When you strip away the headlines, real estate cycles typically come back to the same fundamentals: supply and demand.

That’s how Jim Fox, CFO of BAM Capital, kicked off a recent webinar analyzing the state of the multifamily market. While every market cycle looks a little different on the surface, the forces driving them rarely change.

“When demand exceeds supply, rent prices generally increase,” Fox explained. “If supply outpaces demand, rents fall. That’s when you start seeing things like concessions and free rents just to get apartments leased.”

It sounds simple in theory, but the last several years have been anything but typical.

How We Got Here (and the Sun Belt’s “Pie-Eating Contest”)

Typically, the demand to rent apartments is steady and predictable. New households form every year, people move for work, and companies relocate to communities with business-friendly practices.

But the pandemic shifted those patterns. Historically low interest rates mixed with the sudden rise of remote work gave millions of people the freedom to choose where they wanted to live. At the same time, companies were relocating to lower-tax states, driving even more people to the Sun Belt.

Markets like Austin, Nashville, Charlotte, Phoenix, and pockets of Florida suddenly looked like can’t-miss opportunities for developers. Builders rushed in all at once to meet the demand, triggering what Fox jokingly described as a “pie-eating contest.” Everyone wanted a bigger slice.

The result was a tidal wave of apartment development—one of the largest construction booms these markets had ever seen. During the peak of 2022 to 2024, some of the Sun Belt cities saw new construction grow to a staggering 7.5% to 15% of their total housing inventory. That is nearly three times the normal historical average, and it eventually led to a significant oversupply that the market couldn’t absorb.

Higher Rates Reshape the Development Landscape

For a large development project to work, future rents have to be high enough to cover the cost of construction. That was easy to achieve when the Federal Reserve kept interest rates near zero coming out of the pandemic.

But the market looks completely different today.

Developers were hit with an unprecedented shock as the federal funds rate skyrocketed from 0.8% in February 2022 to 5.33% just 17 months later. It was the fastest rate-hiking cycle in history, Fox said, creating major challenges for the industry and quickly changing the low-cost financing environment developers had relied on.

Today, construction costs remain high, financing is expensive, and projects that penciled out just a few years ago no longer make financial sense. Meanwhile, developments that started during the boom are still finishing up, bringing new apartments into markets that are already oversupplied.

“It’s not surprising,” Fox said. “When a market gets overbuilt, owners and developers can get hurt. That’s exactly what we’re seeing play out right now.”

Vacancies have climbed across the Sun Belt, forcing landlords to cut rents or offer steep concessions just to fill units. Some owners are struggling to refinance large loans that originated in a completely different interest-rate environment, leaving them vulnerable.

Why the Midwest Took “Just an Extra Slice”

Not every region experienced the same level of overbuilding. While development activity increased modestly in the Midwest, builders were more disciplined. Instead of joining a reckless pie-eating contest, the Midwest took “just an extra slice,” Fox said, keeping its peak inventory growth to a manageable 2.8% to 4.5%.

Because of this restraint, Midwestern property owners have been largely insulated from major distress. Rents have held steady, vacancy rates are hovering around a healthy 90%, and standard macroeconomic drivers—like Eli Lilly’s massive $10 billion investment in Lebanon, Indiana—continue to fuel organic, stable job growth in many Midwestern regions.

But there’s a catch for investors—because the Midwest has been so resilient, very few bargains are available, Fox added. Owners aren’t willing to sell their properties at a discount unless their hands are forced.

In the Sun Belt, meanwhile, oversupply in places like Austin and Nashville has created significant challenges. Banks are pulling back, vacancies remain elevated, and some owners are being forced to sell assets at steep discounts.

Spotting Opportunity in an Uneven Market

This regional divide is exactly why Fox cautions against treating the U.S. apartment market as one story.

“It’s an incredible time to buy if you can find the right opportunities,” Fox noted. “But those opportunities are absolutely not evenly distributed.”

Fox said understanding a market takes more than looking at today’s numbers. Investors should know what’s already being built, what’s waiting for permits and what future development could mean for supply over the next several years.

That data-driven approach is why BAM Capital recently looked past its traditional Midwestern borders to acquire a 334-unit property in Wilmington, North Carolina.

The company had been watching the market for more than five years and believed the recent wave of oversupply had created an attractive entry point. While a large wave of new apartments had put downward pressure on pricing, Fox said the development pipeline has since slowed considerably. In the Wilmington submarket, there are no new units under construction or in the permitting process.

 

The long-term fundamentals also stood out. Wilmington continues to attract new residents, the median home price sits around $470,000, and renting remains significantly more affordable than buying. According to Fox, renters in the submarket spend about 19% of their take-home pay on rent, suggesting there is still room for healthy demand. The market checked many of the boxes the company looks for when evaluating long-term investments.

History Repeats: Disruption Always Creates Winners

Fox also encouraged investors to view today’s market in a historical context.

The Savings and Loan Crisis of the late 1980s, which saw thousands of financial institutions fail, and the Global Financial Crisis of 2008-09 both caused widespread disruption across the real estate industry. But those periods also showed that market uncertainty can create opportunities for investors with the patience and discipline to focus on the underlying factors that drive long-term value.

Fox believes today’s market shares some similarities, although the challenges are much more localized—particularly in oversupplied Sun Belt markets. Rather than a nationwide downturn, today’s potential deals depend on understanding where each market sits in its own cycle. For investors, that means focusing on local supply and demand dynamics instead of assuming every market is moving in the same direction.

As Fox puts it: “We believe disciplined sponsors that truly understand supply and demand, and deeply understand their local market, are positioned to identify potential long-term value opportunities for their investors.”

 

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