Multifamily Real Estate Update: Patience, Discipline, and the Turning of a Cycle
Sunbelt apartment communities like those targeted by SB3 are entering a pivotal cycle shift—where disciplined operators with distressed deal flow and a declining supply pipeline are best positioned to capture long-term value in Southeast workforce housing.
When we launched Sunbelt Multifamily Fund III (“SB3”), our $100 million southeast-focused workforce multifamily fund in 2023, we made a commitment to our investors that we would not chase deals just to deploy capital. We delivered on that commitment with just one asset acquired by the fund since it launched. That kind of disciplined restraint hasn't always been easy to explain to investors, but we believe it will be validated in the coming months.
For the last two and a half years, we have watched the market with deliberate patience. Asset prices remained stubbornly high. Rent growth stalled and in many areasturned negative, operating expenses climbed, and a multi-decade-high wave of new supply flooded the market. Although we weren’t actively acquiring deals during this period, we were not idle. We spent this time building relationships and preparing for the opportunity we believed was coming, and that we now believe is beginning to arrive.
But first, I want to provide some context about why the market remains difficult to navigate.
The Backdrop Remains Challenging
The multifamily market still faces meaningful headwinds:
New supply is still being absorbed.The construction boom of 2021 through 2023 produced a surge of apartment completions that is still working its way through the system. Nationally, multifamily deliveries are projected at roughly 469,000 units in 2026—below last year's levels but still well above the pre-pandemic norm. In Sun Belt markets, including many of the Southeast metros where we focus, vacancy rates remain elevated relative to their five-year averages, with some markets sitting 200 to 400 basis points above historical norms1.
Rent growth remains subdued.National multifamily rent growth slowed to just 1.4% year-over-year in January 2026, and performance is increasingly uneven across markets2. Several high-supply Southeast metros are still posting flat or negative asking rent growth, and operators are prioritizing occupancy over pricing—offering meaningful concessions to keep units filled. CBRE projects that many high-supply markets will not achieve positive asking rent growth until late 2026 at the earliest.
Operating expenses continue to pressure margins. Insurance, property taxes, and maintenance costs have risen significantly over the past three years, and that trend has not reversed. For workforce and Class B/C properties in particular—the segment where we invest—these costs are acutely felt because there is a ceiling on how much rent the resident base can absorb.
Interest rates remain elevated. While rates have stabilized, they have not come down to levels that would meaningfully ease the financing burden for leveragedacquisitions. The average rate on commercial real estate loans currently sits around 6.2%, well above the rates at which most 2021 and 2022 vintage deals were underwritten3. This keeps a lid on asset valuations and makes disciplined underwriting essential.
What Has Changed And Why We Are Paying Attention
Against this challenging backdrop, something significant is shifting beneath the surface. After years of watching lenders and distressed borrowers playing the “extend and pretend’ game with their troubled borrowers, we are now seeing clear evidence that the music is coming to an end.
Lenders are getting aggressive. For the past two and a half years, our team has been in regular conversation with the workout and special situations groups at banks,servicers, and private credit funds that originate loans to multifamily sponsors across the US. For most of that period, the conversations were cordial but unproductive. Lenders were kicking the can—modifying loans, granting extensions, doing everything they could to avoid recognizing losses on their books.
In the last two months, the tone of these conversations has changed dramatically. One large private credit fund we have been talking to over the last couple of years told us their distressed multifamily units under foreclosure have increased fivefold in just the past sixty days. We are hearing similar signals from multiple lending institutions. The pipeline of lender-led sales processes is expanding rapidly.
Why now? We believe lenders have reached the point where extending loans to underperforming sponsors is no longer just about buying time, but increasingly the priority has become about protecting the collateral underlying the loan. Bad operators are not maintaining their properties. Deferred maintenance is compounding. The physical condition of the assets is deteriorating, and every month that passes without intervention erodes the lender's recovery value. For lenders, the calculus has flipped: foreclosing and selling to a capable operator is now the better option.
The data supports what we are hearing on the ground. CMBS multifamily delinquency rates rose to nearly 7% in early 2026, and the special servicing rate climbed to over 8%4. Roughly $930 billion in commercial real estate debt matures this year, with a significant share tied to multifamily loans originated in 2021 and 2022—precisely the vintage that was underwritten at peak pricing with aggressive leverage assumptions. According to MSCI, roughly 60% of those loans are set to mature in the second half of 2026, likely triggering another wave of forced resolutions5.
