Recently investors have been drawn to the Sunbelt states—like Texas, Florida, and Arizona—due to their lower costs and rapid population growth. However, reality is starting to paint a less rosy picture. These Sunbelt markets are now facing an oversupply of new multifamily developments, with record numbers of units coming online without sufficient demand to match. This imbalance has led to falling rents and rising vacancy rates, signaling trouble for investors who may have overestimated the region’s potential. Meanwhile, those who might be considering turning away from California could be overlooking one of the strongest multifamily markets in the country: Silicon Valley, specifically San Jose.
The California Multifamily Advantage
While the Sunbelt’s multifamily market is experiencing an oversupply and declining rents, Silicon Valley continues to showcase its resilience. The demand for housing in San Jose remains sky-high, driven by a significant undersupply of units that created a housing crisis. This translates to record rents, and the market is showing no signs of slowing down.
No matter how you feel about California, the strength of it’s multifamily market is undeniable. San Jose, in particular, has emerged as a leader in rent growth.
The Sunbelt’s Reality Check
The multifamily boom in the Sunbelt was fueled by a massive migration trend over the past decade, which accelerated during the COVID-19 pandemic as remote work gave employees more flexibility to leave high-cost cities. However, the optimism for sustained growth in the Sunbelt has run into some harsh realities.
By 2024, the Sunbelt is expected to see the largest wave of new apartment supply in 50 years. In the second quarter of 2024, 119,400 units completed construction, bringing the year-to-date figure to a record 460,200 units — up 26% year-over-year, according to CBRE. A RealPage report estimates that as many as 670,000 apartments could be delivered by the end of this year, passing previous records by about 50%. This sudden influx of supply is set to outpace demand, leading to rising vacancy rates and a slowdown in rent growth. For investors, this is a cautionary tale of what happens when expectations don’t match market realities.
San Jose’s Comeback
Meanwhile, San Jose has quietly become one of the top-performing markets for rent growth. As of July, rents in the city surged by 60 basis points from 2.8% to 3.4% month over month, putting it fourth in the nation for rent growth. For the last 12 months, and demand has surged while new construction has slowed, creating ideal conditions for rent increases.
In fact, San Jose’s rent growth stands at an impressive 7.9% year-to-date, according to Radix, a leading multifamily market data source. This resurgence is a testament to the enduring strength of Silicon Valley’s economy and housing market.
Silicon Valley: A Renter’s Market
Adding to the pressure, Silicon Valley continues to be one of the most challenging places to find housing in California. With average home prices exceeding $2 million, many potential homeowners are turning to the rental market, intensifying competition. On average, there are 12 renters vying for each available unit in Silicon Valley, further driving up demand for multifamily housing.
The Bottom Line
While Sunbelt markets face oversupply challenges, Silicon Valley—and San Jose in particular—remain attractive, long-term investments for multifamily housing. Urban Catalyst is seizing this opportunity with three key multifamily projects in downtown San Jose: Aquino (278 units), Echo (388 units), and Icon (650 units). These developments are strategically positioned to meet the region’s growing demand for housing while benefiting from the area’s low supply and high rental growth. With our deep connections and experience, Urban Catalyst is uniquely positioned to successfully deliver these much-needed multifamily projects in one of the most competitive markets in the country.
Important Disclosures
The contents of this communication: (i) do not constitute an offer of securities or a solicitation of an offer to buy securities, (ii) offers can be made only by the confidential Private Placement Memorandum (the “PPM”) which is available upon request, (iii) do not and cannot replace the PPM and is qualified in its entirety by the PPM, and (iv) may not be relied upon in making an investment decision related to any investment offering by an issuer, or any affiliate, or partner thereof ("Issuer").
All potential investors must read the PPM and no person may invest without acknowledging receipt and complete review of the PPM.
With respect to any performance levels outlined herein, these do not constitute a promise of performance, nor is there any assurance that the investment objectives of any program will be attained. All investments carry the risk of loss of some or all of the principal invested. Assumptions are more fully outlined in the Offering Documents/ PPM for the respective offering. Consult the PPM for investment conditions, risk factors, minimum requirements, fees and expenses and other pertinent information with respect to any investment.
These investment opportunities have not been registered under the Securities Act of 1933 and are being offered pursuant to an exemption therefrom and from applicable state securities laws. All offerings are intended only for accredited investors unless otherwise specified.
Past performance are no guarantee of future results. All information is subject to change. You should always consult a tax professional prior to investing. Investment offerings and investment decisions may only be made on the basis of a confidential private placement memorandum issued by Issuer, or one of its partner/issuers. Issuer does not warrant the accuracy or completeness of the information contained herein. Thank you for your cooperation.
Real Estate Risk Disclosure:
- There is no guarantee that any strategy will be successful or achieve investment objectives including, among other things, profits, distributions, tax benefits, exit strategy, etc.;
- Potential for property value loss – All real estate investments have the potential to lose value during the life of the investments;
- Change of tax status – The income stream and depreciation schedule for any investment property may affect the property owner’s income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities;
- Potential for foreclosure – All financed real estate investments have potential for foreclosure;
- Illiquidity – These assets are commonly offered through private placement offerings and are illiquid securities. There is no secondary market for these investments.
- Reduction or Elimination of Monthly Cash Flow Distributions – Like any investment in real estate, if a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions;
- Impact of fees/expenses – Costs associated with the transaction may impact investors’ returns and may outweigh the tax benefits
- Stated tax benefits – Any stated tax benefits are not guaranteed and are subject to changes in the tax code. Speak to your tax professional prior to investing.
Opportunity Zone Disclosures
- Investing in opportunity zones is speculative. Opportunity zones are newly formed entities with no operating history. There is no assurance of investment return, property appreciation, or profits. The ability to resell the fund’s underlying investment properties or businesses is not guaranteed. Investing in opportunity zone funds may involve a higher level of risk than investing in other established real estate offerings.
- Long-term investment. Opportunity zone funds have illiquid underlying investments that may not be easy to sell and the return of capital and realization of gains, if any, from an investment will generally occur only upon the partial or complete disposition or refinancing of such investments.
- Limited secondary market for redemption. Although secondary markets may provide a liquidity option in limited circumstances, the amount you will receive typically is discounted to current valuations.
- Difficult valuation assessment. The portfolio holdings in opportunity zone funds may be difficult to value because financial markets or exchanges do not usually quote or trade the holdings. As such, market prices for most of a fund’s holdings will not be readily available.
- Capital call default consequences. Meeting capital calls to provide managers with the pledged capital is a contractual obligation of each investor. Failure to meet this requirement in a timely manner could elicit significant adverse consequences, including, without limitation, the forfeiture of your interest in the fund.
- Opportunity zone funds may use leverage in connection with certain investments or participate in investments with highly leveraged capital structures. Leverage involves a high degree of financial risk and may increase the exposure of such investments to factors such as rising interest rates, downturns in the economy or deterioration in the condition of the assets underlying such investments.
- Unregistered investment. As with other unregistered investments, the regulatory protections of the Investment Company Act of 1940 are not available with unregistered securities.
- It is possible, due to tax, regulatory, or investment decisions, that a fund, or its investors, are unable realize any tax benefits. You should evaluate the merits of the underlying investment and not solely invest in an opportunity zone fund for any potential tax advantage.
The above material cannot be altered, revised, and/or modified without the express written consent of Urban Catalyst.
