Does the bottom ever come?
Almost feels like if you’re not trying to survive and are ready to buy, you’re waiting on distress or a market crash. Wasn’t around for the GFC and it seems like those who were are waiting for a Lehman type event/signal for the bottom.
I’m seeing non-NYC office trade at all time lows. Apartments are negative leverage but from a price perspective your price/unit is very favorable plus development & new supply has halted (and in my market- rents have stagnated the last few years). I feel like my shop is missing out because we believe things will get worse and prices will continue to drop. That belief seems to match up with groupthink but I haven’t really been satisfied with the reasoning why.
Starting to wonder if the buying opportunity of a lifetime is already here and was curious to get some thoughts on why or why not that may be the case.
The reality is that short of a Global Financial Crisis level black swan event, there is no singular "bottom."
Even on this site you have people saying that their firm has had overwhelming layoffs and they've been pencils down for the last year and a half and then you have other people who started four new deals in the last six months.
You can not possibly compare the timing and fate of say NYC office to Southeastern Multifamily at the moment. Two almost completely different scenarios. We are collectively simultaneously not at the bottom yet, at the bottom, and already on the upswing.
This is the answer - nobody can time the bottom, and shops will start to jump in at different points as they think we're roughly there (or as they start to see opportunities that are worth pursuing for their mandate).
I remember in peak Covid everyone was starting distressed funds. They thought there was going to be this huge correction...It never came.
The one thing I learned is that when everyone expects or is waiting for a recession, there likely wont be a recession. In 2021, I was having drinks with a few friends. All of who are on the sidelines waiting to buy a house. All of whom have cash. They all said they are waiting for a bottom. I told them to look at their own logic. If you all have cash and are waiting for a drop, then chances are there wont be a drop or if there is it will be minimal. They are all still waiting for that drop, meanwhile prices in my market are up 20% since and its worse considering rates are also up.
Everyone with cash wants a recession because they think it will benefit them, but why would there be one if everyone has cash.
While I don't disagree with this, I struggle with the value proposition of real estate as an asset class at the moment when there's still 10+ year old, Class-A MF deals trading at 4.75% - 5.25% cap rates in Southwest markets. If you don't have a horde of discretionary capital at your disposal, why even try to play that game when there's better investment alternatives in the public markets. If your logic is rates will come down and you'll benefit from that, then you can make an even better bet through long duration bonds which benefit from convexity as interest rates decrease.
As someone else pointed out, it's a very jumbled market and it is difficult to make sense of the market as a whole. Part of the issue is we've experienced a once in a career transition in society in terms of how we use physical space - mainly office. As the office slaughter continues (and rightly so), we'll going to continue to see capital flood into multifamily and industrial - as it has no real alternatives.
I think we need to see the allocators re-allocate out of real estate with allocations taken from 8% - 10% down to say 5% - 7%. That will pull some of the capital / liquidity out of the market, which would be healthy for long-term capital market fundamentals. Or at least imo.
1. A lot of multifamily trading at those cap rates has substantial value-add potential and people are buying because they're trading at favorable per unit pricing so they can renovate and move rents to market and achieve a substantially higher yield. There's an element of betting on rent growth as well of course, but generally rates aren't a primary factor on these deals.
2. The reallocation has already commenced - lots of deals popping up from institutions who have a board mandate to offload certain types of assets to downsize their portfolio and who just need them off the books.
But the price/unit is very favorable in comparison to what? The past 3 years, even the past 5 years? These were times when there was continual cap rate compression, money was cheap and development costs were lower. I don't even know how to look at comps anymore because it's such a sideways environment. I also certainly do not think we are out of the clear yet. Ton's of maturities coming up this year and next, and the extend and pretend will have to end at some point. The Fed is not lowering rates this year unless there is a recession in which case prices will have to fall.
My bottom comes all the time
There is always a bottom. It's just that there won't be any consensus on what/when that is until years after the fact. Anyone who sits around waiting for the fire sale is going to do very few deals.
So yes, the bottom of this market will come. But it doesn't matter, because it's not possible to time it perfectly anyway, especially not in an illiquid market where you're waiting 6-12 months to buy anything anyway. In the stock market, if you think "this is rock bottom" it's great, because you can buy or sell whatever the hell you want and someone will make a market.
If your future self comes to you and says "March 19, 2024 is the day that everyone agrees is the bottom of this cycle, go make some money".... you can't! You still have to source deals, and not everyone will make sense, and convince every Seller to agree to your price, keep them from re-trading, etc etc. Underwrite conservatively and buy when you have opportunities and you'll do fine. Anyone trying to time the bottom of the real estate market is a moron, and I mean that - the point of this business is not to buy really cheap and flip a few years later, you make money by holding through multiple cycles, and it's far more important to underwrite expenses properly and not overleverage than it is to buy at an amazing basis. Plenty of people buy home run deals, get greedy, and lose it all anyway.
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