Multi Fam Pipelines

Wanted to start a discussion and gauge the rooms temperature on if anyone out there has interesting pipeline right now? I source deals for an LP, so I'm in the market meeting with new potential GPs, and the deals I'm seeing are terrible. Shit assets with tons of capex going for 4 caps in average locations. 

Every bid process I've seen play out has 20+ offers, so it is a race to the bottom in terms of value. Seeing value-add deals trade for what will realistically be a 12% IRR unless the market makes magic happen on exit cap rate. 

I feel like this implies the capital markets do not view the apartment industry as risky anymore - like at all. Or, player in the market have changed from traditional real estate investors into traditional yield seeking allocators looking for alternatives to fixed income. 

Anyone think similar or disagree?  

Comments (57)

Aug 3, 2021 - 3:30pm

Affordable housing.  The barrier to entry is knowledge and not capital, which means less of a race to the bottom on fees and more of a question of who wants to put in the work in terms of banging your head against a wall to execute on a strategy.  It also means that there is some gradation in terms of who is adding value, and how much of it.  Local players may have a significant advantage over national ones when it comes to dealing with municipal housing authorities, regional HUD offices, etc.

Aug 3, 2021 - 3:40pm

Can you send some of those 4-caps my way?  Every institutional apartment deal over $50m is going off south of a 4-cap on tax-adjusted numbers, and if you're buying deals today, you're probably hugging a 3 and telling yourself it will be a 4+ in 24 months.  Shit, most folks I know are underwriting 4.0% at the exit... if not lower.

Aug 14, 2021 - 1:27pm

ha, every market is a low to mid 3 cap.  denver, seattle, phoenix, austin, atlanta, etc. across every risk profile (core, value add, etc.).  light upside in core plus and upside in development if you can buy land decently.  value add is completely squeezed.

if you work for morons or guys who want 4 caps, you are toast and won't buy.  folks are using 4% rent growth and bumping exit caps by 5 bps to buy multies in some of the markets above.  nothing makes sense and lots of capital to place, hence the dance! 


  • 4
Aug 4, 2021 - 7:04am

I think you need to look at it on a relative value basis. People are willing to buy these tight deals because they have nowhere else to put there money. Those that invest in office, retail, industrial, apartment are not touching office and retail today (for the most part). Which leaves them buying apartment or industrial. But you still have a plan / budget to put out the same amount of dollars but you have less deals to pursue. So on a relative basis, you're willing to buy an apartment building at a 4 cap to place the dollars because you need to place it but also it's better than what you think retail/office will do. Plus, if you compare it to corporate bonds, you're outperforming. 

Aug 4, 2021 - 9:31am

What does the conversation with your investors look like though; "Compare to bonds and it is a good deal?" 

I ask bc the investors I speak with are not focused on that, as much as they are focused on generating the returns required of them by the specific buckets of capital we're working within. 

I totally understand what you're saying, but if you're a bond trader your cost of capital is lower than if you're a real estate investor. 

You can argue that cap rates follow interest rates, but that theory I feel like has never been fully proven and a lot of people disagree bc of the different ways you can look at cap rates, and for the fact that cap rates fluctuate within RE asset classes, especially outside of any core/core-plus strategy. 

Again, I dont want to sound like I'm saying you're wrong, but I just haven't heard the 'its better than bonds' statement made by anyone outside of brokers or back in school. 

Does anyone have experience discussing funding / investment with a new investor who is moving from bonds to RE bc of the higher yields? that would prove this theory is happening, but I have not heard or experienced this first hand. 

What I am seeing is a lot of syndicators off facebook raising pretty large checks now and saying there will be upside, as well as institutions buying core-plus deals bc the coupon is seen as low risk and they have liabilities they need to match. For example, saw a life co buy a core new build apt all cash at a 4% cap rate, which is different than buying value-add in secondary markets at a 4% cap rate on a risk adjusted basis.   

Most Helpful
Aug 4, 2021 - 9:36am

That's because your viewpoint is syndicators and absolute value investors. The people that drive the market are generally the relative value investors as they have the most capital to place (insurance companies, pension funds, etc.) They will follow the market down (and up). An absolute value investor may buy the 4 cap hoping they can get a 20% IRR, which is possible if cap rates stay compressed. But it's going to be hard to compete against the Life Co who will do the same deal for a 10% IRR and never sell plus their cost of capital is minimum (and they compare deals to corporate bonds as it's the most liquid market, and that is what they are essentially trying to outperform - take a bit of extra risk to buy real estate, and you get extra returns compared to corporate bonds - which they could allocate to instead). 

