Chapter 1 — What Is Multifamily?

Learning Objectives

By the end of this chapter you will be able to:

Define multifamily and distinguish it from the other CRE asset types.
Identify the four physical sub-types — garden, mid-rise, high-rise, tower — and know which markets each serves.
Distinguish market-rate from LIHTC, and know why this course focuses on market-rate (with selective LIHTC coverage in later chapters).
Use the two classification systems institutions actually use: strategy tier (core, core+, value-add, opportunistic) and asset class (A/B/C), without confusing them.

Fast-Track Skip. If you've underwritten multifamily, hotel, or self-storage, skim the strategy-tier section. The language is the institutional shorthand you'll see on every Investment Committee (IC) memo and hear from every GP, and the rest is review.

What "multifamily" means

Multifamily is classified as residential real estate with five or more rental units under single ownership and a single property loan. The five-unit threshold is important — this is where the asset crosses from residential mortgage territory into commercial real estate financing territory. At 5+ units, the loan is underwritten on property cash flows, not borrower income. Everything in this course assumes 5+ units, and we will touch on specific loan types and financing structures later.

Multifamily is one of the four core CRE asset types — alongside office, retail, and industrial — and has overtaken office as the largest institutional segment. The reason is structural: housing is non-discretionary, or in plain English, everyone needs a place to live. With revenue primarily comprised of leases short enough to reprice annually (versus 7-10 year leases in office, industrial and retail), multifamily cash flow is comparatively defensible through recessions. The asset type is not recession-proof (concessions widen, occupancy slips, and rent growth turns negative in deep downturns), but the volatility is muted compared to any other asset type. This understanding became popular post-GFC and into the late 2010's and directly led to:

Syndicator and retail money flooded into the market, and
Institutional allocators placing heavier weight on multifamily investments

Three features drive how multifamily gets underwritten.

The revenue side is mainly comprised of many small leases, as well as other income items and reimbursement items that are tied to the individual tenants. A 250-unit property has 250 potential individual lease obligations, usually 12-14 months each. When stabilized and with proper management in place, income is smooth and predictable, but underwriting hinges on per-unit assumptions — rent per unit, vacancy, concession rate — rather than identifying and performing individual tenant-by-tenant credit analysis. You can't pick up the phone and call your one anchor tenant because you don't have one.

Tenants are, generally, not "sticky" — meaning tenants will move to find a better location, lower price, or better amenities. Because of this, a portion of an asset's rent roll is turning over constantly. Annual turnover runs around 35% on the best-located stabilized A-class and 60%+ on workforce B/C. Every turn costs money — make-ready, marketing, downtime — and every turn is an opportunity to mark rent to market. Maintaining high retention rates and effectively capturing mark-to-market are a couple of many reasons why it is so important to have a competent management company in place.

Expenses are high. Operating expenses run 35-50% of EGI. Property taxes alone can hit 15-25% of EGI in higher-tax states — roughly what a triple-net industrial building spends on everything combined. Small changes in expense assumptions can move NOI more significantly in multifamily than other asset types.

The four physical sub-types

Garden-style: 2-3 stories, surface-parked (all parking at grade, no structure), exterior unit entries. Dominates suburban submarkets across the Sunbelt and Midwest. Almost all 1970s-1990s value-add inventory in the U.S. is garden. Cheapest to build ($130-180/SF), cheapest to operate, and the most common acquisition target for first-time sponsors.

Mid-rise: 4-5 stories, built as either a wrap deal or a podium deal. A wrap is residential wrapped around a center parking structure — cheaper, more common in growing suburban submarkets. A podium is wood-frame residential built on top of a concrete podium that houses ground-floor parking and sometimes retail — more expensive, dominant in denser urban infill where land cost justifies the construction premium. Full amenity package on both. Build cost $220-300/SF.

High-rise: 6-20 stories, steel or concrete construction, structured parking (often below grade), urban infill in primary markets. Build cost $350-550/SF.

Tower: 20+ stories. Almost exclusively top-tier MSA product — Manhattan, San Francisco SoMa, downtown Chicago. Different construction skill set entirely; most general-market underwriters never touch one. Included so the term doesn't confuse you when it comes up in conversation.

