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Every Friday, join us as we dive into the latest in real estate multifamily with David Moghavem, Head of East Coast Acquisitions at Trion Properties. David invites top experts who know the ins, outs, and trends shaping the real estate multifamily market across the nation!
Whether you’re a seasoned investor or just curious about where the next big opportunity might be, Deal Flow Friday brings you the weekly inside scoop on what’s hot, what’s not, and what to watch for in today’s ever-evolving real estate scene.
David Moghavem (01:14)
All right, welcome to another episode of Deal Flow Friday. I'm your host, David Mogavam. And today's episode is another multifamily monologue, the 2026 edition, where we look back at what panned out over the last year, what didn't and what I think happens next and why. Before we jump in, I want to take a minute to acknowledge something that honestly still feels pretty surreal. It's the one year anniversary of Deal Flow Friday. This is where
tens of thousands of streams later, a few hundred subscribers later, 38 episodes later, and we're here. And most importantly, we're just getting started. So thank you to everyone who continues to tune in, share the pod, like, comment, all the episodes, and reaching out with support. It really does mean a lot. If you haven't already, please take a moment to hit the subscribe button. It goes a long way in helping the show grow. I know that's...
pretty cringe to ask at times in the middle of the episode, but please subscribe. really helps. So let's dive in. Why does this episode matter? Well, this episode, you know, it felt like the right moment, not only to look forward and throw out hot take predictions, but to actually reflect and not just reflect on the year, but go all the way back to episode one, where we made our own predictions and revisit what we said.
what we got right, what we missed, and talk about what we learned in the process. This is the kind of reflection that you gotta do in real estate. Real estate, let me remind you, real estate is not just about being right in the moment. It's about being right over time, and part of that, it's an iterative process of reflecting, predicting, reflecting, refining, and looking at what's the data you have available and making predictions based on that. You're not always gonna be right in the moment.
But by reflecting and creating that iterative process and that feedback loop, you'll be able to be right over time. So let's do it. The first reflection, very cliche reflection that we were debating January 1 of 2025. The prediction was whether we're going to survive to 2025 or survive through 2025. And
I think optimistically I predicted survive 225. I thought this was going to be the year and we, you you could listen to episode one as to why, but is the year where rates are maturing and they're not giving any more extensions and sellers are going to capitulate. And that wasn't really the case. There was some distress, but not a wave of distress. There was.
clearly another year where deals were just stuck in the mud. And I think the next few reflections will explain why.
higher for longer. ⁓ I predicted, yeah, it is gonna be higher for longer and that's what happened. We talked about how the market was pricing in cuts that didn't actually happen yet. And that optimism was already ahead of reality. And looking back, that's exactly what happened. Rates didn't drop precipitously. The higher for longer narrative held. what we predicted though was that,
would institutional capital come back? And my prediction was, yes, this 2025 is a year where institutional capital would come back. But that's not how it played out. Why I predicted that, I thought that higher for longer, even though rates was higher, it would bring stability. And I felt that stability would yield
seller capitulation, and it would also yield capital market stability where institutional capital have a benchmark on how to solve deals. what I came to realize is that capital market stability alone would not bring deal flow activity. twofold.
First, psychology still mattered a lot. Even with more rate clarity, confidence, and multifamily fundamentals didn't snap back overnight. Capital stayed cautious longer than expected. And second, the bid ask spread stayed wide. Sellers didn't capitulate to pricing. That met institutional return thresholds. So we just didn't see that wave of institutional capital for those two reasons. Now, our caveat
that we did see institutional capital return, but just not through acquisitions. We saw it in platform investments, in portfolio recapitalizations. I talked about this on the last multifamily market monologue, and I'm not here to give myself credit for that one, but institutional capital's still somewhat on the sidelines, but we did see glimpses of it just in different shapes and sizes and forms.
So let's take a quick rerun of those questions in 2026. Honestly, for the most part, maybe I haven't learned my lesson, but I'm doubling down. I think 2026 is the year where we are gonna start to see seller capitulation. It's gotta be the year, right? And if you're wrong so many amount of times, you gotta be right one of these years. So I'm doubling down on that. I think there is gonna be seller capitulation. I think we're gonna see also another three 25-Bip.
cuts in 2026. think polymarkets predicting two or three of those. I'm leaning towards three just because of the new Fed chair coming in potentially. And then the fact that I think the economy is just a little bit shakier than people make it seem. I think that that results in being more aggressive or hawkish on rate cuts for QE. But I do think Treasury stays sticky.
