clearly improving. Fundamentals are heating up. And yet capital markets are cooling.

And I'm not sure I could recall a period quite like this historically, at least in the last, you know, let's say 25 years. Most of the major data sets go back to around 2000 for capital market data, sales volumes, the quality rent data, etc.

And I don't think in that time period we've seen this paradox play out. And maybe some folks who were in the industry in the 80s and 90s may say differently, but I don't think we've seen this last 25 years. Typically, when fundamentals are improving, and oftentimes, you remember, it's not just the number, it's the direction, it's the momentum, meaning the market may not be strong, but it's clearly trending in the right direction. Typically, when that happens, we see signs that capital flow follows the fundamentals. And it certainly still could happen because this change in momentum on the fundamental side is still pretty fresh, it's pretty new. And everybody probably wants to see if it'll stick. So it might still happen. But as of this moment, capital seems to be on ice. You know, and obviously not just for multifamily, but all commercial real estate, and really a lot of other sectors as well. And especially equity capital, given the Fed's recent rate hike, plus the prospect of another potential hike to come. And honestly, it's very hard to pin down exactly how this story plays out. You know, forecasting future rate decisions has proven to be a fool's errand even for the best macroeconomist. But here's what we do know. Supply-demand fundamentals have clearly hit an inflection point here in 2026, and rents have too. So we're going to focus much of today's episode on that storyline, because again, we have some fresh data that's going to show it. And at the same time, it's important to acknowledge that capital may not quickly follow suit unless we start to see, number one, real discounting, you know, meaning cap rate expansion, particularly on institutional quality upper tier apartment product, or number two, is some kind of unexpected shift or shock that changes that dynamic. So we'll get into all that today, and then we're going to bring in the head of Multi-County Analytics at CoStar, my friend Grant Montgomery, and we'll talk about what Grant is seeing and all the data, and I'll ask him why CoStar recently upgraded their rent forecasts. So that's it for today. Let's get into it. I want to give a shout out first to our headline sponsor, to JPI, a leading apartment developer with a state of purpose to transform, building, enhance communities and improve lives. Check them out at jpi.com. JPI is in the cutting edge of some big innovations in apartment development and construction, using AI and other technologies to improve the construction process and speed up timelines. All right, so we're going to start things off with the little section we call Here's a Chart! And a friendly reminder, if you're new here, this is a podcast of multiple segments. So we're going to do data, we'll do some trivia, we give you some hot takes, we answer questions, and then we'll have an interview, Porsche interview in the second half of the podcast. So for today's Here's a Chart! section, I've got some slides to share with you on the latest and greatest data that was just released covering the state of multifamily fundamentals. This segment is sponsored by Northspire. Most development teams don't have a data problem, they have a timing problem. Something goes sideways on a project and by the time it reaches the forecast, your only options left are a change order or a contingency draw. Northspire is the development intelligence platform that closes that gap. Budgets, forecast draws and vendor data connected at one place, so your team sees the exposure while there's still room to act. Built by a developer for developers, northspire.com.

Okay, we got, again, fresh data, I've said that a lot. We got new data just released this week for Q3 and for September. What does it show us? Let's start with the big story line this entire cycle, supply. Year to date, we've delivered 231,000 units nationally. Now, that's not nothing. It's not like supplies evaporated, but it is the lowest number in seven years. And if we compare that to the peak of 2024, and that's when we delivered 450,000 units just in the first nine months of the year, in 2024, well, we've cut that number almost in half from those 2024 peaks. And so I've said this before, I'll say it again, the rent slowed on this cycle has been almost entirely about supply. That was the big headwind. I kind of say this tongue in cheek a lot, that supply has been the number one, number two, and the number three headwind for the apartment sector these last few years. So then also any rent recovery will also be about supply. Now the declining number of completions, allowing demand to catch up with supply. And that is what is starting to happen. So here are those year to date absorption numbers. And I think if we go back and compare these numbers to predictions going into the year, I'm pretty confident these absorption numbers are well above any mainstream forecast. RealPage shows 345,000 units absorbed through the first nine months of the year. That's down a little bit from the prior two years, but a little bit of moderation. But don't misunderstand that just because it's come down from these crazy high numbers these past couple of years, 345,000 units, that's still a huge number. It's one of the biggest numbers we've seen in 25 years.