Looking forward: 2025

The recent political and economic turbulence has been unsettling, if not unexpected, and has catalyzed this update from us. At a glance:

• Economic conditions are deteriorating and this could impact apartment operations.

• The national multifamily industry remains characterized by strong demand and oversupply.

• Glencrest’s portfolio is outperforming overall with variability at the asset level.

• Rising uncertainty may increase the quality and volume of new investment opportunities.

As we did last year, we wanted to give you an update on macroeconomic and industry conditions and a forecast for the remainder of the year.

Macroeconomic conditions

Some industries and products can prosper irrespective of broad economic conditions, but housing isn’t among them. For most people, monthly rent or a mortgage payment is their largest expenditure, so they have little choice but to economize when they lose employment, deplete savings, suffer investment loss, etc. This doesn’t mean that a company like Glencrest can’t outperform on a relative basis during an economic downturn due to superior asset selection, geographic focus and capitalization decisions, and we do think our portfolio is well positioned in this regard. We also remain bullish on the American economy in the long run and therefore, by extrapolation, in the long-term investment outcome of our portfolio.

We do think it likely that economic weakness is in store for the rest of 2025 - this is our “base case” forecast. As outlined in prior updates, Glencrest has been expressing concern about unsustainable government monetary and fiscal policy for years. Specifically, it has felt like the broad economy in general, and asset prices in particular, have been consistently propped up by an evolving combination of excessive money creation and deficit spending. Our country has been able to get away with it for an extended period of time but as they say: “if something can’t continue forever it won’t.” We think there is a real chance that now is the time it won’t.

The new administration seems to acknowledge that the status quo monetary and fiscal approaches can’t continue, which is good news as compared with the alternative of ongoing willful ignorance. The bad news is that their recipe for change - particularly modifications to tariff, spending and immigration policies - is engendering uncertainty and volatility in the capital markets and broader economy. It isn’t clear that any recipe would be able to avoid this, but this one certainly isn’t. Public equity prices and bond yields have gyrated wildly and many recession indicators are moving in concerning directions, despite a pause in some of the announced tariff implementations.

Modern capital market distress has consistently been met with government stimulus leading to the so called “Fed put.” We think the response this time may be different, at least initially. If the broad stock market values stay depressed for some time, the resulting spillover effect into the economy may be dramatic given that wealthy households increasingly drive consumer demand; top 10% earners have recently accounted for nearly 50% of all spending. Another negative impact would likely be reduced capital gains tax revenue, potentially resulting in even more government spending austerity.

If the economy does weaken, we would expect two impacts on our business. First, a negative impact on earnings, the extent of which would depend on the magnitude of economic weakness. Because our portfolio mostly consists of relatively affordable workforce housing in relatively high-growth locations, we think the impact will be cushioned somewhat. And please rest assured that we have a substantial margin of safety built into our debt capitalization structure to account for this possibility.

Second, we would expect an increase in investment opportunity and volume. In our experience, capital markets tend to extrapolate recent trends. If apartment operating performance deteriorates sufficiently, the exuberance that has kept asset prices high for many years could fade and lead to opportunity for investment platforms with a long-term horizon like ours. Certainly, this was the case during the 2009-era recession following the Great Financial Crisis, when generational buying opportunities became available.

Interest rates are a wild card. Traditionally, rates fall when the economy weakens but, thus far, have stayed surprisingly high despite recent stock market declines, especially at the long end of the curve. This is arguably the most concerning element of the current market turmoil and bears watching closely as it suggests potential systemic change in terms of reduced confidence in treasuries as a safe-haven asset. We still think that long rates will fall on their own if our “base case” scenario evolves, but potentially not as much as history would suggest due to ongoing elevated inflation metrics, which may be exacerbated by tariff policy. Lower interest rates would certainly support asset prices and mitigate distress, but they are unlikely to completely offset the impact of a weaker economy.