I think even with the cuts, don't see rates dropping precipitously still. So I do see the higher for longer, even though I do think there's going to be more than predicted rate cuts. And then I think with the institutional capital, it's always a tough subject. I do think if I do think that there is going to be solid capitulation, I do think that there's going to be institutional capital coming back to take advantage of that. So we'll see. But I really want to.
take this moment to step away from the predictions and give some fresh perspectives of where we're targeting in 2026 and how we're thinking about 2026. So one of the fresh perspectives that I want to talk about here is the idea of market winners. And when I say market, mean, you know, MSAs and multifamily.
and the type of markets and the type of markets that I'm paying attention to this year are what I'm going to categorize as category two and category three markets. And I'm going to talk about that in a bit, but let me first pull up a few rent growth charts of major markets where we own in or I've discussed at some point in the pod and the respective 2025 rent growth percentage for the year.
and their cumulative one to three year forecast rent growth. as you could see for 2025 rent growth, you could see everyone's basically in the negative besides the Bay Area, East Bay, San Jose, San Francisco. They're all positive San Francisco, 5 % rent growth in 2025. Everyone else is pretty flat or negative. Columbus, basically flat, LA flat.
And then you start getting into the negatives, Denver, Austin, Phoenix, Orlando, Tampa, Salt Lake City.
So the former Sunbelt darlings are still down two, three, even 4 % as supply delivered. So demand cool, it depends. And here's where the four categories that I was talking about start to emerge. And this is where it starts to get interesting. So if you look here, I have four categories that I put these markets in. Category one is low supply, high demand. And category two is low supply.
low demand or steady demand. Now, I don't like to say low because it's relative to the supply in the same market. Category three is high supply, high demand. And category four is high supply, low or steady demand. So let's start with category one. Low supply, high demand. You're seeing it. Bay Area. Biggest rent growth in the year in San Francisco, San Jose.
East Bay, this is low supply, high demand. And we're bullish on the Bay. We still are. But the problem is it's now an in favor market. It's leading the country in rent growth. so cap rates have compressed dramatically. It's a great market, but it's hard to find yield. And it's hard to find yield you feel good about. So we'll chase it. We'll spend time there. But the value is tough.
it's gonna take a lot of time to find good value in markets that are in favor. So I'm not writing off the bay, but it feels frothy at But let's revisit category two, low supply and low or steady demand. And most of what you hear is Midwest, right? Columbus, Des Moines, steady markets with reliable cash flow.
And you're hearing the cap rates are starting to compress because of some of the buzz, but for good reason, the cash flow is more predictable. Operations are smoother. And so you're hearing the buzz with the Midwest and for good reason in that regard. I also put Portland in here. think, yes, the urban core, urban core Portland is a different story. still going through concession absorption and still concessionary market. There was a lot of supply delivered. There's not as much supply being built.
but it still need to get absorbed. But suburban Portland, mean, the MSA as a whole has less than 1 % inventory expansion and blended vacancies around 7%. And if you parse out the urban core, I would probably put suburban Portland sub 7 % vacancy. So to me, that feels like almost like another Midwest ish.
market where it's supply constrained and there's steady demand relative to supply. So I like those type of buys in there where it's I wouldn't say Portland's necessarily out of favor. Political risk has definitely dampered some of the institutional capital from driving in. a lot of these capital flows are chasing low supply markets. And the category two
of the low supply, steady demand like a Portland can be really good in 2026. Now, category three is where it also gets really interesting. And this is high supply, high demand markets. And I mean, on a broad stroke, this is the Sunbelt. These are the markets where the hype was loud. And then you open up the OM and you look at the concessions and you look at the vacancy and you're like, what the hell am I looking at? But
Honestly, each MSA, even though it's one category, each MSA really has its own story. Like Atlanta, for instance, had heavy deliveries ⁓ in select sub markets. But, and the pricing is extremely attractive right now for a major MSA. You're getting really good quality product at really compelling yields. South Florida, meanwhile, same bucket, same category, high supply, high demand, but you're seeing those cap rates.
completely compressed because there's just a lot of capital flows. They like the story of South Florida and the growth in that regard. ⁓ But there's a lot being delivered and there's also a lot of demand. so they're all, what I'm trying to say is even though it's in the same category, the yields aren't priced the same. And I think that's where these, this is a category I like playing in because you could really get in the weeds and see which markets are pricing where.
And I think there's a lot of opportunity there where not every high supply, high demand market is priced the same today. And I like that for that reason. And I think there's a lot of opportunity in investing in some of those out of favor markets in this category, like in Atlanta, for instance. And then category four is high supply and low demand. And again, low, I really mean steady. And Austin's like a perfect example of this. Austin does not have low demand.
