How tf is anyone buying multi right now?

We are officially into the 2 caps and good deals in good markets are still getting 30+ offers at guidance. How is anyone making sense of this? 

Comments (54)

1y 
aman12, what's your opinion? Comment below:

Best as I can tell, some of it is due to these family offices. I am on the AM side and at least 50% of the final offers we have gotten over the past 6 months are from family offices that don't have a ton of true multi experience. And we have been transacting quite a bit.

But hey, I'll sell deals at 2-caps all day long.

1y 
yayaa, what's your opinion? Comment below:

Where are you putting your proceeds in?

Most Helpful
1y 
yoruba123, what's your opinion? Comment below:

1031 buyers/family office who rely on broker bullshit on private capital side, blackstone & large PE firms comopressing cap rates due to capital allocation strategy and bench marking to bonds at sub 2% and multiples of corporate being insanely high, tech fucktards who can think 5% YoY rent growth is normal, f**ktard syndicators and any other mother f**ker with OPM who is more focused on fees.

Groups buying value add showing 15-18% IRR are trending cap rates down and using 4% to 7% rent growth through hold period.  Drunken math has worked the last 5 years so the dance continues!!  

HAVING BIG SAGGY BALLS AND BUYING INFLATION STORY.  I am hearing of sub 2 caps with groups trending to 3%.  Listen to W&D podcast with Peter Linneman this morning as well as a panel he had with some folks discussing the market in 2021Q4 on market dynamics. Game is burn off loss to lease with additional rent growth!  Also, single family home monthly mortgage keeps going up due to K shaped recovery to buy a second or 3rd home, crypto money, generational wealth transfer, tech money, etc that can pay FAWWWK YOU MONEY or 20% above ask.  Before you know it, folks will be spending 50% of income on rent.

I think there is a case to be made that there is a spread between institutional and private capital cap rates, so you are seeing instituional groups now deep their toe in sub 100 unit assets to play the cap rate game that private capital deals will compress.

Scary to think how this might shake out but too much capital on the sidelines, so even if interest rates go UP, you will still see cap rates compress.  Where else do you put those funds?  FAWK do I know.  

Array

  • 14
1y 
CRESF, what's your opinion? Comment below:

We have to figure out a way to build more housing as a country. I agree with you that all the dynamics are in place for single-family values to continue to grow at above inflation over a very long period of time, which will lead to the scenario you said (people spending 50% of their income on housing). Housing has historically been cheap in the US...I think we are seeing that starting to flip in a major major way and that will have serious societal ramifications. There is a strong cultural bias towards homeownership - this isn't going to become a nation of people who are happy to rent overnight. I have friends who make $300-500K between them and their partner and they think housing is unaffordable. That's 5-10x the average median income. 

We need more apartments, we need more townhomes, we need more condos, and we need more single-family homes. A lot more. 

  • 5
  • VP in RE - Comm
1y 

Fair point on US historically being cheaper. I look at cities in Europe and see that people "figure it out" (live with relatives, stay with parents until they are older, live in smaller units, etc.).

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  • Investment Analyst in PE - Other
1y 

Rents are increasing at double digit rates, and if you're not forecasting that you're a chump

  • Investment Analyst in PE - Other
1y 

Who is MS'ing this lol. This is the correct answer. My fund has assets hitting 10-20% rent increases on turns. Sorry that you're wrong or too much of a pussy to underwrite what's happening in front of your eyes because it doesn't fit the story that happened the 5 years prior or there's no magical value creation plan in place. Don't overcomplicate.

  • 4
  • VP in CB
1y 

Personally speaking, my rent went up 15% in October which luckily I can afford; however, there are numerous people in my complex (suburban apartments, Midwest, 20min outside of Tier 3 city) that are leaving as they either cannot afford or do not want to pay the astronomical rent increases - some moving in with family/girlfriend, others finding different options (lower quality/smaller apt etc).  Vacancies seem to be rising in my complex but that's obviously very antidotal - for my own sake, I'm hoping some of these property managers realize they only can increase rents so much before people start leaving & getting new tenants becomes harder.

EDIT: Just checked the going rent rates for my apartment complex.  They are down $100-200 a month just in the last couple months and the same exact unit is now ~$100 cheaper than I am currently paying.

  • VP in RE - Comm
1y 

People have efficient capital bruh. Dont be jealous. 

  • 2
1y 
RealEstateAK, what's your opinion? Comment below:

It is extremely competitive out there but here are a few things that I have been seeing in the market. 

1) Large Loss to Lease has resulted in a lower cap rates. It will be interesting to see what happens once we collapse the loss to lease and we do not see the incredible rent growth we've seen recently YOY. 

2) Adding rocket fuel to that is the bridge funds are lending at high leverage at rates that are competitive with the agency along with funding the cap ex budget. They are essentially paying you for the large LTL you have on your books.

3) Capital Allocation - Where else are you going to put your money into today that makes you feel confident you can get to your returns? Even at a 8-12% IRR it's tough to replicate those returns in a steady asset class. 