A few general rules of thumb:

Suburban is surface-parked garden or wrap-construction mid-rise.
Tier 1 downtown is podium mid-rise, high-rise, or tower.
The construction type matters as much as the height.
Wrap versus podium versus surface tells you the build-cost basis, the operating cost profile, and which sales comparables are even relevant. A wrap and a podium can both be called "mid-rise" and trade at completely different prices per door.

Market-rate vs LIHTC

Market-rate is what most of this course is about. Owner charges what the market bears; the dominant category of institutional multifamily transactions.

LIHTC (Low-Income Housing Tax Credit) is the federal tax credit program that restricts rents to a percentage of Area Median Income for 15-30+ years. A LIHTC property at 60% AMI in a market with $80,000 AMI has a maximum rent set by formula — roughly 30% of 60% of AMI, less utility allowance — often well below market. You cannot underwrite market-rate rent growth on a LIHTC property. Rent growth is capped to AMI movement, which historically runs 2-3% per year, sometimes flat, occasionally negative. LIHTC also carries compliance obligations — annual income certifications, IRS Form 8609 reporting — that affect opex.

This course covers market-rate underwriting as the primary track. We touch on LIHTC where it intersects core mechanics, especially in Chapter 11 (the rent assumption changes fundamentally on a LIHTC property) and Chapter 15 (the exit looks different because the buyer pool is smaller and the exit cap reflects the compliance burden).

Out of scope. Project-based subsidized housing under Section 8 (HAP contract properties) is a separate underwriting category with its own ecosystem — HUD compliance, HAP renewal risk, REAC inspections, MOR audits. Exit Basis does not cover it. If a HAP-encumbered deal ever crosses your desk, get specialist HAP-experienced help. Standard market-rate frameworks don't transfer cleanly.

The two classification systems institutions actually use

Every multifamily deal sits on two independent axes that describe different things. You need both, and confusing the two is a very common analyst mistake.

Axis 1 is investment strategy (the risk profile) — what the buyer is trying to do. Axis 2 is asset class (the physical and economic positioning) — what the property itself is.

A Class B asset can be acquired as a value-add deal or as a core+ stabilized hold. That's a function of the buyer's plan, not the building. A Class A new-build can be a core stabilized hold or an opportunistic ground-up development. The two classifications tell you completely different things about a deal, and the language of institutional underwriting requires both.

Investment strategy tiers

Strategy tier is the language on every IC memo, every fund mandate, and every LP report. It's how institutional capital is organized — separate funds, separate return targets, separate risk frameworks. This is also the language spoken at the broker/lender/GP level.

Core is stabilized, fully leased Class A or A- properties in primary or strong secondary markets. Day-one cash flow is the return; minimal renovation; conservative leverage at 50-60% LTV. Target unlevered IRR 7-9%, levered IRR 9-12%, equity multiple 1.5-1.7x over a 5-7 year hold. The buyer is a pension fund, sovereign wealth fund, or insurance company looking for yield with low volatility. Core capital doesn't chase the upside; it chases predictability.

Core+ is stabilized but with modest upside — light value-add, mark-to-market rent capture, modest CapEx. Class A- or B+ properties, often in growing secondary markets. Slightly higher leverage at 60-65%. Target unlevered IRR 8-11%, levered IRR 12-15%, EM 1.6-1.9x. The buyer is a non-traded REIT, fund-of-funds, or family office that wants more than core gives but isn't underwriting renovation risk.

Value-add is the dominant institutional multifamily category and where most dedicated multifamily funds operate. The buyer pays for in-place yield AND identified upside through renovation, operational improvement, or repositioning. Class B properties with $5-15K per-unit renovation budgets is the canonical shape. Heavier leverage at 65-75%. Target levered IRR 15-20%, EM 1.8-2.2x over a 4-6 year hold. If you only learn one strategy tier in detail, learn this one — it's where most deals you'll evaluate live, whether you're investing as an LP, sourcing on your own, or running your own GP shop later.

