Anyone getting deals done in multifamily?
From finding a good deal, making it pencil, finding a lender, and an LP—it seems like it’s nearly impossible to get deals done right now.
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Work at a major bank lender and virtually everything I do is multi. I know people are pessimistic about office but honestly, I don’t see how shops continue to get value add/opportunistic returns in multi. The space is super crowded and there’s so much capital chasing the same deals with the same biz plan. I realized the space had a fundamental value issue when I saw that shops were still buying with negative leverage and trying to justify it somehow. Same thing is happening with industrial.
Look, multi is a fundamental requirement for society. We’re in an affordable housing shortage and will be for a while but I just don’t see how you can get value add/opportunistic returns considering sellers have not adjusted their expectations, debt will remain elevated for at least the next 3-4 years, and rent growth will flatten as inflation normalizes and more supply comes online.
I think if you’re looking for yield, it’s better to go into niche asset classes like cold storage or manufactured housing because there’s much less competition.
Agreed. Everyone is talking about how all these opportunities are going to be coming in the next 6-12 months as owners will be forced to sell with debt coming due. But there’s so much competition in MF, and everyone is waiting for the same flood of deals, which I feel will lead to cap rate compression even for these “distressed” deals.
I dunno, I've already seen asset trades at per unit numbers that shock me - far below replacement costs. I agree that the near term horizon/debt market conditions are likely too bearish to generate a decent enough return to support a 3-5 year fund model, but if I was a cash heavy family office with a long term value mandate I'd be taking a serious look.
Have a different business plan? Yeah, many shops are chasing the same "put in cosmetic repairs and bump rents 15%" assets in the Sun Belt and Southeast, but maybe, you know... try something different?
Well, Sellers will eventually come to earth. But again, what you're really saying is "why can't I make money doing the same thing everyone else has done?" And the answer to that is self-evident. You have to take a risk to make outsize returns. Otherwise be happy with your 8% levered yield or whatever it is.
And cash will stop chasing real estate if things don't change.
I think that if you are thinking about investing in these terms, you probably should find a different business to be in. You drive yield by operating well or executing on a business plan that others aren't, not by moving into a niche asset class where there are 100 players instead of 10,000. Unless you're the absolute best in class at finding, evaluating, and managing cold storage facilities, you'll do just as poorly there as in multifamily.
Honestly the best space to be in right now is probably office, if you're coming in and not sitting on underperforming assets. Any place that institutional money is fleeing is going to be the best risk adjusted yield.
You're a fucking dumbass he wasn't talking about running his own vertically integrated deal shop he'a just speaking generally. You just took some shit hyper literally and then gave the most humble brag, condescending and long-winded reply that essentially amounts to "I'm better than you because I'm an operator". That was crazy yo😂
I totally agree with this comment and appreciated it too. Do not listen to the people criticizing it as I can tell you know what you are talking about
Manufactured housing trades tighter than multi. Less supply with just as much demand to purchase.
Class A for sure. But I gotta believe Class B/C mobile home parks are wayyy above apartments.
On the development side. Short answer is no and nothing has pencilled to good risk-adjusted returns since October 2021 :(
Nothing has penciled since then, but deals were still done.....
They were. At returns that now look pretty bad. Imagine buying a deal at a sub 3 cap, your MTM business plan is less successful than UW and cap rates blow out 175-200 bps all while your 3-yr floater is coming due. No thanks
Still a fair amount of activity in the core+ space. True core deals (i.e. north of ~$120M) are mostly dead due to institutions being on the sidelines, but there are some pretty long bid sheets on $50-100M, recent-vintage deals in places like DFW and Denver. Several recent deals in Denver got to guidance pricing and had 20+ offers, the majority of which were well-qualified buyers.
Definitely a flight to quality right now. We're finding return expectations for these type of core+ deals to be 10-12% levered IRR, up probably ~150 bps vs the 2022 peak. Some unlevered buyers floating around out there right now looking for 7-8%.
Seeing 4.6 - 5.0 going-in caps right now (after burning off LTL & concessions probably 4.75 - 5.2). Add 25-50 bps on cap rate for pre-stabilized deals (i.e. 75% occupied or less). Subtract 25 bps for attractive loan assumptions. When the transaction market was dead last fall, I figured going-in cap rates would be 5.0 - 5.5 at this time, but to a previous poster's point, there is still a ton of capital chasing quality deals right now. I will caveat all these figures by saying my firm typically UW's more conservatively (I'd argue realistically) than most on acquisitions, so our cap rates are probably a hair low vs most groups.
Feels like most of this stuff is pricing approximately at replacement cost, plus or minus 5-7%.
On the latest Walker Webcast, Kris Mikkelsen pretty much has the same thoughts around core plus activity.
Have definitely seen a few deals that could be considered distressed, but the "wave" isn't here yet. The wave will mostly be 1970-2000 vintage Class B and C stuff, but there are some Class A ones as well...they're just being shopped quietly. I can think of two deals in TX right now where the owner (a firm that is lauded on here all the time) bought in 2021 with a 2-year, ~70% LTV CMBS floater that expires this year. They won't qualify for extensions as operations are flat. They are pretty much saying "get us out at our basis", which I've never really seen from that group before. Will be telling to see where bids come in.
