The Biggest Issue in Multifamily Today? Excess Supply, Says Legacy Partners CFO

Despite high construction costs and interest rates, increasing inflation and pockets of oversupply, the U.S. multifamily sector has shown resilience, according to Legacy Partners CFO Robert Calleja.

 

Active in all major branches of the sector, from acquisitions to property management and asset repositioning, Legacy Partners manages 50 communities and more than 12,000 units across six states.

 

Calleja has 23 years of experience in the commercial real estate sector and a background in financing and multifamily development, so we asked him to weigh in on what it takes to balance risk exposure and opportunity in today’s unstable economic environment.

 

How would you describe multifamily investment and development activity over the past few years?

 

Calleja: Better than expected. The rapid rise in interest rates in late 2022 and throughout 2023 has cast a pall over the real estate investment and development markets. However, the stability and reduction in rates during 2024 allowed deals to get done again.

 

What would you say is the main challenge in the sector today and how are you addressing it?

 

Calleja: Generally, the biggest issue facing multifamily today is excess supply. We are addressing that by meeting the market on our lease-ups and stabilized properties, as well as being patient for the supply overhang to be absorbed.

 

Tell us a bit more about your current development activity. In what ways do your projects stand out in crowded markets?

 

Calleja: We have specifically chosen not to create a branded, cookie-cutter project template across our markets. Even though we are developing at scale across the country, we take a curated approach to each asset to deliver a targeted product for the market, as opposed to a one-size-fits-all approach.

 

With construction costs still high and lingering supply chain disruptions, how do you ensure that your projects are delivered on budget and on schedule?

 

Calleja: Working closely with your general contractor—and by extension, their subcontractors—is the only way to manage those risks. There needs to be a clear understanding of each project’s key risks and a sharing of responsibility on all sides to mitigate those risks.

 

You have several ongoing projects in major markets such as Denver, Dallas, Seattle, Los Angeles and others. What key indicators do you consider before deciding to build in such competitive markets?

 

Calleja: We primarily look at growth drivers: employment, in-migration and new business growth, as well as supply constraints, to determine which markets to target. The ideal market would have both high growth and high barriers to entry because that dynamic will drive the greatest rent growth over time. But a market must have one or the other to make development a reasonable investment on a risk-return basis.

 

You also have a lot of experience with repositioning and/or renovating older properties. What would you say makes more sense today: ground-up development or value-add plays?

 

Calleja: In the current capital market environment, it is difficult to acquire value-add properties that pencil because of the cost of debt capital and the current supply situation. New development in pockets with more measured supply issues makes more sense because the delivery window is two years out when the supply overhang is over. Whereas with value-add, the expectation is that you begin that program immediately and the next 12 to 18 months is likely not the window to be vacating and renovating product.

 

The one exception would be long-term hold assets already in your portfolio. In those assets, a selective upgrade program could make sense because there isn’t the short-term pressure a new acquisition at a premium cost drives.

 

Given residents’ rapidly changing preferences, how do you ensure your new multifamily developments align with their expectations and lifestyle trends?

 

Calleja: The key is to design with future flexibility in mind but also stay attuned to key touchstones that have stayed relevant to residents over the long haul.

 

Speaking of staying relevant, at the beginning of last year, you partnered with The Resmark Cos., and entered the BTR sector with two projects in North Dallas. What factors drove this move and what opportunities do you see in the BTR space?

 

Calleja: We had been watching the BTR space for several years before we took the plunge with our two properties in North Dallas. The cost of owning a home continues to rise and the affordability gap in most markets continues to widen, so we see a long-term need for rental housing that looks and feels like a single-family home to meet the needs of growing families that are priced out of homeownership.

 

We have also sought to deliver a premium, well-curated product with a high percentage of detached units and attached garages that we feel will compete favorably with the bulk of the BTR products on the market, as well as with new starter home communities.

 

Looking ahead, what are your growth priorities? Are there specific projects or emerging markets you’re particularly interested in for the coming quarters?

 

Calleja: We expanded to Texas over a decade ago, to Florida about five years ago and to the Carolinas and Tennessee last year. We will eventually fill in metro Atlanta and possibly expand up to the Mid-Atlantic, but we have no immediate plans to do either. We feel we are in great markets throughout the U.S. and plan to continue developing in them for the near term.