Typically, at this time of the year I’m down in Florida, enjoying some time in the sun with my family. However, this year is a bit different. We’re patiently waiting a new baby, providing some extra time to ponder the year ahead. It’s the calm before the storm.
Nobody needs another year-end roundup or set of predictions, but this isn’t for you. It’s for me.
One of the reasons I enjoy writing so much is that I find it helpful to craft narratives around all the messy data, events, and random chaos that surrounds me. It provides a much-needed sense of calm.
This is the story I’m telling myself today – it’s the one that’s going to propel my actions in the year ahead.
Unlike 2023, which brought pain with little hope, 2024 was a transitionary year for the real estate market, for Atlas as a firm, and for me personally.
The year ahead is filled with excitement and optimism.
Here are 10 things I’m pondering as we head into 2025.
1. How will the Southeast multifamily fundamentals play out?
Starting with the most general, the southeast multifamily market fundamentals are on solid footing and the outlook is bright. We’ve hit peak new supply in nearly all markets, housing starts have dropped to the lowest level in a decade, wage growth has outpaced rent growth for 22 straight months, single-family housing remains historically expensive relative to renting, and demand remains near record levels.
Rents are projected to turn positive in nearly all markets by the end of 2025.
Will this dynamic be disrupted? If so, by what? Barring any demand shocks, multifamily is poised for a significant run up in rents.
2. Multifamily real estate is not about cash flow.
I tweeted this out a few weeks ago and it elicited some good feedback.
This isn’t a new phenomenon. Multifamily real estate, as an investment vehicle, is about growth, not about cash flow. As institutional capital has flooded the real estate market, performance expectations have changed.
This is especially notable in today’s environment, where the investment thesis is driven by future growth as opposed to in-place cash flows.
3. Avoiding the value trap.
It wasn’t long ago that deals were trading at 3 caps, well above replacement costs, with the expectation rates would stay near zero and rents would continue to grow at an outsized pace.
The world has changed dramatically since that investment landscape in 2021/2022. However, there seems to be an assumption that we’ll get back to a world of abundant capital and unbridled optimism.
Many deals today look cheap when compared to peak pricing, but yields are thin, and cash-on-cash returns are non-existent.
Investors today are justifying purchases based on a combination of discount to replacement cost, diminished supply pipeline in 2026-2028, and yesterday’s prices as reasons to buy.
While we believe in that thesis broadly, that doesn’t mean every purchase will be a good deal.
It’s my job to find high-quality assets in good locations with a high probability of achieving mid-teens IRRs with the potential to outperform.
Don’t get sucked into the value trap.
4. How long will the historically large discount to rent versus buy last?
I feel terrible for any young person in the market to buy a home today. They’ve been completely screwed.
Higher rates have only exacerbated a pre-exiting issue of demand outpacing supply. Layer in higher costs for taxes, insurance, and maintenance, and you come to today’s record discount to rent vs. buy.
This is a major issue which I don’t see going away any time soon. Even if mortgage rates come down in 2025, those price savings would likely be offset by more price appreciation.
The decision to rent vs. buy isn’t entirely economical. People will continue to get married, have kids, and eventually buy homes when they can afford to do so, regardless of housing costs. Of course, this is happening later in life (avg first-time homebuyer is 38) keeping individuals in the renter pool longer.
5. When are we going to accept that we can’t predict interest rates?
I know the answer here is never, but if the past few years has taught is anything, it’s that no one can predict interest rates.
Check out the chart below. The purple line is what experts predicted, and the blue line shows what actually happened.
We’ve been wrong for a decade straight.
On top of that, we can’t believe what the Fed says. Remember the message that there is “no urgency to raise rates” a few weeks before they began a rapid increase?
Don’t invest in deals where success is driven by declining interest rates. Buy deals with great long-term fundamentals that will outperform if rates come down.
