Smaller multifamily projects rise as Tacoma makes middle housing push

Tacoma City Council approved its fourth multifamily property tax exemption (MFTE) project this year, with most developers choosing the 12-year MFTE that requires 20% of units be affordable at 70% Pierce County AMI ($84,560 for a family of four). Recent approvals are small-scale: the latest is seven two-bedroom townhomes (990 sq ft) with expected market rent $2,300 and rent-restricted rent $1,825; other 2024 approvals include a 12-unit (8-year, market-rate) project and several 12-year projects in the 4–8 unit range, with two more agenda-ready. The city’s Home in Tacoma policy and zoning changes are driving a sustained shift toward 'missing middle' developments; impact is local and concentrated among small multifamily developers rather than broad market-moving.

Analysis

Developers are increasingly favoring smaller multifamily footprints because they compress entitlement and construction timelines and raise optionality on hold-versus-build decisions; that change shifts margin capture away from large-scale vertical developers toward local specialists who underwrite high per-unit costs and faster lease-up. Expect a bifurcation in economics: smaller projects trade off economies of scale for lower cyclical exposure and quicker capital turnover — attractive to private equity and nonbank lenders that price speed and covenant tailoring over absolute scale.

Second-order winners are modular/manufactured component suppliers, small-balance commercial lenders, and tech-enabled property managers that lower per-unit operating cost for <20-unit portfolios; large national apartment REITs see little direct benefit because the units are below institutional portfolio thresholds. On the supply-chain side, demand will tilt toward finish trades, fixtures and adaptive-reuse expertise rather than heavy civil or tower crane work, compressing volumes for large GC-capex suppliers and expanding margins for light-manufacturing vendors over 6–24 months.

For municipal finance, incremental tax-exemption programs shift revenue volatility to landowners and increase sensitivity of city receipts to policy cycles; a political rollback or legislative tightening would be the fastest catalyst to revalue small-project backlogs and related credit lines. Macro risks that could reverse the trend include materially higher real rates (which reprice small-balance lending spreads), a sudden construction-labor shortage pushing per-unit costs above restart thresholds, or investor fatigue on yield-compromised affordable set-asides — any of which can flip risk premia within quarters rather than years.

Key Decisions for Investors

• Long LADR (LADR) — rationale: small-balance commercial mortgage originations should grow as private developers lean on nonbank lenders; timeframe 6–18 months. Position sizing: modest (1–3% portfolio), target 15–25% upside if spreads stabilize, downside: credit drawdown risk up to 30% in a sharp CRE shock; hedge with short high-beta bank exposure.
• Long Builders FirstSource (BLDR) + Home Depot (HD) pair — rationale: increased renovation/adaptive-reuse and finish-demand for smaller projects benefits light building-materials suppliers and retail distribution; timeframe 3–12 months. Risk/reward: expect 10–20% upside if localized retrofits accelerate; downside tied to a national housing slowdown (~25% draw).
• Short KB Home (KBH) or D.R. Horton (DHI) selective exposure — rationale: marginal shift of entry-level demand into low-rise multifamily in urban infill reduces near-term absorption for some entry-level single-family segments; timeframe 12–36 months. Pair trade: short builder (0.5–1% notional) vs long BLDR (0.5–1%) to neutralize housing cycle beta; reward medium (15–30%), risk large in a broad housing rally.
• Reduce/avoid concentrated exposure to the local municipal credit or single-asset CMBS pools tied to small-project parcels — rationale: policy-driven tax exemptions increase revenue volatility and create political tail risk. Action: reallocate to diversified CRE lenders or short-duration muni exposures until policy permanence is confirmed; timeframe: monitor next 6–12 months for legislative signals.