Distressed sponsors are running out of options. The multifamily market has already witnessed a string of high-profile sponsor failures across the Sun Belt, including operators who acquired thousands of workforce units with floating-rate debt and aggressive value-add business plans that never materialized. Some held on longer than others, but the bill is coming due. Inexperienced operators who acquired assets at the top of the market with the wrong capital structure are now facing foreclosure on portfolios they can no longer service.
The Supply Picture Is Turning in Our Favor
While the current oversupply creates near-term headwinds, the forward-looking supply story is much more constructive. Multifamily construction starts have dropped roughly 71% from their peak in early 20226, falling to the lowest levels in over a decade7. Given that new projects take 18 to 24 months from groundbreaking to delivery, this collapse in new starts virtually guarantees a sharp decline in deliveries by 2027 and 2028.
In our core Southeast markets, this dynamic is already taking shape. Atlanta's construction pipeline has fallen to a decade low, with deliveries projected to drop more than 50% from their peak8. Across the region, the combination of declining supply, ongoing population growth, and persistent housing affordability challenges sets up a favorable environment for well-positioned operators to benefit from tightening market conditions in the years ahead.
Our Approach: Buying Right in a Dislocated Market
This is the environment our fund was built for. We structured a patient, disciplined vehicle specifically because we anticipated that the excesses of 2021 and 2022 would eventually create dislocation—and that the best buying opportunities would come from lender-led processes, not fully marketed deals from well capitalized sponsors.
Our strategy rests on a few core principles:
Sourcing from the workout desk, not the brokerage market.The relationships we have built with special situations teams at lenders and credit funds over the past two and a half years are now bearing fruit. These are proprietary or semi-proprietary deal flows, not broadly marketed processes where fifteen buyers are bidding on the same asset. Lenders want certainty of execution, and we have spent years demonstrating that we are a credible and capable counterparty.
Targeting workforce housing with real value creation potential.We are not buying Class A lease-up deals competing with new supply. We focus on workforce and value-add multifamily—properties where the prior operator failed to maintain the asset, execute the renovation plan, or manage the property competently. These are assets where a capable owner-operator can meaningfully improve the physical product, stabilize occupancy, and grow income over time, regardless of what broader market rents are doing. With our in-house property management team, Sunbelt Properties, this is exactly what we are set up to do.
Underwriting to today's reality, not yesterday's hopes.Every acquisition we evaluate is underwritten to current rents, current operating expenses, and today's financing environment. We are not making bets on aggressive rent growth or interest rate cuts. If those things happen, they represent upside, not the base case.
Buying at a significant discount to replacement cost.Properties acquired through distressed channels are often available at 30% or more below their 2021 or 2022 valuations9. When you combine a meaningful basis advantage with the improving supply dynamics described above, the potential for outsized risk-adjusted returns over a 3 to 5 year hold period is increasingly compelling.
Looking Ahead: Cautious Optimism
We are not calling an all-clear on the multifamily market. The current environment still demands caution, selectivity, and conservative underwriting. Rent growth in many of our target markets will remain modest through the end of this year, and operating expense pressures are unlikely to abate in the near term. The broader macroeconomic environment, including trade policy uncertainty, the impact of artificial intelligence on the labor market, slowing job growth among younger renter cohorts, and elevated interest rates, warrants caution.
However, we believe the next 12 to 24 months represent one of the most compelling buying windows for Southeast workforce multifamily for years. The convergence of accelerating lender-led deal flow, a historic decline in future supply, and our deep relationships with workout teams positions us to acquire high-quality assets at attractive bases.
We did not build our fund to be deployed quickly; we built it to be deployed correctly. After years of patient preparation, we believe the moment we have been waiting for has arrived.
* Ballast Rock Asset Management (“BRAM”), Ballast Rock Private Wealth (“BRPW”), and Ballast Rock Capital (“BRC”) are operating entities of Ballast Rock Holdings (“BRH"), an integrated investment management company. Ballast Rock Asset Management is a non-registered entity. Ballast Rock Real Estate is a wholly owned subsidiary of BRAM. BRPW is a registered investment advisor. BRC is a registered Broker dealer and a MEMBER of FINRA / SIPC. BRC’s registered head office is 460 King Street, Suite 200, Charleston, SC, 29403. Tel: 800-204-2513. To check background information about BRC and its representatives, visit FINRA’s BrokerCheck. Please see important disclosure information in our Form CRS
