Most "Houston is interesting" content stops at thesis. It tells you the market is moving and points at a chart. It does not give you the four numbers an underwriting memo actually needs.
Below are the four numbers — and the math each one produces when you put them together for a mid-2026 Houston small-multifamily B/C-class acquisition.
The Four Numbers (Houston Small MF, Q3 2025 → mid-2026)
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1. 6.5% cap rates (Q3 2025) — with 50–75 bps of compression expected in 2026 2. 8–12% cash-on-cash on stabilized assets 3. 10–15% below-market rents on older small-MF inventory (value-add upside) 4. 9,000 units under construction — the lowest level since 2011
Each number on its own is interesting. Stacked, they describe an entry window the Houston small-MF market does not produce often.
Number 1: Cap Rates at 6.5% — and the Case for Compression
Houston small-multifamily cap rates expanded to 6.5% by Q3 2025 (per The Cade Letter's small-MF tracking). That is the high end of the current Houston cycle.
What matters for an acquisition decision is what happens next. Cap rates are tied to two things: capital costs and capital appetite. As of Q3 2025, both moved in the buyer's favor at the same time.
- Institutional capital flowed into Houston multifamily at +32% YoY in 2025 — $3.4B total volume, average price/unit of $136,423 (Yardi Matrix Q1 2026).
- The Cade Letter's Q3 2025 read calls for 50–75 bps of compression in 2026 as that capital deploys into the small-MF segment.
Translation, in acquisition-memo terms: a buyer underwriting at 6.5% today, holding through stabilization, can reasonably underwrite an exit at 5.75–6.0% in 2026–2027. On a $1.5M acquisition, 75 bps of compression is roughly $170K–$230K of value lift on cap rate alone — before any rent growth or expense management.
Sensitivity-test: at 50 bps compression instead of 75, value lift drops to ~$115K–$155K. At 0 bps (compression doesn't materialize), the cap-rate component is zero and you are left with only the operating math. The thesis depends on capital flow continuing to deploy — not on rate cuts arriving on any specific schedule.
That is the floor. The operating math sits on top.
Number 2: 8–12% Cash-on-Cash on Stabilized B/C
Stabilized B/C-class small multifamily in Houston is producing 8–12% cash-on-cash as of late 2025 (Cade Letter).
Two pieces of context matter for that number:
- It is roughly 2–3x what stabilized Class-A institutional product is yielding in the same Houston market.
- It is available at small-MF transaction sizes ($1M–$5M) where sub-institutional buyers can compete without bidding against pension funds.
The yield is not speculative. Stabilized means the asset is currently throwing this off. The buyer's job is to maintain it through transition, not to invent it.
The risk on this number is operational, not market: B/C properties have higher tenant turnover, higher maintenance reserve requirements, and management-intensive cap-ex schedules. Underwrite to the low end (8%) on first-year stabilization assumptions.
Number 3: 10–15% Below-Market Rents — The Value-Add Layer
Older small-multifamily inventory in Houston is renting at 10–15% below market (Cade Letter). That is the gap a value-add operator closes through unit-by-unit turnover.
Worked example: a 20-unit asset at $1,200/door market rent, currently leased at $1,050 (12.5% gap). Closing that gap as units turn captures $150 × 20 × 12 = $36,000 in additional NOI annually at full stabilization. At a 6.0% exit cap, that is $600K of value creation on top of the cap compression.
Stacked with the 75-bps cap compression on the original $1.5M acquisition, total value lift comes in around $770K–$830K on a $1.5M deal — roughly 50% gross return on equity at the acquisition price, before financing, over a 24–36 month hold.
Sensitivity considerations:
- Capture rate. Models assume you close 100% of the rent gap. In practice, plan for 70–85% — competitive supply, lease-renewal friction, and reno timing all eat capture. At 75% capture, the value-add component drops to ~$450K.
- Reno cost-per-door. The math holds at $5K–$10K/door. Above $15K/door, IRR thins fast.
The numbers are real, but they are upper-bound numbers. Sensitivity-tested numbers are still attractive — that is the point of the four-number frame.