Opportunistic is ground-up development, deep repositioning, distressed acquisition, or any other high-risk/high-return strategy. The property is often non-stabilized at acquisition. Heaviest leverage and highest risk. Target levered IRR 20%+, EM 2.0x+. The buyer is an opportunistic real estate fund or a developer.

These tiers drive everything downstream — the LP base willing to underwrite the deal, the loan structure available, the exit cap compression assumption that's credible, and the framing that holds up to scrutiny (whether you're evaluating a deal being pitched to you or pitching one of your own to capital partners). When a broker labels a deal "value-add," they're signaling a target buyer and a return profile, not just describing a renovation budget.

Asset class (A/B/C)

Class A, B, and C are descriptive shorthand for quality and age relative to local stock. They aren't absolute. A Class A in Cleveland is not the same product as a Class A in Manhattan, and the bands shift as new construction redefines what the top of the market looks like.

Class A is the newest, most amenitized product in the submarket, usually delivered within the last 10-15 years. Granite or quartz countertops, stainless appliances, in-unit washer/dryer standard, full amenity package. Top quintile of submarket rents. Tightest cap rates.

Class B is the broad middle. Built late 1980s through early 2010s, well-maintained, often partially renovated, middle-of-distribution rents. Most U.S. value-add acquisitions are Class B where the sponsor believes light renovation can push rents toward Class A in the same submarket. The single most-transacted asset class in institutional multifamily.

Class C is older inventory — 1960s through early 1980s — usually unrenovated. Below-average rents. "Workforce housing" in many submarkets. Operating intensity is higher and cap rates are wider as compensation for that. Most operational risk in the asset type lives in Class C.

The plus and minus modifiers ("B+", "C-") are informal and not standardized across firms or brokers. Treat them as directional. When in doubt, focus on year built, last renovation, current rent versus submarket median, and physical condition. The letter is a label; the underlying numbers are the truth.

How the two axes interact

Asset class \ Strategy	Core	Core+	Value-add	Opportunistic
Class A	Common — newly delivered stabilized	Common — small upside	Rare — limited renovation upside	Common — ground-up development
Class B	Rare — usually doesn't qualify	Common — modest improvements	Dominant — renovation drives rent capture	Possible — deep repositioning
Class C	Never — operating intensity and renovation needs disqualify	Never — same reason	Common — operational turnaround or light renovation	Common — distressed or deep repositioning

When you read a deal, identify both axes separately. "Class B value-add in Charlotte" is a complete categorization. "Class B" alone tells you about the property. "Value-add" alone tells you about the strategy. You need both to know how to effectively underwrite the deal.

What carries into the rest of the course

Physical sub-type determines which comp set is relevant. You won't pull rent comps for a garden from a downtown high-rise. Comp selection in Chapters 18-19.
Strategy tier drives return targets, leverage structure, and exit assumptions. A core deal underwritten to value-add return targets is unrealistic and will likely fail at IC. A value-add underwritten to core return targets will lose the bid. Strategy framing in Chapter 16, return targets in Chapter 15.
Market-rate versus LIHTC matters before anything else. If the rent roll is rent-restricted, your opportunity to increase revenue meaningfully decreases.

Review Questions

A broker sends you a 320-unit asset, 4-story podium construction, built in 2021, 12 amenities listed, suburban submarket of a Tier 2 MSA, with the seller asking a 5.0% going-in cap rate. Classify the physical sub-type, the asset class, and the most likely strategy tier this deal will be marketed as.
The rent roll shows in-place rents averaging $1,100 against a submarket Class B median of $1,450. The OM calls this "Class A" and labels the deal "core+." What's your hypothesis, and what would you check first?
Why does annual tenant turnover matter for underwriting even when occupancy stays roughly constant year to year?
A LIHTC deal shows projected rent growth of 4.5% per year. Without seeing the model, what is your first question to the analyst?
A buyer pitches the same Class B 1990s suburban property two different ways: once as a "value-add opportunity with $8K per unit renovation budget" and once as a "core+ stabilized hold with light cosmetic refresh." Same property — explain how the return targets, leverage, target LP base, and exit assumptions all differ between these two framings.