Q4 2024 Industry Spotlight: Greg Willett

Industry Spotlight: Greg Willett

Written by Michael Becker, Principal & Lily Turner, Marketing Manager
Q4 2024 Newsletter


 

GREG WILLETT | First VP & National Director, Research Services, IPA

Greg Willett

is a recognized & respected industry leader serving as First Vice President & National Director of Research Services at Institutional Property Advisors ("IPA"), a division of Marcus & Millichap specializing in real estate investment financing, sales, advisory, analysis, and consulting services.

In his role at IPA, Greg applies his 25 years of extensive experience in research and analysis of the U.S. real estate market's micro- and macro-fundamentals to align institutional investors with their investment goals. Before joining IPA, Greg was a Chief Economist at RealPage for 22 years. Today, Willett is among the most referenced experts on economic and housing trends (ConnectCRE). Greg graduated from Western Kentucky University with a B.A. followed by a Master of Liberal Arts from Southern Methodist University. Greg is also an active member of the National Multifamily Housing Council, the Urban Land Institute, and the National Apartment Association.

On December 12th, SPI Advisory co-founder & principal, Michael Becker ("MB") sat down with Greg ("GW") to discuss his forecasts on the future state of the capital markets.


 

MB: "What are your thoughts on the current state of the market nationally, and how do you see Texas fitting into that picture?"

GW: “Starting with the overall economy, job creation is healthy but has meaningfully slowed compared to previous years. The nature of job growth has shifted, with most new jobs in moderate-paying sectors, while high-paying jobs have seen a significant slowdown. This shift has impacted Texas markets, especially DFW, where high-paying jobs have traditionally been a stronghold. While DFW and Houston remain top performers in job growth, they’re not seeing the exceptional growth we’ve grown accustomed to.

Looking ahead, we certainly expect further slowing for both the U.S. and Texas markets next year, but conditions should remain relatively healthy.

 
 

That said, Texas does face some unique challenges, particularly around immigration, where labor shortages could become more pronounced here than in other markets across the country.

Despite the broader economic slowdown, we’ve seen unexpectedly strong demand for apartments this year, both nationally and in Texas markets – an upside surprise relative to our expectations coming into 2024. Nationally, we’ve absorbed north of 400,000 units this year, which is very healthy.

In Texas, strong demand is partly driven by ample product availability due to high delivery volumes, but also because fewer people are leaving the rental market to purchase homes because the premium to buy versus rent continues to be unusually steep.”

 
Affordability Gap Widened; Loan Qualification Remains a Significant Barrier
 

MB: "What was the national delivery volume this year?"

GW: “Around 500,000 units were delivered nationally."

MB: "So, we're essentially absorbing 80% of what's being delivered?"

GW: “That’s a pretty accurate relationship, especially when looking at Texas, though there’s some variation across the metros. In DFW specifically, we’re seeing demand for 36,000 units compared to 42,000 completions. So, while we’re not quite absorbing everything, it’s closer than we initially expected going into the year.”

 
The Tides Turn in 2025 - Strengthened Demand Offsets Abating New Supply
 

MB: “Like many others, I’ve been anticipating a ‘light at the end of the tunnel’ for deliveries coming sometime next year, maybe around late Q2 or early Q3. Does that seem accurate, especially in DFW? Or might it be later, especially compared to markets like Austin?”

GW: “In Austin, yes, the recovery there is running a bit later than other markets. Overall, though, the pipeline has dropped significantly, particularly in the second half of 2024. We’ve been delivering far more units than we’ve been starting, and that’s resulting in shrinking pipeline numbers.”

MB: “Would you say we’re past the peak now?”

GW: “Definitely. In DFW, for instance, at the peak, there were about 75,000 units under construction. By the end of this year, assuming everything scheduled for Q4 finishes on time, that number should drop to around 50,000, which is a substantial reduction. We’re seeing a similar trend nationally, although next year’s deliveries will still be considered aggressive by historical standards, just lower than this year’s.”

MB: “What’s the delivery projection for next year in DFW?”

GW: “Next year, we're projecting around 36,000 units in DFW, still a substantial number.”

MB: “Will most of that be front-loaded?”

GW: “Yes, it's pretty front-loaded. Many projects are nearing completion. Keep in mind, though, that ‘completed’ units may include properties that are already open and operating to some extent – they just haven’t delivered the final wave of units yet.”

MB: “What are you anticipating for 2026? A much more significant slowdown?”

GW: “Yes, 2026 will slow down considerably due to the sharp decline in start numbers. It’s likely to be the bottom of the cycle, with delivery levels falling below historical norms for the first time in a long time.”

MB: “Are we talking about levels similar to 2014?”

GW: “Exactly, somewhere around that range. It’s likely to be closer to the levels we saw from 2014 to 2019, where activity was steady but not overly elevated.”

MB:“What about new development plans? Are those still sitting high, or are developers slowing down?”

