As a real estate investor, you first need to ask yourself: where should I invest? Some take the stay-in-my-backyard approach, while others search the entire country for deals. At High Peaks Capital, we connect with investors and real estate professionals throughout the country. That way, we can allocate capital to the ideal markets, regardless of location. As such, we’ll use this article to discuss the top markets primed for new multifamily development. 


Specifically, we’ll cover the following topics: 


  • Conditions that Support New Multifamily Development
  • Ideal Markets for New Multifamily Development
  • Final Thoughts  


Conditions that Support New Multifamily Development


Economic and Demographic Trends (i.e. Demand)


More than anything else, site selection for a multifamily development depends on current and expected demand. For instance, if I build a 100-unit apartment complex, will enough tenants sign leases at the underwritten rent levels? If this demand doesn’t exist, the nicest apartment building in the world will either A) sit vacant, or B) lease up at rents far below requirements (e.g. underwriting one-bedroom apartments at $1,200 but leasing them at $750).


Broadly speaking, multifamily demand revolves around two trend categories: economics and demographics. Economic trends involve the long-term projections on a market’s jobs, major employers, supporting industries, higher education institutions, etc. In a nutshell, is this area growing, or is it dying? If the former, at what rate? 


Demographic trends relate to economics but more specifically address generational projections. For example, what effects will Millenials entering the standard buy-your-first-house period of their lives have on apartment demand? Will Gen Z entering the job market impact demand? Does a market have positive or negative net migration? 


Answering these questions gives you key insight into whether a market can support increased supply of multifamily developments. 


Market Rent Comps 


Demand relates directly to market rental comparables, or comps, as well. When you underwrite a new multifamily development, one of your first steps will be projecting your top-line results, that is, how much can you collect in rent? Typically, developers find apartment comps by unit type (e.g. efficiency, one-bedroom, two-bedroom, or three-bedroom). 


These top-line projections then drive the rest of your operating budget and entire underwriting process. If market comps are too low, your pro forma net operating income will likely not drive a cap-rate valuation high enough for loan qualification. Or, you will need to put in significantly more cash than initially expected to qualify. 


Bottom line, before looking at developing a property in a given market, ensure the rents justify the investment. 


Capital Requirements


Capital requirements, or the amount of cash you’ll need to put into a deal, also drive market selection. In terms of rents, first-tier cities like San Francisco, New York City, and Washington, DC will certainly command some of the highest. But, a new investor typically doesn’t have the cash necessary to break ground on an apartment building in one of those cities. The capital requirements are far too high, leading to more institutional-level and sovereign-wealth funds driving those deals. 


Alternatively, second- and third-tier smaller cities with positive demand trends generally have far lower capital requirements. For instance, you’ll need far less cash for a 250-unit apartment complex in Richmond, VA than New York City. 


Permissive Zoning Environments 


Some markets have extremely restrictive zoning environments. In other words, the local municipalities make it difficult to secure approval for a new multifamily development. A market may meet the above criteria, but if you can’t purchase a parcel of land zoned for multifamily development (or eligible for a streamlined rezoning), you’re out of luck. As a result, any market analysis should include a thorough review of the regulatory environment there. 


Construction Labor Availability


Skilled construction labor still hasn’t recovered to pre-Great Recession levels. Simply put, there isn’t enough labor to support construction demand. And, some markets have more significant shortages than others. Prior to selecting a market, research the local labor market. Talk with a variety of general contractors and ask about their project pipelines. When can they take on new projects? Are they having trouble sourcing subcontractors? 


The longer your construction period lasts, the more you’ll need to pay in holding costs (e.g. property taxes, construction loan interest, utilities, etc). 


Material Costs


Unfortunately, in the Covid-19 era, all construction material costs have skyrocketed. As such, you won’t necessarily find “good deals” in any market. Despite this, some places will still have higher costs than others due to a variety of factors. Prior to selecting a market for your multifamily project, talk with a variety of suppliers and general contractors to develop accurate cost-per-square-foot hard cost construction estimates. This will help inform your underwriting and, ultimately, decide whether or not to move forward with a deal.  


Ideal Markets for New Multifamily Development




Compiling the above market research isn’t necessarily an easy process. Fortunately, real estate analytics organizations compile much of the information for you, saving you the legwork. In particular, PwC and the Urban Land Institute compile an annual report diving into much of the above information: 

Emerging Trends in Real Estate 2021 […] provides an outlook on real estate investment and development trends, real estate finance and capital markets, property sectors, metropolitan areas, and other real estate issues throughout the United States. […] Interviewees and survey participants represent a wide range of industry experts, including investors, fund managers, developers, property companies, lenders, brokers, advisers, and consultants. 

This annual report allows multifamily developers to glean insight from real estate professionals and stakeholders across the country. While this report doesn’t excuse you from your own market due diligence, it should provide solid guidance on market conditions. 

Top Markets for New Multifamily Development 


This report also polls experts on the markets with the best multifamily development prospects. More precisely, it asks these experts to rank markets based on a buy, hold, or sell classification. Below are the top five markets in terms of buy recommendations, representing general bullishness by these experts: 

  • Raleigh/Durham, NC
    • Buy: 72%
    • Hold: 20%
    • Sell: 9%

  • Tampa/St. Petersburg, FL
    • Buy: 67%
    • Hold: 30%
    • Sell: 2%

  • Salt Lake City, UT
    • Buy: 67%
    • Hold: 27%
    • Sell: 6%

  • Austin, TX
    • Buy: 63%
    • Hold: 26%
    • Sell: 12%

  • Boston, MA
    • Buy: 60%
    • Hold: 32%
    • Sell: 9%


Final Thoughts


New York City, San Francisco, and Los Angeles may command some of the highest rents in the United States, but you also need massive amounts of capital to enter these multifamily markets. Instead, we argue for finding the “sweet spot” in these second- to third-tier cities with positive economic and demographic trends.  


If you’d like to discuss different real estate investing options for your unique situation, we’d love to chat! Drop us a note, and we’ll set up a meeting to talk about available multifamily development opportunities.