As an aside, for instance, the investment / allocation committees at AIG, PGIM, NML, NYL, will say we can buy $500MM of corporate bonds and make 2% or allocate that $500MM to real estate and make 3.5%. So we make an extra 150 bps for taking the risk. Is this justified? If yes, okay great let's do it. If no, they will keep the money in corporate bonds. This is a super simplified explanation but it's a baseline to explain how the big institutions look at it. 

Aug 5, 2021 - 2:22pm

Commissions and fees

What does the conversation with your investors look like though; "Compare to bonds and it is a good deal?" 

Actually, this is a point we make sometimes.  If you buy a building that is 100% covered by a Section 8 contract, you can make a strong argument that all you're really doing is arbitraging Treasuries.  10 Year Treasury was at 1.19% yesterday - if I tell an investor that I can buy a Section 8 building at a 4.19% cap rate, I've got a strong argument that I'm helping them make a 300 bps spread on an asset that is also backed by the US Government (HUD).  Yes, there are differences and some additional risks (operation and management, for an obvious one), but it's a conversation that a non-CRE focused investor can wrap their heads around.

Aug 4, 2021 - 9:49am

I mostly agree with this, but this would be in the context of core deals. 

The investor looking for a 10% IRR can easily get this with a 4% cap rate, leverage, and time beyond 3-5 years. 

Outside of core investors, a group with a mandate that needs to exit deals within 3-5 years is where I'm saying I dont see how you can make sense of the pricing without believing there will be huge growth in costs of materials (to justify purchase basis) as well as incomes (to justify yield growth)     

Aug 4, 2021 - 7:45pm

It actually works for value add deals as well. These investors have to allocate money and get returns and if you think you are seeing compression in the value add space, you are also seeing it in the core space. That is why many pension funds and insurance companies began to tilt their portfolios (as much as they could) towards value add deals in around 2015-2017, because the wind was no longer at their backs. This coincided with pricing being bid up and seeing some compression (which has only been exacerbated by covid). The insurance companies will still look at bonds and corporates, as well as high yield bonds. And than you ask, well would I rather own a junk bond or real estate and compare the yields (again, this is all super high level, but it gives the jist of how these firms look at the issue). 

  • Analyst 1 in RE - Comm
Aug 5, 2021 - 12:58am

You need to consider the debt the institutional players can get, which allows them to pay more and drive down cap rates, while still generating sufficient returns. Plus, many markets are accelerating so quickly, if you put something under contract at a low 3 cap it's probably closer to mid 3s by the time it closes. Rent growth has been astronomical, especially in the sunbelt.

Aug 4, 2021 - 11:15am

What happens if evictions cannot be a thing anymore moving forward? Instead the government comes into play with assistance programs… Feel like this is a possibility due to all of the moratoriums

How would this effect the multi family asset class?

Aug 5, 2021 - 1:53pm

In Class A multifamily, evictions are very, very far from the norm. On most of our deals, if we even evict one tenant, that's a notable event. 99.99% of the fraud is upfront during the application process and a good property manager can stiff that out before they ever move in. 

Not being able to evict tenants is a bigger deal for mom and pop owners and/or actual slumlords, but for institutional product I don't factor it in at all. 

Commercial Real Estate Developer

  • 2
  • VP in RE - Comm
Aug 4, 2021 - 1:56pm

I work on the GP side focused almost exclusively on multifamily and agree, nothing makes sense. I have resorted to two strategies:

  1. Tertiary markets - markets like Chattanooga, Space Coast, Wilmington, Savannah are far less competitive but still offer compelling fundamentals.
  2. Alternate sources of LP capital - there are some crowdfunding or pref equity group structures that make 11% IRR deals just as profitable as 15% IRR deals would be with a conventional LP. "LPs hate this one trick!"

Both strategies are higher risk, but it's the world we live in. Just spoke to a broker on a Tampa deal currently on the market that had 50 tours and 12 pre-empt offers. Fuck that, it's not even worth wasting the time.

