I'm curious to hear everyone's take on the current outlook for multifamily acquisitions along the East Coast. Have you noticed any notable buying opportunities? It seems like there's been some talk about strong buying opportunities due to factors like floating rate debt and projected rents not materializing as expected. Do you think these opportunities are starting to emerge, or do you anticipate them happening in the near future?
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Are you willing to buy negative leverage? That's where core trades are today in gateway east coast markets. There might be some rent growth story there to get into positive leverage within a few years, or maybe there is a bet on interest rates coming down, or maybe it's just groups needing to put money to work. I don't know. Its strange, but the longer the market stays frozen and interest rates stay high, the more groups I expect to justify it.
Edited:
Are you willing to buy negative leverage? That's where everything is trading at.
So that's my question, are there any value-add deals even available at price points that make sense?
In the 20-teens when we were all saying "How are these office deals trading at such tight cap rates" and "Why is there so much money flocking into office" and "Office is such a safe play" etc. That's multi over the past few years... There will be a reckoning soon. Multi is just flooded with dumb money at this point, every syndicator and scam artist has jumped in and keeping prices high because they know nothing about yield, operations, or any real estate fundamentals. Agency financing has helped prop it up as well, and the CLOs pumped so much into it because of the Agency "take out" story. There will be so many that get burned in the next few years that got caught holding the bag. Multi will be the office product of the late 2020s IMO. Only deals I see trading right now for multi is core that are still trading for yesterdays cap rates by the non traded reits who only care about AUM or the syndicators who only care about fees, pretty much anyone trying to create cash flow/yield and healthy return are sitting on side lines.
In some markets, but not every market. Depends on how much supply they've added/have in process. Look at this as a percent of overall inventory and you'll see how overheated some markets got. Lots of sunbelt cities are going to see flat and maybe even negative rent growth for the next few years. Charlotte, Nashville, Austin, etc. all come to mind.
Supply constrained coastal markets are positioned well, though. They didn't have as much development post covid, keeping the underlying market fundamentals in check. Also, with 7% mortgages, you're now pushing higher earning professionals into the rental market (or keeping them there longer), which also bodes well for landlords looking to grow NOI.
But coastal markets have seen massive insurance bumps or having to self-insure. I know plenty of southeast investors who have abandoned anything coastal purely due to insurance alone.
I think it's exaggerated to say multi will see the same reckoning as office. Office had a fundamental reckoning due to work from home exponentially increasing after covid that multifamily will never have to deal with. Office deals are completely dead because groups can't keep them leased and the cost to get them leased up are insane. Multifamily never becomes as obsolete as office does. Someone is always willing to live in the Class-C/B properties, but with office the only thing that has a chance at being leased these days is Class-A. If you have Class B or lower, or even less desirable Class-A, you're sitting there with a major leasing problem on your hands and you have to shell out big $ to have any shot at leasing and even then you might come up empty handed. The TI / renovation costs to make office leasable often does not pencil anymore relative to the rate they can lease it at and the chance they sit on the sidelines sucking wind. To add fuel, even if they get them leased after spending all that money, the tenant could fall out or leave after 3 - 5 years and all over again the owner has to put capital into it because future tenants don't like the past tenants build outs. This is a huge fundamental issue that multi will never have to deal with, so sure maybe groups are overing paying today and once the dust settles they'll be in a tough spot, but it just will never get to the point that office has.
I always love the “this will never happen” comments with regards to investments. It’s reminds me of the “this time it’s different” comments. I’m not here to be Nostradamus, and predict why multi will take a bath, just that when everyone was saying retail is the best asset class because you’ll always have a consumer economy, people will always need to buy things, blah blah - Boom, Amazon. Same thing with Office, people will always need to make money, people will always need to work somewhere, - Boom, Zoom/Covid. I don’t know what that boom will be for multi, but I just know there is a storm brewing, and the massive amounts of units delivering leading to vacancy, the ridiculous cost of mortgages and prices of SFHs, the government sponsoring of GSE post financial crises and DUS licensed fraud, the rampant amount of unaccredited investor fraud + syndicator money, every Tom, Dick, and Harry saying they can teach you how to get passive income on social media by buying multi etc. This is not sustainable.
What if the government comes in tomorrow and says no more single family homes to be owned by PE and force Blackstone to dump a huge supply of SFHs on the market, or says values and too high there will be a program to subsidize all SFHs, or any other of a million things that can happen. At the end of the day, when people say this is safe play nothing bad will ever happen to it, that’s when it’s usually time to bet against it.
I guess with the 4-10mm homes shortage, Americans are going to figure out how to live in tents or on trees pretty soon, just like how covid/technology killed the office sector
If you can't think that everything is eventually disrupted, and that there is always risk in anything you do, then you're probably not a good investor. You have to have The Tenth Man rule / be the contrarian in investing, no matter how improbable or how safe. Yes, very hard to figure out what will happen in the future, but just like I can't be positive that Multi will crumble, you can't be positive Multi will endure.
