Starlight U.S. Multi-Family (No. 2) Core Plus Fund: Navigating Liquidation in a Stabilizing Multifamily Sector

The Starlight U.S. Multi-Family (No. 2) Core Plus Fund has entered its final liquidation phase, with dissolution expected by year-end 2025. This process, marked by strategic asset sales and debt resolution, reflects both the fund’s operational resilience and the broader challenges of a multifamily sector in transition. While the fund has returned capital to unitholders through special distributions, its performance has been constrained by market dynamics such as expanding capitalization rates, oversupply in key Sun Belt markets, and competitive pressures.

Strategic Execution: Asset Sales and Debt Management

The fund’s liquidation strategy has prioritized systematic dispositions and debt reduction. By Q2 2025, it had sold key assets like Montane Apartments and Hudson at East, using proceeds to repay outstanding mortgages and unsecured loans [1]. The Summermill at Falls River property was transferred to its lender to extinguish $85,639 in debt, generating a $13,000 gain in Q3 2025 [1]. These actions underscore a disciplined approach to liquidity, though they have come at the cost of fair value losses on remaining properties. A $21,974 special distribution to unitholders in Q2 2025 further highlights the fund’s commitment to capital returns, even as it reported a $32,851 net loss for the same period [1].

The fund’s operational performance, however, remains a bright spot. A 95.6% physical occupancy rate as of June 30, 2025, and successful value-add upgrades—such as the 18.4% return on cost at Summermill—demonstrate its ability to extract value from assets [1]. These efforts contrast with broader market trends, where rising vacancies and aggressive pricing have eroded revenue.

Market Challenges: Oversupply and Cap Rate Pressures

The fund’s struggles are emblematic of the challenges facing high-supply markets like Austin and Phoenix. In Phoenix, for instance, the multifamily sector absorbed 19,000 units in 2024 but now faces a 11.9% vacancy rate and 23,000 units under development—5.5% of existing inventory [2]. Austin’s 7.4% supply growth as a share of existing inventory has similarly driven negative rent growth, with concessions such as six to eight weeks of free rent becoming standard [1]. These dynamics have compressed net operating income (NOI), as seen in the fund’s 22.9% year-over-year decline in Q2 2025 [2].

Cap rate trends further complicate the picture. Phoenix’s cap rate stands at 4.9% as of Q1 2025, above the national average of 5.2% in 2024 [3]. This divergence reflects oversupply and investor caution in high-risk markets. Meanwhile, national cap rates are projected to decline modestly by 17 basis points in 2025, driven by slowing construction starts and stabilizing demand [3]. The fund’s exposure to oversupplied markets has thus amplified its underperformance relative to broader sector trends.

Broader Sector Stabilization: A Mixed Outlook

Despite localized challenges, the U.S. multifamily sector is showing early signs of stabilization. Nationally, over 500,000 units were absorbed in 2025, supported by household formation and a shortage of single-family homes [2]. However, this growth is uneven. In Austin, for example, while Downtown properties posted a 2.8% annual rent increase in Q2 2025, suburban markets remain frozen due to high development costs and lack of consensus on cap rates [4]. Phoenix’s absorption of 4,100 units in Q2 2025 suggests resilience, but its 12.1% vacancy rate and -2.6% rent growth underscore ongoing fragility [2].

The sector’s long-term outlook hinges on slowing construction starts, which are expected to ease supply pressures by 2026 [3]. For the Starlight fund, this timeline aligns with its liquidation horizon, raising questions about whether the final liquidating distribution will reflect stabilized market conditions or lingering volatility.

Conclusion: Lessons for Investors

The Starlight fund’s liquidation phase offers a case study in balancing strategic execution with market realities. Its disciplined debt management and value-add initiatives have mitigated losses, but its exposure to oversupplied markets has constrained returns. As the broader multifamily sector stabilizes, investors must weigh the risks of high-cap-rate environments against the potential for recovery in Sun Belt cities. The fund’s final distribution, expected once remaining liabilities are resolved, will serve as a critical barometer of its success in navigating this complex landscape.

Source:
[1] STARLIGHT U.S. MULTI-FAMILY (NO. 2) CORE PLUS FUND [https://www.newswire.ca/news-releases/starlight-u-s-multi-family-no-2-core-plus-fund-announces-q2-2025-results-888500555.html]
[2] Multifamily Resilience Drives Stability In 2025 Housing ..., [https://www.credaily.com/briefs/multifamily-resilience-drives-stability-in-2025-housing-market/]
[3] 2025 U.S. Real Estate Market Outlook Midyear Review, [https://www.cbre.com/insights/reports/2025-us-real-estate-market-outlook-midyear-review]
[4] Q225 | Multifamily Market Report | Austin, TX [https://www.matthews.com/q225-multifamily-market-report-austin-tx/]