For most of the last decade, multifamily was the default answer for private real estate investors.
Debt was cheap. Cap rates compressed. Rents rose faster than operating costs in many markets. You could buy a property, execute a straightforward value-add plan, and let falling yields on sale do a lot of the work.
That environment has changed.
Rising interest rates, tighter lending standards, and slower rent growth have exposed how dependent many multifamily deals were on one thing: favorable capital markets.
At the same time, a quieter shift has been taking place. Investors who still want real estate exposure are spending more time looking at operating assets with multiple income streams and land positions that can be entitled or expanded over time.
The logic is simple: if capital markets are less forgiving, you want assets where returns are driven more by execution and less by cap rate movement.
What Went Wrong for 2020–2022 Multifamily
None of this is an indictment of apartments as an asset class. People will always need housing. The issue is the pricing and structure many sponsors used from roughly 2020 through early 2022.
A few things happened at once:
- Purchase prices assumed aggressive rent growth. Underwriting often depended on rents continuing to grow at 5–10% annually — a pace roughly double the long-term average. (Freddie Mac Multifamily Outlook)
- Short-term, floating-rate debt became increasingly common. Multifamily bridge loan volume reached $15.4 billion in 2021, up 389% from 2019, according to CBRE. (CBRE Multifamily Debt Market Data)
- Exit cap assumptions stayed anchored to 2021. Many deals modeled a sale into the same low-yield environment they were purchased in, with little room for rates to move against them.
When short-term debt matured into a higher-rate environment and rent growth normalized, the math stopped working. Multifamily CMBS delinquencies rose sharply, reaching 7.23% by June 2026, as higher borrowing costs and weaker valuations increased refinancing pressure across the sector. (Trepp CMBS Delinquency Report)
The lesson is not that multifamily is broken. It is that single-engine return structures are vulnerable when the engine stalls.
Two Return Drivers Instead of One
Operating real estate with an entitlement or expansion path looks different. Instead of relying on one variable, these assets have two distinct sources of return:
- Operating performance. The property already hosts a business: hospitality, events, food and beverage, specialized commercial uses, or a mix. Revenue comes from customers, not only from tenants. Thoughtful operations, pricing, and capacity management can grow income even if capital markets are flat.
- Land and entitlement value. The site often includes additional acreage or underutilized land. Advancing entitlements, increasing allowable uses, or adding capacity can change how the market values the property, independent of current income. Entitlement moves land from a speculative development opportunity toward an approved use, reducing development uncertainty and creating a separate path to value creation. (International Right of Way Association)
These two elements work in tandem over the life of the investment.
While the operating business generates cash flow, the team can advance entitlement or expansion plans forward. When approvals are in place, the market values both the income stream and the option set that didn’t exist at purchase.
You’re no longer dependent on a single outcome. If operating performance exceeds expectations, the investment can perform even if exit values are conservative. If the land value step-change is significant, it can carry more of the return even if operating growth is steadier than planned.
Why Institutional Capital Often Skips These Deals
If the logic is straightforward, why isn’t there more competition for these assets? One answer is that the underwriting work is harder.
Larger institutions tend to favor assets where performance and valuation can be assessed against established market data and comparable properties. A 300-unit apartment building has a rent roll, historical operating results, established cap-rate benchmarks, and a deep body of market data. That makes the asset easier to model, compare, and price than a property whose value depends on multiple operating businesses, land, entitlements, and future development. (CBRE U.S. Real Estate Market Outlook; Green Street Commercial Property Price Index)
A multi-use hospitality estate with an events business, food and beverage operations, and 10 acres of potential entitlement does not drop into a template:
- Revenue is diversified across weddings, concerts, private events, and on-site spending.
- Margins vary by line of business.
- Future value depends in part on permits and approvals that are not yet in place.
For many large capital allocators, that complexity is a reason to pass. It does not fit their mandate or their internal process.
For specialized operators and their investors, it is the point.
When fewer buyers are willing to do the work, entry basis can be more reasonable. And when the operator controls both the business and the land strategy, return levers are closer to execution than to market sentiment.
Risk Looks Different, Not Lower
Operating assets with entitlement upside are not low-risk by default.
They carry their own set of considerations:
- Operating businesses can miss forecasts.
- Entitlement timelines can extend as restrictive zoning, cumbersome approval processes, and local development constraints slow projects.
- Construction and expansion costs can change with the market.
The distinction is that many of these risks are operator-controlled rather than market-dependent. Strong local teams, conservative phasing, and realistic entitlement assumptions can mitigate a portion of the risk in ways that macro conditions cannot. For investors, the key questions become:
- Does the operator have a track record running real businesses, not just owning buildings?
- Are entitlement and expansion plans supported by local demand, not just by pro forma models?
- Is the base business healthy enough that the land strategy is a bonus, not a requirement for survival?
When those answers are satisfactory, the risk profile can feel more understandable than a highly leveraged asset whose success depends on refinancing into a friendlier interest rate environment.
Where This Leaves Multifamily
Well-bought multifamily will continue to be a core part of many portfolios. Distress in the sector may also create opportunities to acquire quality assets at improved pricing. (Yardi Matrix National Multifamily Report)
What’s changing is the assumption that apartments are the only, or even the primary, way to gain exposure to real estate. In a market where debt is more expensive and less forgiving, rent growth is moderating, and capital markets are less willing to reward thin strategies, assets with multiple, execution-driven return paths are attracting more attention.
Operating hospitality and specialty real estate, paired with entitlement or expansion work, is one example of that shift. It is a more complex approach. It requires more active management. It does not fit every investor.
For those willing to think beyond single-engine income streams, it is increasingly where the more resilient opportunities are being found.