Multifamily RE - Full of Dummies?

*Largely focused on the Southeast Multifamily market.

Is the multifamily RE sector full of a bunch of idiots or self-loving narcissists or both? Who the hell buys an 80s vintage property at a 3 cap thinking they could rehab it into a 5+, then selling the stabilized piece of crap at below a 5 cap?

All equity is 100% wiped out on all these properties and majority of loan balances, especially those who leveraged their property at 80%, will not be paid off.

Does anyone agree or disagree? I feel like the tide is still slowly going out and will be fully drained by the summer with majority of the southeast value-add players swimming naked.

I actually have a lot of thoughts about this, which I can try and condense (brevity is not my strength!).

First and foremost, people are stupid.  Even if I'm really good at what I do, I probably have many of the same weaknesses and foibles as my fellow man - so getting swept up in the wave of enthusiasm for a particular geography or asset class is a feature, not a bug.  Think about the degree to which valuations for last mile industrial, or self storage, got shot to the moon over the last five years as well, and are now crashing.  What it boils down to, quite honestly, is that very few people in real estate have an original idea about what they're doing, and why.  You know who is getting exposed right now?  The bottom 80% of the operators.  The people who didn't have a true plan to add value, who didn't understand the operational and logistical difficulties of managing real estate - the folks who saw a gold rush and decided to join the throng.  And that happens all the time.  There is nothing unique about this cycle, about this asset class, about this region.  It's just that most of the shitty actors get wiped out, or knocked back to zero, and a fresh crop hasn't grown up yet.

Second, and related to that, is that so much of this business is driven by the need to raise capital.  So you go where the capital wants to go, and because fund managers tend to see their job as not doing worse than anyone else, rather than doing better than everyone else, you tend to see a massive herd mentality (and I'm sure none of them would admit that but it's true).  So yeah, some earlier actors are hitting absolute grand slams in the Sun Belt, in Atlanta, in the Research Triangle, etc.  So now there is an easy story to tell.  "Hey, this guy is knocking out 25-30% IRRs, it is a proven product, invest in my Class C deal!"  That story works, because the guy writing the check can go to his investors and cover his ass if something goes wrong, and he knows it.  If out of 100 people, you and 90 others are making the same mistake, you don't look like an idiot.  If you're taking a big swing on something and miss, you stand out.  The number of conversations I had with equity who weren't interested in affordable housing in the northeast/mid-atlantic because they were "focusing on the Southeast market" in the last 3 years is astonishing.  I mean, why does that make sense?  As long as you're doing an appropriate risk adjustment, why is one market superior to another?  So yeah, I'm I'm John Smith and trying to break into the game as a real estate owner/operator, it's highly likely that I'm going to find a lot more wallets willing to open for that Class C MF building in Tallahassee, FL that I plan on sticking some lipstick on, than the exact same product in Troy, NY.  Which of course drives down yields in the middle and later part of the cycle and creates a feeding frenzy, which inevitably leads to the kind of crash we're seeing today.  The only reason it's any different in 2023 is because this time, rates rose fast enough that the suckers left holding the bag of a decaying asset are the guys who tried to bridge and flip it, and not the longer-term holders who bought them out.  Which is a good thing, in my mind.

There's more, I think, but this is already a wall of text!