The Market That Turned Winners Into Losers

What if I told you that an apartment acquisition in a highly desirable market, made before the pandemic, purchased at an above-market cap rate, and that experienced 30%+ rent growth over the subsequent 2-3 years is now worth less than at acquisition six years ago? Would you believe it? I wouldn’t. Yet this is what’s happening in Austin, TX, at least according to data from Apartment List. I saw this chart on LinkedIn last week and found it fascinating (excuse their inability to spell San Francisco).

If rents are back to 2020 levels yet expenses have increased, then net operating income must be lower. Add to the fact that cap rates are 100-150 basis points higher today than at the market peak, and you have a recipe for a lower valuation. Let’s look at some quick math on a hypothetical acquisition.

This assumes you paid a 5-cap in 2020 when rents were $1,000/unit and total expenses were 50% of revenue. Given that cap rates in Austin were solidly in the 4% range back then, this would have been a good deal, especially considering rents grew 30% over the next three years and cap rates fell into the 3% range. If you had the foresight to sell in 2021 or 2022, you timed this market well.

How Does a Good Deal Go Bad?

Everything goes against it. Revenue is lower over the past six years, insurance is double, property taxes remain too high, and general expenses continue to grow. Net operating income is 25% below what it was at acquisition, causing the value to drop 34% over six years. Let’s start with revenue. A massive amount of new apartment supply flooded the Austin market in 2024 and 2025. Simply put, demand has not kept up with supply. A reasonable person would have assumed at least some residual rent growth despite the historic levels of new supply—yet six years later, rents are flat.

What do owners do when they’re all competing for the same tenants? They lower rents and offer concessions. I’d actually be shocked if the property in this example operated at economic occupancy of 88%. It’s likely even lower today given concessions and bad debt. On the bright side, other income has probably risen as utility reimbursements have increased and owners find new ways to add monthly fees.

Expenses have made the revenue situation worse. In 2020, property insurance was a completely different market. A property like this one probably had a policy that cost less than $500 per unit. Today, it’s likely more than $1,000 per unit. A series of storms across the country, including ice and freeze claims throughout Texas, have caused premiums to spike. Property taxes tell a similar story. The tax assessor doesn’t want to hear that your property is worth less—the city needs the money. While property taxes today are probably on par with the level at acquisition, they’re still too high. Perhaps there’ll be some relief over the next 12 months. This line item is why owners have taken advantage of a Texas loophole to temporarily convert their multifamily properties to affordable housing. There are massive savings to be found in reduced property taxes. It won’t help the valuation much, but it makes cash flow less dire.

General operating expenses also continue to rise. It would be nice if these fell in tandem with rents, but that’s just a dream. Payroll costs have increased. To compete with more available units, marketing costs are higher. Maintenance costs continue to rise. And property managers find more ways to bill back owners. Total operating expenses seem higher than they should be, with no clear path back down. Owner-operators have the best chance of reining them in.

Can Time Still Heal This Wound?

In real estate, we’re told that time heals all wounds. We can look at the Great Financial Crisis and see that investments made in 2007 were back on their feet five years later. In this hypothetical, the buyer didn’t overpay. In fact, they paid a higher cap rate than the market offered at the time. It’s reasonable to believe that more time will turn this property around. So what needs to happen for this owner to get out whole? Rents need to increase $90/unit (9%), vacancy (including concessions and bad debt) must improve to 7%, expenses remain flat, and cap rates fall to 5.0%, a 50 basis point drop. These feel like reasonable assumptions, yet it may still take three years to see rents grow $90/unit. And expenses will surely rise during that time, meaning rents will need to increase even more for NOI to reach the necessary level.

Where the Opportunity Lies

In Austin, I think there’s opportunity to make new acquisitions. Using this same deal as a template, if I could pay what the original buyer paid in 2020 knowing that operating expenses are now 20%+ higher, I feel better about my chances to add value on the revenue side as the market recovers. Austin remains a desirable market with continued job and population growth. Rents will accelerate again, and cap rates will fall as investors bet on continued growth. The fundamentals still support it.

The recovery will take a while, though. Rent concessions need to wane, market rents need to firm up, and economic occupancy must rise solidly above 90%. Operations must first stabilize before any hope can be placed on cap rate changes. Once investors see improving fundamentals, their capital will follow and values will improve. This good deal, turned bad deal, will become an okay deal.

New deals, though, could be great.