Controlling the Controllables: How We Protected Performance in a Tough Market (H1 2025)

💡 Summary

In today’s multifamily market, higher vacancies, negative rent growth, and inflation are creating real headwinds for investors. Break of Day Capital’s 2025 midyear update shows how disciplined expense management, operational efficiency, and tools like EliseAI are driving NOI growth and stability despite income pressure. With property valuations below replacement cost and potential rate cuts ahead, operational excellence remains the key advantage for multifamily investing in a challenging economic environment.

While the market has thrown some curveballs, we’ve focused on controlling what we can: tightening expenses, improving operational efficiency, and finding creative ways to strengthen performance across our assets. We thought some of those insights would be valuable to share with everyone, not just those who joined the call.

Market Reality

We can’t control the market, but we can control how we run our properties. The first half of 2025 brought real headwinds: higher vacancy across Tucson (~7–8%), negative rent growth (-2.6% YoY), and a spike in concessions earlier in the year before easing. Against that backdrop, we focused on the levers we do control: costs, operations, leasing discipline, and revenue management.

What We are Controlling (and How)

• Expense discipline: Our controllable expenses are running better than both pro-forma YTD and historical levels, thanks to tighter vendor management, staffing optimization, and ongoing audits.
• Operational efficiency: Rolling out EliseAI for centralized 24/7 leasing and resident communications—boosting lead conversion, scheduling tours instantly, reducing repetitive staff tasks, and lowering operating costs.
• Weekly blocking & tackling: Daily/weekly action items, monthly site inspections, quarterly marketing reviews, and incentives for follow-ups and renewals to maximize retention.

The Results: Expense Outperformance Despite Income Pressure

Even where income underperformed due to occupancy dips and softer trade-outs, we offset the impact through cost control and targeted operational moves:

• Portfolio renewals: Renewal lease trade-out averaged +4.1% with 63.8% retention in 1H25, supporting revenue stability while minimizing costly turns.
• Property gains from ops focus:
  • Icon on Pima: +28.4% average NOI in 1H25 vs 2H24 and +8.1% economic occupancy; +10.9% YoY NOI growth.
  • Mission Antigua: +7.9% NOI growth in 1H25 vs 2H24 with +1.4% lift in economic occupancy; bulk cable implemented to grow other income in 2H25.
  • Icon on Spanish Trail: +2.8% average NOI vs 2H24 and +11.6% YoY NOI growth in 1H25, despite slower leasing in Q2.

These improvements came while overall controllable expenses outperformed budgets, underscoring the benefit of disciplined management during a revenue-choppy period.

Looking Ahead: Stay Disciplined, Stay Selective

Our 2H25 focus remains the same: tighten expenses, price intelligently, push qualified traffic and conversions (with EliseAI support), increase utility recovery, and only invest in renovations that deliver verified premiums.

In a market we can’t control, operational excellence is our edge.

Macro Update: The Big Picture for H2 2025

The economic backdrop is challenging, with inflation staying stubbornly high. In June, consumer inflation (CPI) rose 2.7% year-over-year, while tariffs on goods like furniture, electronics, and apparel—which are being passed on to consumers—are pushing prices even higher. Core inflation is hovering near 3.1%, signaling persistent inflation worries. marketwatch.com

Economic growth is slowing. The Federal Reserve projects GDP growth to decline to around 1.4% in 2025, down from earlier estimates, while inflation remains elevated and unemployment is expected to stay higher than historical norms. ft.com

On the rate side, the Fed is keeping the federal funds rate steady at 4.25–4.50%, though markets are hoping for cuts later in the year if inflation cools. usbank.com

What this Means for Real Estate Investors:

Despite these headwinds, there are bright spots. Property valuations remain attractive (often below replacement cost), and experienced operators can still deliver positive cash flow—especially as rate-cut expectations grow. ft.com

This environment favors working with skilled operators who can navigate cost pressures, manage efficiently, and lock in opportunities while prices are favorable. Lower valuations and the potential for rate cuts give well-run properties an edge, making operational excellence the key to protecting cash flow and positioning for growth in the next market cycle.