Number 4: Supply at 11-Year Low
The fourth number is what separates this window from generic "Houston is interesting" content.
Houston small-multifamily has 9,000 units under construction as of Q1–Q3 2025 — the lowest level since 2011 (Cade Letter). Q1 2025 starts were down 77% YoY. The pipeline has collapsed.
| Year | Houston Small-MF Construction | Status |
|---|---|---|
| 2011 | Cycle bottom | Last comparable trough |
| 2018 | Cycle peak | Heavy delivery |
| 2024 | Tapering | Pipeline narrowing |
| 2025 | 9,000 UC | 11-year low |
| 2026 | Forecast collapse | Inside Loop 610 deliveries = 10% of 2025 (Marcus Millichap) |
Why this matters at the deal level: cap rate compression alone gets repriced eventually as deals trade and the market normalizes. Rent growth alone gets absorbed by competing supply when developers respond. The combination — cap compression PLUS supply contraction — is what protects both the entry and the exit. They work in the same direction at the same time.
A buyer who acquires in mid-2026 captures cap compression on the way in (the 6.5% → 5.75–6.0% reset) and supply absorption on the operating side (rent growth without competing inventory delivering into the same submarket). That alignment is rare; it is what makes this window distinct from the late-2010s Houston cycle, where supply ran ahead of demand.
The Catch
No window is free. Two risks deserve a line in the memo before you sign anything.
Risk 1 — Submarket selection. The Houston supply contraction is uneven. Inside Loop 610 sees 2026 deliveries at just 10% of 2025 levels (Marcus Millichap). Outer-ring growth markets — Conroe, Baytown, Galveston, Katy, Sugar Land-Stafford, NW Houston (Hwy 249) — keep delivering at higher cadence. A buyer who treats "Houston" as one market underwrites the wrong supply curve. The four-number thesis is most acute Inside Loop, in established submarkets like Montrose, Downtown, NW Houston/Bear Creek, and South Central/Greenspoint.
Risk 2 — Operational softness during the inflection. Houston multifamily occupancy bottomed at 89.0% in mid-2025 (Greater Houston Partnership) before recovering to 92.2% by January 2026 (Yardi Matrix). Rents printed -1.2% YoY through Q1 2026. The acquisition window opens before the operating data confirms it is open. Buyers who wait for trailing rent and occupancy data to normalize will arrive after cap compression has already happened. The job in mid-2026 is to underwrite to current operating data while pricing the 12–18 month forward setup — an analytical posture, not a vibe-based one.
What Goes in the Acquisition Memo
If you are writing the memo, the four numbers anchor four sections:
- Entry cap rate. Actual deal cap vs. the 6.5% Q3 2025 small-MF benchmark (Cade Letter). Document the spread and explain it.
- Exit cap assumption. Bracket 5.75–6.0% with the institutional capital flow data ($3.4B / +32% YoY in 2025) as the basis. Sensitivity-test no-compression scenarios.
- Stabilized cash-on-cash. Model to 8–12% range. Use 8% as the underwriting case, 10% as the base, 12% as the upside.
- Value-add lift. Model the 10–15% rent gap at 70–85% capture. Stress at 50% capture for downside.
Anchor each section to a specific source citation. The four numbers do the heavy lifting; the memo's job is to verify that they hold for the specific deal in front of you and that the deal-specific risks (sub-market, vintage, deferred maintenance, financing structure) do not erode the thesis.
The window is narrower than 12 months. The math is sharper than the headline data suggests. Underwrite the deal in front of you against these four numbers, and you have a defensible memo.
Sources & Further Reading
- Houston Multifamily Supply Contraction Window Angle — full thesis (P88 T4367)
- Brief: Four-Number Acquisition Memo (P90 T4368)
- The Cade Letter — Houston Small Multifamily Q1–Q3 2025 (P88 T4365, primary source)
- Marcus Millichap — Houston 2026 Forecast (P88 T4366, supply data)
- Yardi Matrix — Houston Q1 2026 (P88 T4363, capital flow + occupancy)
- Greater Houston Partnership — Multifamily June 2025 (P88 T4364, construction trend + occupancy bottom)