Obvi need bid ask spread to reduce. This could be via more distress, rates reducing and return requirements and cap rates falling, etc. regardless, does anyone have a Guage on when acquisition activity will pick up pace again. I imagine once the flood gates open people will start buying like crazy again given that it’s been nearly 7-8 months with very suppressed deal activity.
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I honestly don’t see things opening up until maybe the 3rd quarter of this year.
Looking at active listings via major brokerage companies, the only thing on market rn are DR Horton housing communities that they couldn’t wholesale, 60s-70s vintage in tertiary markets, & land deals. There’s no compelling reason for an owner to come to market at the moment.
Mostly seeing homebuilders trying to unload their new developments to get them off their balance sheets (like DR Horton mentioned above). I've seen a couple listings where people are going out to market in some more secondary markets like Savannah, GA with brand new built BFR product at about 7% cap rates on stabilized NOI. Granted the tax adjustment (and adding in appropriate assumptions) this becomes more in line with a 6.5% cap rate. Still, we are seeing pricing movements from more motivated sellers, and this will only continue for the next 6 months or so as loans mature and people would rather exit their deals than refi and need an infusion of capital. My guess is that people are going to jump too soon at the expanding cap rates and make some risky acquisitions in the next couple months but we will see more institutional players come into the market again by the end of Q3 or early Q4 depending on how inflation numbers and interest rates are looking.
Wait, when you say 7% on stabilized NOI, you're saying the homes are vacant and they're paying on potential NOI correct? I.e. lease up risk is priced into the 7%?
If not, please point me in the direction of these sellers.
Not entirely. The property I'm referring to specifically is a phased BFR product that has lease up already started. and preleases on the remaining units still under construction. Total occupancy, if no other leases occurred until completion, would be approximately 70%. There is still some risk involved in the remaining stabilization but with the attractive cap rate and not the full risk of lease up we are transacting rather comfortably. There are definitely deals that are being asked at a 6.5% cap rate or higher but they aren't leased at all which the lease up risk would make the deal much more difficult to make sense of. All of our pipeline currently is off market deals that we have through home builder relationships that they have either started leasing themselves through 3rd party management services or would ask us to assume the lease up risk.
with the refi, there is no infusion of capital, but these sponsors and LPs are taking haircut on their equity if they sell if im correct?
At refi they could have a capital call. If the lenders are underwriting at higher cap rates with lower leverage points or with higher DSCR thresholds on higher interest rates, it is extremely likely that loan proceeds would be less than the outstanding balance on in-place loans. For example, if you have a loan that's maturing and will have $10MM outstanding at refi, but your loan proceeds are only $9MM because of DSCR constrained then you need to make a capital call of $1MM. In some cases, you might have cash on hand designated for reserves but could use that capital to cover the shortfall of paying off the initial loan and transactional costs. But, in this case some operators might not have cash on hand and rather than refi and have to get additional capital from investors, they might sell the property now and hope it transacts before interest rates rise again and cap rates expand.
You are correct that sponsors would take a haircut if they sell now because they might've bought a MF property at a sub-4% cap rate 2 years ago and now they would need to list it at a 6.5%+ unless it was assumable debt. The only reason that people would need to sell now would be the scenario I outlined above, a fund is closing and they need to liquidate, or they completed their business plan and now trying to exit the deal to move onto the next.
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