"I'm sorry, are you for real? You want to bet against the housing market and you're worried WE won't pay YOU?"
what do you do to make money while sitting on the sidelines if pricing for MF doesn't make sense? what are shops supposed to do everyday to keep the lights on?
The worst will have layoffs or close their doors. The rest will have shit raises, shit bonuses, and no backfilling positions when people leave. At least that's what I expect. Essentially shrinking the industry.
If you believe this, then you believe that serious deflation and a massive recession will take hold. because barring that, the demand fundamentals are far too strong to create an office like reckoning. that certainly is a possibility, just saying that's what you're outlining in a nutshell. Otherwise, sure there will be some more downside but not what you're describing.
The market is frozen and transaction volume is in the gutter. Too many groups out there chasing the extremely limited opportunities so you have anything decent bid up to levels that are difficult to raise equity for. A lot of those deals are falling apart but some are closing. Plenty of stuck owners and stuck lenders. In many cases neither can afford to sell at current pricing and subsequently nothing happens
I think there are two potential paths forward over the medium term
1. if lenders and owners continue kicking the can and try to hold on deal volume will continue to be muted for the foreseeable future. More people will lose their jobs. Less flows into real estate because of relatively low yield generation. After a few years the market opens up a bit as the bidder pools have thinned. maybe by that point there has been some rent growth allowing valuations to increase and being more sellers to the table
2. For a multitude of potential reasons people start puking assets
To answer your direct question, yes seeing opportunities in the Southeast and FL in the value add space, but that doesn’t make them good deals. Vast majority I see are worth so much below the loan balance that they are headed back to the lender, just a matter of when.
I am seeing many, many deals in lease up (in the supply heavy markets) where a merchant builder is trying to offload deals at C of O or at stabilization. All at dumb prices - those guys are in for a reckoning after the leasing season. That’s where I think there will be opportunity, but you need the right capital for it - you’ll get core quality real estate at core plus returns. That’s a good deal but not a screamer - that said, vast majority of LPs are looking for 15%+ IRRs on those deals, and that’s just not going to happen much. It will likely be core plus funds, family offices with hands on asset management teams, or REITs picking off those deals, rather than JV groups or value add funds. EQR just picked up a good example of a deal that fits this profile south of Boston, minus the heavy supply.
I’m familiar with that EQR deal. They are getting good rents. But wasn’t that part of their co-GP structured finance program? That wasn’t a fully marketed process and likely isn’t exactly the same as the distressed merchant stuff you’re seeing in the sunbelt.
The developer had a 10% construction loan and wanted to get out, regardless of the good performance at the asset
I think the positive negative leverage conversation is a bit overblown on your Y1 cap rate. You can make a quick spreadsheet and underwrite to UIRRs that exceed debt costs right now in multi with the most influential assumption being projected exit cap and go fwd expansion from here. But yes, imo realistic revenue and expense assumptions can get you above your cost of debt and make debt accretive to equity IRR. So I can get in the low 7 UIRRS if my going in is 5.25-5.5 as they are right now.
I think more consequential question is if low 7s is good enough relative to if the treasury stays in low 4s. If LPs and the LPs LPs don’t think so cap rates need to go higher.
Any development deal that broke ground 2020-2022 is likely unable to payoff their bridge debt right now. The opportunities are starting to make some sense, but gut tells me bottom comes 2025/2026 when all those loans roll. When the banks get the keys and look to offload is where the opportunities will come for the next cycle.
It'll be fine.
The market is stuck because Sellers think they can hold on and buyers are waiting for 2008-level distress to swoop in. Neither is realistic.
We're finding plenty of opportunities. If I were in a space where I had a lot of competition and no real advantage, I'd be offering 5% more to sellers so they can get out and pay off their debt, or pay their closing costs, or get a couple cents on the dollar. Bid a little above the "market" and transact like hell. Anyone buying right now is going to be in a phenomenal place in 5 years, you just need to have more than a flip mentality, which few do.
If your idea is to liquidate in 3 or 4 years then yeah, it'll be tough right now. Buy and hold owners should transact a little expensive and refinance down the road.
Except for the fact that simply "offering 5% more" doesnt get it done still. The bid ask spread is huge. Buyers are not looking for 2008 level distress, they're looking for positive leverage.
Sellers don't know what to buy even if they are able to transact. So therefore they find themselves stuck.
Sure, you may be transacting, but transaction volume is down heavily across the board and will remain. Eventually market dynamics will play their role and both sides will meet in the middle, but its not going to happen anytime soon.
I thought that was pretty obviously meant to be a placeholder number and not a declaration that every single property currently up for sale in the United States of America will trade if the offer is increased by exactly 5% and not one basis point more or less.
C'mon man.
Why would a Seller need to know what to buy?
Which is a long way of saying literally nothing.
what makes you say this?
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