What should we be buying?
Long time lurker. Run a small family office with just shy of $1b aum mostly in value add multifamily but also have some exposure in other asset classes. It feels like nothing is penciling and its time to target something new or change our criteria and focus given every deal we see we are competing with 1031 buyers or dealing with unrealistic sellers. What would you do with $100m? Basis plays below replacement cost? Pref equity?
You want to know what honestly is the best thing to do. Take that $100M and drop in the S&P 500 and call it a day. No Im being serious. Unless you're underwriting cap rate compression or huge rent bumps, nothing will work right now. Speaking of replacement cost, my old mentor said "Replacement cost only makes sense in markets where someone is willing to replace it." Otherwise if replacement cost is your thing, I got some buildings in Gary, Indiana that are amazing values.
Sellers dont want to sell. Why should they? If they did, they'd end up in your shoes running around trying to find something.
What're your return requirements? Have some special situation stuff in some niche re spaces if you are open to connecting. There are good deals out there but have to get creative and have a broad reach.
how niche are we talking?
translation: have to be cowboy as fuck with your pro forma
Stabilized garden style surface parked multifamily (please dude!)
Drugs. Recession-proof industry.
definitely manga, light novels, and gold
Are you in Tampa by chance
Land between Seattle and Vancouver (best climate in the next 100 years).
Minority stake in a major sports franchise in a league that already has a great tv deal.
GE Health Care stock, VGT, VOO.
Secondaries company shares of Prenuvo.
Strong disagree in the sports franchise as a minority owner. I worked for a fund that had minority interest in teams, we tried to sell for awhile and finally found someone willing to take it off our hands. For one no operational control, another issue is minority sales are more common in the space because people are willing to overpay on small allotments thus bolstering massive valuations for the majority owners. Teams are also selling for record numbers where it no longer makes sense. I believe the Celtics were actually losing money now because of the player salaries. Seahawks sold for a record of nearly $10B and the overall EBITDA after merchandise, ticket sales, TV revenue, was only like $150M. So literally a 1.5% return. These sports teams are only worth it for the super wealthy who have so much money that they just want to have fun now.
You talked me out of it (although the fun aspect was on my mind and clouded my judgment). Thank you.
Replace: minority stake in sports team.
Add: oyster farms in more northern areas due to global warming
No one is buying a minority stake in a team for the cash flow, you do it for the sweet, sweet depreciation and K-1 losses.
Without knowing your return hurdles or timeline, if you can be patient, it feels like we are in a trough of values for Sunbelt multifamily new construction. I would pick a handful of submarkets that (1) are desirable and (2) have mostly absorbed 2021-2024 supply. You have to hold your nose on the going-in cap rate, but you can legitimately buy new product for $75-100K/unit below replacement cost.
High quality office in the private markets and REITs in the public market.
British farmland. Climate change is making certain regions of Britain more akin to prime wine growing regions of France. Welsh sparkling wine is seeing a resurgence and highly esteemed French champagne producers are already buying up tracts to help ensure their future production.
Our grandkids might think of British wine like we think of French and Italian wine, which would be pretty hilarious if it wasn't also existentially terrifying.
Not a chance. Not because of climate change concerns or growing conditions, but because most of these top tier French and Italian chateaux and cantinas rely as much on marketing and historical reputation as actual differentials in quality to justify their price.
Wine has been a big deal in France, for example, for centuries. That kind of historical inertia doesn't get shoved aside in the space of a few decades.
I'm going to trust the actual brands more than you on this one, Ozy. They seem to know something you don't.
If you are a family office with a long hold period, just scoop up new construction MF in TX below replacement and wait for the recovery.
Going to be a LONG recovery there
Not too bad. You just need a 50 year time horizon.
We are a family-office, self-funded structure. Best advice is to underwrite a shit ton of deals in various markets and one will randomly work on paper without having to push assumptions too much. Based on your capital, you are not going to get high volume so you can be selective. Texas is a challenge right now but stable MSA’s are good and when/if cap rates compress, they will compress in those markets as well with the likelihood of real NOI growth being more likely. We can’t do volume so we wait for those deals while churning models and getting beat in B&F’s until one pans out. We’ve been active buyers every year and really one have one “loser”. Two most recent deals are a 2020 mixed-use in a CBD and a 70’s vintage deep value-add in a true in-fill location.
You run a family office with almost $1b aum that's almost all-in on multifamily? This is baffling to me, how have you not diversified significantly into other asset classes unless this is some kind of strict real estate mandate or family business? I can't imagine this would outperform being diversified among public/private equity or even just dumping into an S&P index like someone else mentioned
Have you considered allocating more capital outside of multifamily?
We've had some great success doing the site development for residential communities and then developing commercial and retail pads around them. As residential growth continues, demand for neighborhood-serving commercial generally follows.
We've also completed several successful 1031 exchanges into retail and commercial development this year. In my experience, there are still opportunities out there if you're willing to look beyond the traditional multifamily value-add.
Hard to say without knowing your return targets, but it definitely feels like deals require a lot more creativity today than they did a few years ago. The easy wins seem to be gone, but there are still ways to create value if you're solving a problem rather than just chasing cap rate compression.
Everyone talks private credit but there’s so much money to be made that no one is doing.
Everyone is tightening spreads into oblivion at 75% LTV.
Do 90% LTV deals. With borrowers who need it / stuck. Charge 2-2.5x. At 90% LTV…
Free lunch?
No free lunch. Not enough NOI for that kind of leverage.
To give an example - think for a moment about the bread and butter of the debt fund world today - taking out the construction loans of multifamily lease ups started in 2021-22 and delivered 2023-25. Given the recent bump in SOFR expectations, most of these deals are sizing to like a 1.10x (approx. 6.75% DY) on in-place interest-only debt service hoping to get up to a 1.25x / 7.75%-8.00% DY at stabilization at 65%-67% LTC (approx. cash neutral on the original construction loans). This assumes a 3-yr SOFR swap at 4.20% and SOFR + 185 pricing.
If you were to double the spread from SOFR + 185 to SOFR + 370, borrower is looking at an all-in rate of 7.90%. On in-place income, I/O DSCR is 0.63x and on stabilized NOI it would be a 0.74x.
You can try to take back the asset but people not in the lending industry think it is much easier than in reality. Get ready for a neglected asset at a minimum. Adversarial sponsor if it's not a relationship.
How is the DSCR .74x on an all-in rate of 7.90%? This implies a 5.85% debt yield — likely very close to the cap rate. Which wouldn’t make sense.
And there is no 1.10x DSCR on 6.75% debt yield — that’s a s+250 rate. You can get that rate closer to a 7.5-8.0% debt yield. The 6.75% is sized to a 1.0x and that’s about as aggressive as the market gets.
I’m saying size to a 6.5% going-in Debt yield. Assuming 90% LTV, that implies a market acquisition at a 5.85% cap rate.
You can buy lease-up multifamily in Dallas at that cap rate. Looking at a deal in Katy that is 30% leased and they want a 6.0% cap on projected stabilized NOI.
For your 1.0x coverage (going in) you price at s+285. For the leverage, a min multiple or profit participation. Your sponsor gets a great levered return. You gross up to a 15-18% levered return (warehouse lines are pricing at s+135).
And the downside protection of debt.
But that deal isn’t getting done because nobody will do 90% LTV.
They will, however, invest common equity in that same deal for a 14% levered return. Why? Why do an equity deal at a 14% when you can do a 90% debt deal at 15-18% for the same property?
I’m not saying it does not have a different risk/reward profile. Just surprised there isn’t a somewhat large market of highly capable groups doing this.
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