GW: “Developers are still eager to start projects, especially since anything started now would finish right at the bottom of the delivery cycle. Capital availability is improving, with some traditional funding sources that have been on the sidelines re-engaging and planning to allocate more capital next year. However, plans don’t always align with reality. We expect start numbers will begin ticking back up in the second half of next year, but not drastically.”

 
Commercial Real Estate Lending Expected to Increase
 

MB: “So, those would likely be 2027 deliveries?”

GW: “Exactly.”

MB: “Anything else on the capital front or sales? I spoke with a broker in Austin last week, and he mentioned how tricky the market is right now. He did a study looking at 2014 to 2019, where they’d sell about 100 apartment buildings in an average year. He said last year they sold 35, and this year it’ll be around 30. He noted that the market is about twice the size it was in 2014, but sales volume is down significantly. Are we looking at about a third to half of normal sales volume?”

GW: “Yeah, that’s pretty accurate, but the story varies by market. DFW, for example, remains the most active market, with the largest pipeline going into next year. While activity is down from peak levels, it’s more like a return to historically normal levels rather than the elevated highs of 2021 and 2022. So, it’s still very active by comparison.

In other parts of the country, like Florida and the Carolinas, we’re seeing a similar trend to DFW – still some activity but off the peak. On the other hand, there are markets where sales have dropped drastically. Austin and Phoenix are probably the best examples. These are markets with the most temporary oversupply and were overheated relative to historical norms.

As for Texas overall, Houston is an interesting case. It hasn’t experienced the same supply wave as the rest of the state, so sales activity there is closer to what you might call normal.”

MB: “How is rent growth shaping up nationally this year, and what’s your forecast for next year?”

GW: “Nationally, we'll end the year slightly positive – around 1%. Some sources show slightly negative, but the data we’re tracking points to modest growth. For next year, our forecast for the US is 3%, which is on the lower end of normal.

 
National Apartment Rent Growth Returning to More Typical Levels as Construction Wave Recedes
 

The key shift is that operators are starting to play on offense again after a year of being exclusively on defense. Additionally, many of the heavily discounted leases signed in 2024 will be up for renewal. While growth won’t be huge, there should be some recovery, which will help overall numbers.”

MB: “Do you think 2026 and 2027 will see rent growth well above historical norms – not 2021 levels, but still elevated?”

GW: “Yes, we expect a premium relative to historical norms, but most of that growth will come from markets that have struggled in the past year getting back on track. Markets that have been performing well won’t see much improvement beyond current levels.”

MB: “So, should we expect outsized rent growth in Dallas and Austin?”

GW: “Exactly. For DFW, this year we’re technically slightly negative – less than 1%. Next year, we expect around 2% growth. For Austin, we’re forecasting around -3.5% for this year, but that might be optimistic. As of Q3, Austin was at -8%, so landing at -3.5% by year-end seems unlikely. For next year, Austin should see slight improvement, probably around 1%. Houston is seeing stronger numbers since it hasn’t been hit as hard by supply challenges.”

 
2024-2025 Market Predictions
 

MB: “Do you think San Antonio will follow Austin’s trend?”

GW: “San Antonio will be somewhere between Austin and DFW. The current declines are steeper than DFW’s, and the recovery will be more sluggish, partly due to spillover from what’s happening in Austin.”

MB: “What's your Investment Sales team’s outlook going in next year? Are they bullish? Do they expect transaction volume to pick up?”

GW: “The DFW team is very optimistic about a meaningful upturn, which isn’t surprising. The Austin team is less bullish but expects some improvement. Houston is more stable, with business as usual compared to the other markets.”

MB: “So, nationwide, the sentiment is optimistic about seeing more transaction volume?”

GW: “Yes, definitely. There’s a ‘fear of missing out’ driving more activity – people feel if they don’t make moves next year, they’ll regret it down the line. That’s what’s seeming to bring capital back into the market. The big unknown is how much product actually comes up for sale, as there’s not much motivation to sell, but we’ll see how it plays out.”

 
National Apartment Trading Activity and Dollar Volume Below Historical Norms
 

MB: “Any other thoughts we haven't covered?”

GW: “I think we covered everything. The outlook for the next year is improving, but it will still be a bit of a struggle compared to what we’d consider normal. In Texas, what we consider normal is far higher than what other markets are experiencing.”

MB: “Our strategy has been to buy as much as possible in 2023 and 2024, survive until 2025, then thrive in 2026 and 2027, and sell in 2028 to take some chips off the table. Would you say that aligns with your view of the cycle?”

GW: “Yes, I’d agree. One other factor to consider, aside from supply-demand and capital markets, is operational challenges, particularly around rising expenses like insurance and payroll, which are impacting profitability more than we’d like. Nationally, there’s also an increasing regulatory concern, with things like rent control and eviction moratoriums being considered. That could be more of an issue elsewhere, but it might actually benefit Texas, as we’re slower to adopt these types of regulations.”