Property Play: CEO of Bozzuto Group on his latest apartment strategy
Summary
- The Multifamily Paradox: Despite falling rents and rising vacancies due to current oversupply, investor demand remains high because existing buildings can be purchased at 10-20% below replacement cost.
- Supply Cliff Incoming: The current "unprecedented supply" will be absorbed by 2026 or early 2027. High construction costs and interest rates have halted new starts, creating a future supply shortage.
- "Renters by Choice": High mortgage rates and home prices are forcing high-income earners to rent longer. Bozzuto notes their residents pay less than 30% of income on rent but cannot afford the equity check for a home purchase.
- Regulatory Moat: Regulation accounts for 40% of development costs. This creates a high barrier to entry, favoring large, capitalized incumbents over smaller developers.
- Rate Prediction: Bozzuto predicts the Fed will cut rates by 50-75 basis points by year-end, which would stimulate transaction volume.
Trade Ideas
Toby Bozzuto
President and CEO of Bozzuto Group
Bozzuto states that due to high construction costs, you can buy existing Class-A apartment buildings at "10 to 20% below replacement cost." He also notes that while there is oversupply now, new starts have stalled, leading to a supply gap in 2026/2027. Publicly traded Multifamily REITs own these exact assets. The market is currently pricing them based on today's weak rent growth (oversupply). However, the "replacement cost" arbitrage and the looming supply cliff imply their asset values and pricing power will surge in 18-24 months. Large coastal REITs (AVB/EQR) align with Bozzuto's specific focus on East Coast/Chicago markets. LONG. Accumulate high-quality residential REITs while they trade at discounts to the cost of building new competition. Interest rates remain higher for longer, crushing cap rates; the recession deepens, causing high-income employment loss (the "renter by choice" demographic).
Toby Bozzuto
President and CEO of Bozzuto Group
Bozzuto predicts the Federal Reserve will cut rates by "50 and 75 basis points by the year end." If the Fed cuts rates aggressively as predicted, yields will fall, and bond prices (which move inversely to yields) will rise. Additionally, lower rates are the catalyst Bozzuto identifies for unlocking the housing market. LONG. A direct play on his macro call for rate cuts. Inflation re-accelerates, forcing the Fed to hold or raise rates, invalidating the prediction.
Toby Bozzuto
President and CEO of Bozzuto Group
Bozzuto notes that "families are being formed later" and even wealthy renters cannot afford to buy homes at 6% mortgage rates, leading to longer tenure in rentals. This creates a "sticky" tenant base for high-end multifamily operators. The traditional churn of tenants leaving to buy homes has stopped. This supports occupancy rates even during a period of high supply. EQR and AVB specialize in the high-income, coastal demographics Bozzuto describes. LONG. The "broken" for-sale market is a tailwind for the high-end rental market. A significant drop in mortgage rates could trigger a mass exodus of these tenants into homeownership.
Toby Bozzuto
President and CEO of Bozzuto Group
Bozzuto explicitly states that "40% of our costs have to do with regulation" and that "you can only pencil the higher-end stuff" due to costs. He also notes a massive structural shortage of housing supply. High regulatory costs and capital requirements act as a moat for the largest players. Small private developers cannot survive a 40% regulatory burden + high rates. This consolidates market share into the Large Public Homebuilders who have the balance sheets to navigate the "regulatory morass" and hold land. WATCH. While Bozzuto is a multifamily developer, his commentary on the difficulty of building confirms the oligopoly status of large public builders. Continued high rates keep mortgage affordability out of reach for buyers, stalling volume.