  • VP in RE - Comm
Aug 5, 2021 - 9:22am

Yes - we are on track to exceed our target volume this year, but the deals are less exciting, usually have some sort of funky component to them whether that's the market they are in, loan assumption, etc. However, I think the risk adjusted returns on them are much better than competing with 50 other groups on a "down-the-fairway" value add deal. And we are underwriting 5.25% exit caps, so I feel like we have given ourselves adequate cushion for our typical 3-5 year holds.

Aug 5, 2021 - 12:10am

I'm working at a multifamily developer in a large Texas city, and yes it is crazy right now what some people are willing to pay. They must be underwriting crazy rent growth assumptions or just have an extremely low cost of capital. Almost every deal here is trading at sub 4-cap and a lot of the deals trading hands aren't stabilized yet so the new owner is taking on a lot of lease-up risk. Crazy times but pretty good to be on the development side right now.

Aug 5, 2021 - 9:29am

Particularly when you fuckers are still able to build to a 5-5.5% YOC.  Hard to mess that up when shit is popping off at a 3% cap.  

That said, my DFW portfolio is seeing 15-20% rent growth on new leases, and Austin is about the same.  Plus home prices are up way more and there is no inventory, a pretty good recipe on the demand side.

  • VP in RE - Comm
Aug 5, 2021 - 1:12pm

I mean with groups putting $1-2mm hard deposits down at PSA signing, i don't even see the point of DD anymore.

Aug 5, 2021 - 1:54pm

Adam Neumann is out there closing on projects in 20 days. There is more money looking for real estate than anyone knows what to do with. 

Commercial Real Estate Developer

Aug 5, 2021 - 1:57pm

Southeastern-based. Our pipeline is more active than it has been in a very long time. Rents have grown by double digits over the last quarter (and 25%+ in some submarkets), making increases in construction costs negligible. There was a time not so long ago that LPs wanted to see a 7 yield and a 22% IRR. Now, we just closed on a deal in a "transitional neighborhood" that had a 6.27 exit, 15.66 IRR, and that was with a tax abatement. Zero questions asked about the returns. 

Commercial Real Estate Developer

  • 3
Aug 5, 2021 - 2:33pm

What was the profile of the LP? AUM, typical risk profile, etc...? I think understanding where the money is coming from and the profile of the decision makers behind the funds is valuable to see what / who we're working with or against. 

Aug 9, 2021 - 1:43pm

European here. We see deals in prime locations going between 3 - 3.5% whereas tertiary locations go just slightly above 4 now. Deals we are bidding on are still a war between multiple bidders at this moment. With debt being insanely cheap this is going to last for some time.

Aug 9, 2021 - 3:16pm

Crazy that equity investors are this aggressive but that's the market, driven by low interest rates as others have noted. But how are lenders getting comfortable with the rent growth, lease-up and exit cap assumptions? 

I do real estate
Aug 9, 2021 - 3:23pm

Does not matter whether sponsors are underwriting 5%+ rent growth , 5% vacancy, 0% concessions, 0% credit loss in the exit. Our max rent growth is 3% and we need data to back that up. We underwrite 1% concessions in the exit and if we use 5% vacancy, we need data to back that up. We also vet the sponsor underwritten rent premiums and often haircut them. We are not doing mental gymnastics to convince ourselves that sponsor will achieve their rent growth, premiums, etc. We are just okay with tighter going in and exit metrics. Example- We will live with a 7% DY minimum on the exit as opposed to say a 7.50% or 8%. Sponsor might be showing a 9% DY on their numbers, but we dont care about that. If anything, we can structure an earnout and if they achieve the metrics they expect to achieve, they get rewarded with more proceeds. We also settle for low teens returns on our regulatory capital. There are couple of tricks we have up our sleeve, if borrowers agree to a swap, because of a lower constant we can use, the metrics get a boost and can hurdle. 

Aug 13, 2021 - 12:05pm

I've generally been impressed with how lenders have acted over the past decade. I know some of it is driven by regulations, but a lot of it is long memories from the GFC. I haven't seen too many deals push above 70% without some major balance sheet support from a developer. Now, as an equity investor I'd love more leverage in some cases, but as someone with a vested interest in the world not going to shit, lower debt is going to mean less volatility.

  • Associate Director in RE - Comm
Aug 14, 2021 - 1:39pm

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