6. Will operators keep throwing good money after bad?
The defining activity of 2024 for multifamily owners was ‘extend and pray’. Over-levered and underwater owners raised preferred equity and extended loans with the hope things improve quickly.
The equity in most deals acquired during the market euphoria in 2021/2022 is somewhere between impaired and completely gone.
Instead of selling these deals at a loss, investors bought themselves an additional 12-24 months by throwing good money after bad.
Will that dynamic continue in 2025? I don’t think so.
It’s time to face the music. All these GPs who have downplayed the severity of the situation to keep raising capital for new deals will have to come clean.
The tragic part here is that most LPs would have been better off if deals were sold in 2023 or 2024 as opposed to being encumbered by expensive preferred equity for 24 months.
7. The challenge or opportunity of being stuck in the middle
As a multifamily owner-operator, it feels like you have two options to operate your business.
- 1. Stay small and do sub-institutionally sized deals, leaning into the benefits of bringing a professional approach to a fragmented space.
- 2. Become large by scaling up as quickly as possible.
Is it possible to be in the middle? I certainly think so.
At Atlas, we compete with institutional firms to acquire high-quality multifamily assets in the Southeast, but we’re a team of 12.
To be successful, we lean into the things we can do that others cannot. We’re not going to outbid Blackstone for a straight down-the-middle deal.
Here’s how I described it in an earlier post:
We do things that only Atlas can do. We have access to flexible HNW and family-office capital and are unencumbered by legacy portfolio issues. We take unique stances on markets/rent growth. We roll out mid-term furnished unit strategies. We bring tailored design and renovation programs. We lean into what only Atlas can do.
We know more than anyone else. The best operators know the most and we pride ourselves on being the most informed, the most researched, and the most thoughtful group. We’ve been investing in the Southeast for the past 14 years and have spent thousands of hours touring deals, allowing us to quickly identify opportunities and overlooked assets.
We are not afraid of making mistakes. If we’re not making mistakes, we’re not taking enough risks. We are willing to take calculated risks if the upside potential makes sense.
We’re relentless. When the first few people say “no,” we don’t back down. We push through barriers, pursuing opportunities with passion and focus.
We foster a culture of passion and continuous learning. Everyone at Atlas is committed to growing and staying informed, whether through books, podcasts, or conferences. This culture creates unique insights and perspectives that large firms can’t replicate.
These aspects change how we think about the risk/return of an opportunity. If we believe the market will grow faster than the forecasts, we identify a unique upside angle, and we’re willing to take risks, our upside case is more attractive, our downside is better protected, and sellers/brokers know we’re the most informed buyer.
This also changes the math regarding what we’re willing to pay for a deal, making us the most aggressive buyers.
We’re not being reckless; we just know more and have more conviction than other buyers.
8. The importance of avoiding distractions.
The biggest challenge in business today is having too much to do and avoiding the little distractions.
Being able to focus on making progress on the few most important tasks requires that you be ok with missing all those nagging notifications and place your attention on what matters most.
You will not be able to eliminate the buzzing and the pings. You must let go.
I really enjoyed this Plain English episode with Oliver Burkeman.
9. A musing on AI
AI is incredible. It’s a complete game-changer and something everyone should spend time mastering.
However, in a world that is becoming more commoditized and productivity-focused, creativity and individuality are becoming rarer and more important.
There is so much focus today on doing more in our finite time that it stifles creativity. Instead, focus on being authentic and original. It will be rewarded.
Activities like deep work, mindful engagement, and savoring simple moments bring greater satisfaction than multitasking and productivity hacks.
10. Less thinking and more action in 2025
This final point feels like an appropriate one to close out the year. I spend a lot of time reading, listening, writing, and thinking.
I need to get out of my head, trust my gut, and take action.
2025 will be the year of action.
This will likely be my last post for a bit. We’re expecting our 3rd child shortly after New Year’s, so I’ll be stepping away for a few weeks to focus on family.
I wish you all a Happy New Year!