If you look at Austin, I'll pull up a chart, but Austin had 20,000 units absorbed this year. That is insane. But when you deliver 30,000 plus units the year before and are building another and delivering another 20,000 units this year, that's going to be low demand compared to the high supply. And that's what Austin's going through right now. It's the worst performing MSA, major MSA in the country.
right behind Austin as worst performing, the second worst performing is probably Denver. And you're seeing similar, again, it's not low demand, it's steady demand. think Denver's absorption was hovering around 8 to 10K, but the supply was being delivered at around 12 to 18K for the same corresponding years.
low relative to supply, low demand relative to supply. These are the markets that I'm not writing off, but they're not the markets for 2026. They need more time. And you got to buy at a steep, deep, deep discount. And you have to also understand that you might be catching a falling knife because it might get worse. And so those are markets where I just think patience matters.
So the big takeaway here is last cycle everyone was tracking migration. This cycle markets are being rewarded for constraint. so category one looks like the best on paper, right? The low supply, high demand, but pricing is gonna be tight. And so you're gonna have to look at a thousand deals to find that one deal that makes sense. And it's gonna be really tough and you're gonna bang your head against the wall.
trying to find the right deal that makes sense on paper. But my God, if you find that deal, you're gonna be really happy and just gotta be disciplined, extremely disciplined on those category one type of markets, like a Bay Area, because it gets frothy. But the markets I'm really excited about are the category two and category threes, because they're somewhat contrarian for different reasons. And you can find the strong yield and steady cashflow like a Portland.
you could find the wide pricing in a major MSA turning the corner like in Atlanta. And so again, I'm still gonna chase the Bay Area gem, but it's harder. And I'll still look for that Denver sweetheart deal, but it's gotta check a lot of boxes. So that's why I like category two and category three for that reason.
So another prediction that I wanted to share with you all, it's not really a prediction, it's really just a case for class B housing based on an AI study that I saw, that I came across. And listen, I'm just giving a caveat, try on properties, we do class B housing, it's our bread and butter. So take this take for what it is, I'm obviously biased to class B housing, but I think after seeing this study from
AI, everyone's always asking like, how is AI going to impact renters and what type of renters are going to be impacted? And when I saw this study, my dad, my dad actually sent it to me and it really got me thinking that I do really feel like class B housing is going to be a winner in 2026 after seeing a study like this. And I think on the other side of that, I think class A housing and class C housing is going to struggle. So
Here's the chart.
So this is from Microsoft. Microsoft released a study ranking occupations with the highest AI applicability. And the pattern really jumped out immediately. These aren't factory jobs. These aren't traders. They're not operational roles. They're all white collar service, clerical, analytical jobs. Customer service, writers, sales support, analysts, coordinators, assistants.
So this is like very urban, mid-income, and the renters, all these people are renters. This isn't a list of jobs being eliminated. It's a list of jobs that are gonna become more productive. So this means fewer people doing the same work, but potentially higher wages for those who are doing the work. And we talked about this in the pod before.
AI isn't going to replace people. People leveraging AI are going to benefit and replace the people who are not leveraging AI. And so to me, this is a win for Class B renters, Class B renters that are, if you're buying a Class B property with incumbent renters, my bet is that those renters are gonna see wage growth as their exposure to AI.
and their overlap to AI and their ability to be able to leverage AI will make them more productive and will make that industry grow and will yield to higher wage growth for those tenants. But I'm not ruling out that there's gonna be uncertainty through AI. There's gonna be more job churn, there's gonna be longer gaps between job roles when someone needs to find a role. There's definitely...
Fewer people needing to do the same job and as companies grow, they're not one for one hiring based on that growth because they can leverage AI. So I understand that, but to me, I feel like that in of itself is actually affecting class A more than it's affecting class B. Because when there's this uncertainty and when income feels uncertain, people don't upgrade. They don't stretch for class A.
They don't try to move and upgrade from their class B property to the top of the market, concession, lease property. Instead, they renew. They renew and there's more retention. They become more price sensitive. So I just think through this study, my prediction is that renter duration is gonna increase. But the ability to push rents
is gonna decrease or decline in that regard. And that's where I think Class B shines. I think that's where workforce housing wins. I think that's where low well located Class B properties win. I think that's where diversified employment markets win. And so I don't think AI kills rental demand. I don't think AI is gonna cause this job loss, but
I do think it compresses renters ability to pay, which will hit class A and will make it harder for class A properties to complete their lease up and will hit class A properties from absorbing. It's gonna hurt absorption numbers in those lease up type of properties. But I also think it's going to help preserve a stronger renter pool for class B.
And so that's why I feel really good about Class B properties and where Class B properties, the gray color, if you will, are positioned heading into 2026. So those are my predictions. Thanks again for tuning in. Looking forward, we have a lot of great guests lined up ⁓ this year already. And so stay tuned and thanks again.