If the economy weakens enough, a return to excess monetary creation from the government followed by significant inflation feels very likely because it will be necessary to avoid absolute economic calamity. This could ultimately help reduce the deficit (as a percentage of GDP) and return our country to a more solid fiscal position although it would be painful for many along the way. Generally, high inflation is good for companies like ours with fixed-rate long-term debt, a necessary product (shelter), and the ability to reset nominal annual rents on a rolling basis.

It is certainly possible that the economy will do better than we expect, in which case earnings will be higher and investment opportunities fewer. We are proud of our track record under status quo conditions, so this outcome will be just fine with us.

Forecasting the future is hard, which is why we work to position our portfolio for many different outcomes. While we remain resolutely optimistic about domestic economic prospects in the long run, we believe we may be entering a bumpy patch. In short, we are always thinking of the economic backdrop and hope this narrative will provide food for thought when thinking about your overall investment portfolio.

Industry conditions

The apartment industry started the year on relatively solid footing. First quarter absorption of market-rate apartments was the highest in 30 years. This is a sign of strong ongoing demand and a great tailwind for our industry, partly facilitated by an increased propensity to rent vs. buy due to the rising cost of homeownership.

As we’ve mentioned in previous updates, the bigger issue for national multifamily conditions has been supply. The low interest rates of a few years back spurred a massive building boom. Approximately 550,000 units were delivered in 2024, which was the highest number in decades. This figure is expected to decline by 10% or so in 2025 and then fall dramatically in 2026 and 2027 to approximately half of recent peak volume.

Ongoing robust demand and elevated supply have largely cancelled each other out and led to tepid operating conditions when viewed through a national lens. Average rent growth in 2024 was less than 1% and vacancy rates ended the year right above the long-term average of 5%. Not terrible, but far from great.

Current forecasts generally call for a modest improvement this year and a substantial improvement thereafter as the one-time construction wave is absorbed and oversupply turns to undersupply. Note that these forecasts could be threatened by the economic downturn we believe may occur.

Portfolio performance

Multifamily is a local business and individual property and portfolio performance can vary greatly from the national average. We are pleased that Glencrest’s portfolio continues to deliver relatively strong performance.

In the first quarter of 2025, the average new Glencrest resident paid 2.1% more for their unit than the resident that moved out and existing residents accepted average rent increases of 5.8%. With close to an equal mix of new leases and renewals, rent revenue growth was approximately 4% - above the general rate of inflation, which is always our goal.

Portfolio occupancy (excluding our one “lease up” asset) is currently 95%. We have seen more variability across individual assets recently, especially related to absorption of new apartments or troop deployments. We're also observing a slight but noticeable uptick in delinquency; nothing alarming but possibly consistent with our theory of a decelerating economy.

Our capital structure remains conservative. Glencrest’s weighted-average debt maturity is more than 7 years from now and we have a debt service coverage ratio well above 2x. Every asset that was underwritten to distribute a dividend last quarter did so, with an average annual yield of more than 6%, even in the face of substantial ongoing renovation and repositioning at many.

In sum, we feel good about our portfolio positioning and stand ready to play both defense and offense as context requires.

2025 forecast

Two traditional investment adages may prove true as the balance of this year unfolds:

1. “When the tide goes out, you see who has been swimming naked.”

2. “Be fearful when others are greedy, and be greedy when others are fearful.”

We think we may start to see more naked swimmers and a lot of scared investors as the year progresses and capital markets turbulence continues.

Our long-term investment horizon and reputation as a buyer of choice may allow us to source particularly attractive investment opportunities if the fear factor increases in our industry. We are resolutely not “market timers” and expect to find attractive acquisition opportunities regardless of how the economy evolves. That said, we do encourage investors to consider keeping a bit of extra “dry powder” for now.

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Glencrest is about to celebrate our sixth anniversary. We are proud of what we’ve built so far and excited for the future. Please know we take our obligation to deliver above-average investment outcomes seriously and that we are grateful for your support and partnership.

If you have any comments or questions about these thoughts, please feel free to reach out by phone or email. We are always happy to talk.

Sources: Yardi Matrix, RealPage, Newmark Research