⛅ Is the Sun Belt's run over?

👋 Happy Sunday, Best Ever readers!

In today’s newsletter, the Sun Belt fades, OZ 2.0 redraws the investment map, tariffs keep coming, underwriting standards tighten, and much more.

Today's edition is presented by Sunrise Capital Investors, which has a track record of over $1 billion in transactions and zero investor losses. Learn more about their latest fund today.

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Let’s CRE!

🗞️ NO-FLUFF NEWS
CRE HEADLINES

🪵 Lumber Spike: Canadian lumber tariffs doubled from 14.5% to 35% and could climb even higher before month's end as Trump's Commerce Department pursues a separate national security investigation, driving up construction costs and housing prices for American builders and buyers.

💪 Record Strength: The multifamily sector posted its strongest Q2 on record with 188,200 units absorbed, vacancy down to 4.1%, and rent growth turning positive at 1.2% YoY as all 69 tracked markets saw demand gains and investment volume hit $32.9 billion.

🌴 Sunshine State: Florida will eliminate its 2% commercial rent sales tax in October, ending a 55-year-old policy unique to the state and saving tenants with $100,000 monthly rent an extra $24,000 annually while potentially boosting property valuations.

🏗️ Construction Kings: For the first time in history, all top retail construction markets are in Texas, with over 17 MSF under construction in early 2025 as the state's booming population and domestic migration drive unprecedented retail development.

💾 Rags to Richmond: Richmond became the fastest-growing U.S. data center market with capacity surging from 100 MW to over 800 MW in H1, but rising community opposition and power constraints threaten to slow the region's rapid expansion.

🏆 TOP STORY
IS THE SUN BELT’S RUN OF DOMINANCE OVER?

The Sun Belt's run of multifamily dominance may be coming to an end. July 2025 rent data from Markerr shows negative rent growth concentrated across Sun Belt metros, marking a stark shift from the region's recent boom. The nationwide performance gap has widened to 960 bps, with rents ranging from 4.6% growth to a 5.0% decline, suggesting a fundamental geographic realignment in rental markets.

The new market leaders tell the story:

• Northeast and Midwest markets surge: Six of the top 10 rent growth markets are now in the Northeast, Mid-Atlantic, or Midwest, led by Springfield, MO (4.6%), Lancaster, PA (4.5%), and Rochester, NY (4.3%).

• Sun Belt struggles: The 10 worst-performing metros are primarily Sun Belt and Rocky Mountain markets, with Austin leading declines at -5.0%, followed by Cape Coral, FL (-4.4%) and Denver, CO (-4.2%).

• Single-family follows suit: The pattern extends to single-family rentals, where Chicago, Madison, and Providence lead growth while Florida and Texas markets dominate the decline list.

• Five-year outlook confirms shift: Projections show Syracuse, NY (5.5%) and other Rust Belt markets leading future growth, while traditional Sun Belt powerhouses like Austin (1.9%) and Phoenix (2.4%) lag significantly.

• National context: Despite regional polarization, national rent growth edged up 70 bps to an average of $2,075, with modest cyclical fluctuations hovering near 1%.

The primary culprit? You guessed it: oversupply. While rapid construction caught up with demand in previously hot Sun Belt markets, historically overlooked Midwest and Northeast markets have benefited from constrained supply and renewed interest. Florida and Texas markets have particularly struggled, with multiple metros in both states appearing among the worst performers.

THE BOTTOM LINE

The rental market map is evolving. The 960-bp performance gap suggests this isn't a temporary blip but a fundamental shift in regional dynamics, likely driven by supply imbalances and changing migration patterns that could reshape CRE investment strategies for years to come.

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🗺️ ON THE MAP
HOW OZ 2.0 IS REDRAWING THE INVESTMENT MAP

The federal Opportunity Zone program just got a serious upgrade, and it's about to get a lot more competitive. Opportunity Zone 2.0, passed under the Big Beautiful Bill, makes the program permanent while slashing eligible zones by nearly 20%, from 7,800 to about 6,300. The new framework introduces rolling 10-year designation cycles starting in 2026, replacing the static 2017 map that critics said had grown too broad.

The reforms are significant. Eligibility thresholds tightened from 80% to 70% of median family income, eliminating zones that had crept into affluent areas through the old "contiguous tract" rule. Investors get a streamlined deal: five-year capital gains deferral and 10% step-up in basis, ditching previous deadline-driven complexity. Governors have until July 1, 2026, to submit new designations.

The geographic winners are clear:

• California leads nationally with roughly 2,750 eligible census tracts.

• Texas is a close second at 2,500 — numbers that mirror their massive populations but also reflect economic complexity in high-cost markets.

• Houston emerges as the local champion with 631 potential tracts, including 526 in Harris County alone — a fivefold increase from 2017, representing 21% of all Texas zones.

• Dense urban markets dominate as the program targets areas with genuine economic distress rather than borderline communities.

The original program proved its multifamily impact, generating 68,000 more apartment units than pre-program trends worth an estimated $18 billion. Los Angeles saw openings jump from 1,245 pre-tax break to 3,432 in 2024, with 7,441 more underway. Nationally, OZs' share of new apartment construction doubled from 12% to 23%.

OZ 2.0 represents a smarter, tighter approach that should drive more capital to truly distressed areas while maintaining development momentum. With the investment window opening January 1, 2027, and expanded focus beyond real estate into logistics, manufacturing, and services, competition for remaining zones will be fierce — especially in powerhouse markets like Houston and Los Angeles.

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🎙️ THE BEST EVER CRE SHOW
HOW NEW UNDERWRITING STANDARDS ARE RESHAPING CRE

Ryan Duff, a former agency lender who underwrote $4.5 billion in closings, joined Pascal Wagner on the Best Ever CRE Show this week to discuss the fundamental shifts reshaping CRE underwriting. The conversation revealed a systematic recalibration of credit standards that's eliminating weak operators while creating opportunities for sophisticated capital.

📣 "When I first started originating debt — you know, 10, 12 years ago — GPs would have no skin in the game,” Duff says. “Now they are being required to put 5-, 10-plus percent equity into these deals." This, he says, eliminates the fee-harvesting model where sponsors extracted acquisition and asset management fees without meaningful downside risk.

💧 At the same time, lenders are imposing substantially higher liquidity covenants and interest reserves — often 12-16 months for value-add repositioning plays. FHFA-mandated loss-sharing mechanisms now require seller-servicers to maintain balance sheet liquidity to cover potential defaults, creating a more robust credit infrastructure.

📊 Perhaps most significantly, the industry is experiencing a fundamental shift from cap rate compression-driven value creation to organic NOI growth models. 

📣 "I think going forward,” Duff says, “people are underwriting deals a bit more conservatively. Rent growth — instead of 6%, 7%, 8% — is more 2% to 3% to 4%, and people are not making super aggressive exit cap rate assumptions like they used to."

This represents a return to fundamentals-based underwriting where operators assume exit cap rates only 25 bps inside acquisition caps versus the previous 100-plus bp compression assumptions. For LPs conducting proper sponsor due diligence — including REO schedule analysis and bridge loan vintage exposure assessment — this reset creates compelling risk-adjusted return opportunities with better-capitalized, operationally-focused sponsors.

🎙️ Listen to Ryan’s full episode here.

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