To your point on LP capital...JV market feels really dead right now. My firm has a pref/JV platform and it's purely been pref for us outside of a few deals we already approved with a sponsor we've done a lot of business with. People buying right now are primarily discretionary fund groups and DST/1031, at least in the space/markets we play in.
From the perspective of a small operator, the market is frozen. There is little bifurcation between a shit deal and a good deal, with the former being VERY overpriced and the latter still not interesting. The deals I have been able to compete on are all loan assumption/seller carry deals with large operational upside (not your typical lipstick, but heavy value add (construction) or operational leverage) that can bridge you the ~24mo to get to stabilization. The typical owner is not selling in this environment unless they have to.
Frankly, it is hard to get excited about anything that doesn't stabilize in the low teens unlevered considering I am getting over 5% in my checking account.. From my perspective there is little incentive to reach for a deal. There is much more downside than upside in this environment and if things are to turn worse (assuming you are REALLY plugged into your markets) it will be near impossible to miss it. Conversely, reach now and fight a slowing economy, high inflation, weakening consumer? Not appealing. We are modeling 0 market rent growth, sometimes negative.
I will be happy to be proven wrong, we have a solid asset base and can go the next 18mo without buying another deal. Good luck to everyone out there!
It is a tough market right now. Sellers want premiums and seem to sometimes be pricing in the higher cost of debt into the current sale price. Even in markets that have cooled off, if the property is not distressed or the deal isnt collapsing due to financing issues, good luck. Most markets seem to be in a weird limbo.
Dev shop here, the only multi we've been able to underwrite successfully has been student housing deals and garden/townhome as a carve out from a larger industrial development plot. It's not a great deal on its own per se but we getting better approvals from those cities if we reduce warehouse a few hundred k SF and add some relatively affordable housing.
Can you walk me through why Student Housing has penciled?
Bump
How are you all thinking about it exit cap rate 5 years out / stabilized YOC targets relative to the forward curve? We are seeing core buyers re-entering the Multifamily acq space as of this month, which we have been waiting for before getting back into the pool. Brokers are calling the bottom as of late. Understandably they have to sell so there’s likely more volatility left but presumably the fed actions are going to dive future cap rate expansion / compression.
LOL @ "brokers are calling the bottom"
What cap rate are core-buyers looking at, and when you say enter the market, do you mean bidding on assets?
Exit cap rates are tough. I am more focused on gauging how the exit basis feels compared to trades in 2022 and replacement cost today; does the price per square foot at exit make sense?
Yes—going in caps of 5.50% on in place NOI and 5.0% on a forward tax adjusted income stream. This is suburban product in a high growth major metro. I’m told REITs are looking at deals but have essentially marketed their portfolios to around a 6.0% cap and therefore cannot buy anything sub 6.0% right now.
It is interesting to hear the institutional perspective on investing. The idea of projecting any sort of exit cap/market rent growth/etc was and always has been not part of my analysis. This is the main difference I think when you move from being a selective syndicator to a platform for large institutions to invest with.
From a definition standpoint, I consider a syndicator as someone that is working with a small team of principals and a few juniors to help with acquisitions and back office. These types can scale up or down and don't have any sort of mandate or fund that they need adhere to/deploy. This is where I sit. That is probably the reason that my group has been so selective when it comes to investing. FWIW we watched everyone get filthy rich over the last 6 years while we plotted away doing a couple deals a year, and while we executed well, we could have made 5x if we were just a little more aggressive. At the end of the day we don't project any market rent growth on any of our assets and adhere to a strict value add strategy of reinvesting into the property and bringing rents to market
As for what we are looking for now? Need to stabilize in the double digits for me to get excited.
Another caveat, I am not competing on the big assets. I invest in the 5-25m range
Jumping out of the institutional world into the GP, this is the biggest change I made. Where are exit cap rates going to be in 5 years? I don't know, and that shouldn't drive whether I do a deal or not. What are you stabilizing to, how does that compare to trades/replacement cost, and most importantly, does that stabilized yield offer an attractive cash yield? The issue is too many people got into the business of doing deals that made no sense as long-term holds b/c they assumed the dumb money buyers were always going to be there. Need to be able to offer a long-term yields that makes sense relative to other investment opportunities.
I think an experienced and disciplined investment team will have similar outlooks at both sophisticated platforms, as well as smaller syndicators.
We are seeing in real-time tons of syndicators falling apart, and the biggest name institutions in the same boat because both groups made the exact same mistakes.
I would say that we are seeing wayyy more smaller syndicators more aggressively falling apart though; the truth is they made highly aggressive, ill informed decisions, while unfortunately using highly uninformed people's money on a massive scale.
The institutional investment platforms have also made the same mistakes, but at least have a lot of wins on the board, and can likely support the bad investments via the better performers if they're in a fund structure; it will just drag down their overall investors' returns.
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