1y 
Username_TBU, what's your opinion? Comment below:

The loss to lease being marketed I see is crazy. Basically I see a broker show a few months of 26% rent bumps on turns and say mark to market rent is 26% higher. and then guidance is a 4 cap on marking all rents 26% higher...

  • VP in RE - Comm
1y 

What i don't understand is how you finance LTL. If you can get to a 4 cap by bumping rents 20+%, that would mean your in-place cap is like a 2 cap, which will dictate financing. 

1y 
Sham Wow, what's your opinion? Comment below:

To be fair - Garden style multi people are allocating to the land

1y 
pudding, what's your opinion? Comment below:

While I've learned no one knows anything. I'll take a stab here…pricing will get better once the large institutions can invest in office/hotel again (and maybe retail though even before the pandemic many institutions stayed away). Some of the Capital which should be going to office and hotel (and retail) will get reallocated and pricing should get better. 

1y 
TheDebtStar, what's your opinion? Comment below:

Somewhat relevant to the discussion, I was thinking late at night one night of what would happen to multifamily if mortgage rates increased drastically. Like 7% interest rates drastically and what environment that would entail. Honestly, in a scenario like that, inflation could be in the teens, so cap rates may not necessarily follow upward (or upward as much). These large multifamily funds would be holding cash and would probably be even more motivated to invest in the space (and quickly). Rent growth would continue and so a 4 cap today could be a 5+ the very next year. 
 

These are the things I think about when I'm in bed late at night. Reminds me of that meme of the guy in bed with his chick laying next to him.

1y 
CRE, what's your opinion? Comment below:

There is more money than ever and not enough places to put it. Simple economics. The demand for multifamily is high, thus prices are high.  

Commercial Real Estate Developer

  • 1
  • 1
  • VP in RE - Comm
1y 

Um yeah, doesn't really answer the question.

  • 1
1y 
CRE, what's your opinion? Comment below:

Of course it does. If you have to get money out, you find a way to justify the deals. 

Commercial Real Estate Developer

  • 1
1y 
Gaylord Focker, what's your opinion? Comment below:

Capping YR 2 proforma rents, burning off all loss to lease & sprinkling in exit cap compression. U/W is fun.

1y 
C.R.E. Shervin, what's your opinion? Comment below:

"Ideally" inflation means more money so people use money to buy assets raising their value, yields are low, so companies must pay more money for leases and payroll, so people have more money, so companies can raise rents, so relative cap rates may stay same or rise, but value increases because of higher NOI. So will companies pay people more money, if they don't then they are doing to ruin their own business cycle.

1y 
KClubs, what's your opinion? Comment below:

Something I genuinely worry about is the hot potato game that the value-add folks play in. Owner A renovates 10% of units and jacks up rents 20%, implying that you can do that same across the whole property. Owner B buys it on that basis, but in reality only renovated 10-30% of the units, increasing the rents 15-20% before marketing as a building that is 20-40% renovated. On a microeconomics scale, it can work...but what happens when an entire metropolitan area experiences this kind of hot potato passing. Not to mention, this strategy almost entirely removes an entire subset of the asset class for people who can't afford nicer apartments. If your HH income is $33k, rents going from 750 to 900 is a huge deal. Historically, Americans moved west and south. Where tf are you gonna go now to find a cheap place to live?

  • VP in RE - Comm
1y 

Not to mention that replacement costs in many secondary markets are around $250-275k per unit, while 80s deals are now trading in the $300k per unit range, new stuff $450k+

  • VP in RE - Other
1y 

I mean at some point this game of hot potatoes stop but what if that is a feature and not a bug? You have institutional buyers, both domestic and overseas who will buy core real estate at 3 caps once the property is fully stabilized, all the renovation is done by the multiple prior buyers who each did a little reno and now there is literally no meat on the bone but thats what a particular buyer with a certain risk profile is looking for, they do not want to do any more value add and they just want to clip coupons. I like to think of it as an assembly line, you have these shitty value add garden style players who put lipstick on a pig but the properties all eventually reach the end of the assembly line and get bought by institutions who prefer stabilized core real estate. To your point on rent increases, I think we should build more, even if its all market rate housing and that benefits tenants in terms of keeping rents in check but also offer additional new built housing for them. 

  • Analyst 2 in RE - Comm
1y 

you have these shitty value add garden style players who put lipstick on a pig but the properties all eventually reach the end of the assembly line and get bought by institutions who prefer stabilized core real estate. 

But that's OP's point - these shitty, new paint & signage, repositioned B & C properties are not stabilized core real estate assets. If anything, the double-digit rent increases on a populous experiencing single-digit income growth, on top of a building likely riddled with deferred maintenance, is anything but stable.  At some point, there has to be a tipping point. As you said, these value-add garden-style players are, by and large, shitty operators of housing. 

1y 
KClubs, what's your opinion? Comment below:

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1y 
DeeperSense, what's your opinion? Comment below:

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