Trends Watch: Real Estate Private Equity in Multifamily Real Estate

EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.   

This week, Elana talks with Zihao Wang, CEO/Principal, Motiva Holdings.  

What is your outlook for real estate private equity investing in multifamily real estate?  

The past 24 or so months have presented significant challenges for the multifamily asset class. Rising construction costs have impacted development, high interest rates have obstructed financing, and cap rate expansion has widened the bid/ask spread and lowered values. Additionally, supply-side pressures are hindering occupancy and increased expenses are affecting cash flow. These factors have made this period one of the most uncertain times for multifamily real estate in the last decade. However, despite these challenges, I believe that multifamily real estate remains one of the best asset classes for long-term investment. Its strong fundamentals, including persistent demand and robust economic resilience, continue to position it as a reliable and profitable choice. The strength of the multifamily sector lies in its robust fundamentals, particularly the ongoing supply-demand imbalances and the escalating costs of homeownership. In fact, in order to meet our nation’s housing demand, we need to build 4.6 million units by 2030, an amount that’s close to impossible to reach. Additionally, the gap between monthly mortgage payments and rent, coupled with the growing difficulty of saving for a down payment, has driven many individuals to choose renting over owning. Despite efforts to increase affordability and encourage development, home ownership will continue to be a difficult endeavor, which is why multifamily will continue to have demand in the future. In addition to surging demand and strong fundamentals, multifamily real estate stands out as a resilient asset class that offers protection in any economic environment. During economic recessions, renting often becomes the preferred option as potential homeowners delay their purchases, making multifamily properties a reliable source of passive income. This countercyclical nature provides investors with a buffer against market volatility. Conversely, in times of economic expansion, multifamily assets act as a robust hedge against inflation. As inflationary pressures mount, rents typically rise in tandem, allowing multifamily properties to maintain their income-generating potential and preserve value. Overall, I believe that multifamily real estate will continue to be one of the most reliable and profitable asset classes for private equity investing. While multifamily, like any investment, experiences fluctuations, its strong fundamentals and resilience to economic volatility make it a solid asset class for successful investing over the long term.  

Where do you see the greatest opportunities and why?  

The best opportunities lie in markets with low competition and strong growth fundamentals, such as supply-demand imbalances, economic drivers, and population growth. For example, Orange County in California is one of my top picks. The challenges of building in the area, combined with demand drivers like major employment hubs such as Disneyland, make it one of the fastest-growing markets in the country. Similarly, the Dallas-Fort Worth (DFW) market stands out due to its affordability, significant population growth, and expanding economic base. With major financial institutions like JPMorgan and Goldman Sachs establishing offices in core Dallas and employers like Toyota setting up operations in North Dallas, DFW’s economic outlook and population growth is very promising. However, every opportunity comes with its own set of risks. In California, for instance, the complex regulatory environment can pose significant challenges for developers and investors, potentially slowing project timelines and increasing costs. Navigating these regulations requires deep local expertise and a strong understanding of the legislative landscape. On the other hand, while DFW offers tremendous growth potential and looser regulations, it’s currently experiencing heavy supply-side pressure. This influx of new development is resulting in short-term oversupply, impacting occupancy rates and rental growth. To be successful, investors must carefully analyze each opportunity and weigh the risks against the potential rewards, ensuring they have strategies in place to mitigate these factors and capitalize on the underlying strengths of these markets.  

What are the greatest challenges you face and why?  

One of the most pressing challenges in operating multifamily assets is the rise of uncontrollable expenses. A key example is the steep increase in insurance costs, which have surged by over 10% year-over-year in recent years. This escalation is driven by factors like increased replacement costs, rising insurance fraud, and more frequent natural disasters, which have led some insurance carriers to exit certain markets. These issues are largely governed by the private sector, which is profit-driven, making it exceptionally challenging to find quick or effective solutions. The unpredictability of these expenses complicates underwriting and budgeting, adding layers of risk and complexity to investments. As insurance premiums and other operating costs continue to rise, multifamily operators must navigate these challenges with meticulous financial management and strategic planning to safeguard their assets and maintain profitability.  

What keeps you up at night?  

The main concern on my mind right now is deciphering what will happen at the macro level in the next 12-24 months. Currently, on the operations side, we're seeing tighter safety margins as rents soften and expenses rise. On the investment side, we are seeing low transaction volume due to the wide bid/ask spread between sellers and buyers, high cost of debt and limited equity. In fact, our team underwrites 20-30 deals a week and 99% of those deals don’t make it past our investment committee for further diligence. While there seems to be light at the end of the tunnel with the Fed signaling multiple rate cuts, we are unsure of the timing and velocity of those cuts as well as whether we’ll see a soft, hard, or no landing. At Motiva Holdings, one of my main tasks is to prepare our operations, liquidity and balance sheet for the conditions 12 months ahead. For example, in the case of a recession, vacancy rates on certain properties, especially those with heavy one bedroom/one bathroom units, would spike as tenants move in with their families to save costs. With this, we need to begin implementing budget cuts for those properties to continue cash flowing. Although we rely on historical trends for guidance, the unique nature of the pandemic economy and the government's response make it challenging to predict the future with confidence. This uncertainty makes it difficult to determine the best decisions to make today to maximize future returns. 

The views and opinions expressed above are of the interviewee only, and do not/are not intended to reflect the views of EisnerAmper.