In 2020, Carlos Vaz’s multifamily portfolio contained 14,000 units in Texas. Now, he has about 3,000 apartments.

The unit reduction wasn’t forced upon him, he says. He chose to sell at the top of the market — a decision he doesn’t regret.

“We sold a lot,” Vaz said. “We’ve had our own issues with our own properties. But we believe that this is one of the best times to buy, and we have been very diligently trying to find deals.”

But right now, the founder and CEO of apartment owner CONTI Capital says it's hard to make acquisitions work, with obstacles to investment varying by market. 

In Austin, for instance, brand-new properties can drop 30% to 40% below replacement costs, according to Vaz. But there’s a catch.

“It [the prices] gets you excited on one hand,” Vaz said. “On the other hand, the rents are so negative. It’s like, ‘How long do I need to carry this deal here until it’s positive again — just the cash flow alone?’ That’s the conundrum that you have.”

While underwriting in Dallas and Houston is easier, there are still challenges. “In those markets, it has not been easy,” Vaz said. “Now, if interest rates are too high with a chance of potentially a rate increase, that can become even worse.”

Here, Vaz talks with Multifamily Dive about the impacts of elevated interest rates, heavy supply and increasing expenses.

This interview has been edited for brevity and clarity.

MULTIFAMILY DIVE: What led to this difficult situation for apartment owners, in your opinion?

CARLOS VAZ: You come from a near-zero interest rate to over 500 basis points. It's like you drive a car on the highway for maybe 20 miles per hour. Then you get in that same car, and now you drive for 160. I mean something's going to happen, right? 

So, if you go back to 2021 or so, look at any report about Austin, and you see rent growth of about 7% or 8% — massive rent growth. You see interest rates that are very, very low. At some point the Fed was going to increase interest rates, but I mean that increase was so fast. That was highly, highly destructive because you go from, call it, a 3% interest rate to a 7% or 8% interest rate. 

How long before things get better?

The market is adjusting itself. Many times you can be the best operator possible, but there's nothing you can do. In 2021 and 2022, the valuation was very different. And the way the market was hit was massive. I think we’re still going to have more issues coming before we're able to get to the other side.

But there are other issues plaguing apartment owners and operators, right?

Then, on top of that one, you have your oversupply, if you look at Phoenix and Nashville. Colorado is not in a good situation. They're right there in terms of very negative rent growth. It’s not a Texas issue. It's a macroeconomic issue that we're dealing with.

How is this oversupply affecting you? 

I'm going to be talking more about Austin because that's a market we're very familiar with. You have so much new supply, and you need to give a lot of concessions. Then what happens is your marketing starts to get much more expensive, because you really need to fight for that new resident. And you need to find different ways of doing marketing because you need to attract people. So that’s a challenge.

What Texas markets are showing the best recovery from oversupply?

It’s very, very local. For example, Denton is almost like Austin. If you look in Round Rock, Round Rock might be one of the first to get some positive rent growth there. Inside of any MSA [Metropolitan Statistical Area], they are going to recover differently. Dallas and Houston are definitely going to be ahead. Austin is going to be the laggard.

But in a place like Denton, they’re not only overbuilt, but that submarket needs to grow faster. Well, what’s happening right now is that the number of international students [at the University of North Texas] dropped a lot. So that local economy is suffering a lot because the university was a big center. If you don't have strong enrollment, that local economy is going to suffer. So that recovery is going to take longer. 

Are property taxes a bigger issue in Texas?

It depends on which county you're talking about. Property taxes are never an easy one. In Texas, property taxes are anywhere between 30% and 40% of your operating expenses. Payroll is also one that has been substantially going up, even medical insurance for employees.

How are you dealing with other expenses?

It’s very interesting. At first, insurance went up. Now insurance is coming down, which is a blessing. Let's knock on wood on that. We're going toward the hurricane season, and hopefully nothing's going to happen. 

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