Multifamily - Opportunistic investing at this point in cycle?

AB84's picture
Rank: Orangutan | 312

Hello all - I would value your input on a crossroads I am facing.

I work for an LP fund that focuses on multifamily and student housing. We have been on the value-add train, slowly shifting to core-plus (like everyone else). Deals are getting harder to find, the compensation sucks, I'm not learning anything new.

An opportunity has crossed my path to join a developer focused on multifamily, mixed-use, and office in major markets throughout the southeast, predominantly major florida markets. The compensation is **immensely **better and the projects are more interesting.

As exciting as this is, I'm worried about getting into the development space at this point in the cycle. I raised this issue over the phone with their CIO, and he focused on a few points:

  • The amount of institutional opportunistic equity on the market is very high and increasing (I'm not sure why this is a good thing, beyond making it easier to capitalize projects)
  • Value add returns are coming in (I didn't understand how this related)
  • This group "picks their spots" with a recession in mind (medical/academic employment drivers, core downtown areas, etc.)

So what do you all think about opportunitistic plays at this point in the cycle? On one hand, I totally believe in the multifamily demand story. On the other hand, I don't think $2,000+ 1 bedroom rents are sustainable (Maybe im wrong?).

Comments (11)

Mar 5, 2019

If you're at a learning stage in your career, you shouldn't be so concerned about where we are in "the cycle". And that's without the obvious caveat that no one knows precisely where we are in the cycle, what a downturn looks like, or anything like that.

This developer clearly has an active pipeline for the next year or two or they wouldn't be hiring, which means for the short term you probably have reasonable job security and the opportunity to learn a ton about development, which is pretty much universally applicable in CRE.

Moreover, it's called a cycle for a reason. Even if a major correction in that market is coming, it'll turn around again, and it usually happens pretty quickly, so it's not like the firm or the industry is about to become obsolete. Worst case scenario is you make some money, learn what you can, and are better positioned for when the market starts heating back up.

And finally, and perhaps most importantly, its not your money. If your firm is "opportunistic", bully for them. At the end of the day if they have to chase tighter returns, that is a problem for the partners, not you (unless you're getting significant equity, of course). They still need to deploy capital in order to pay overhead, and the fees they'll make on even a bad deal are vastly more than you'll be compensated, so it makes more sense for them to churn an extra sub-par deal or two than to cut staff. I've seen a LOT of this mindset in NYC - principals and hiring managers realize that replacing and re-training staff is expensive and time consuming, and unless you expect a prolonged drought in development opportunity, it makes far more sense to build an okay-ish product (from a return standpoint) if it means being able to keeping institutional knowledge and experience within the firm for when it comes time to be able to jump quickly on lucrative deals, that inexperienced and junior PMs wouldn't be able to value and push through fast enough.

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Mar 5, 2019

I agree and appreciate the input. I guess I am just very cautious about a downturn because at my age, I really have limited savings to fall back on if I lose my job.

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Mar 11, 2019
AB84:

I guess I am just very cautious about a downturn

You should be. Pricing is approaching crisis era levels, if not already above in some areas. Not wanting to be caught with your pants down is exactly why I've held off. What's the rush?

Timing the market exactly is impossible but dodging a very obvious bullet is something else.

If indeed there's a recession risk, you have to consider the virtues of the entire market going on sale. Buy when everyone else is afraid. Right now, everyone is greedy like a pig, so if you don't have something to sell at least build up your capital base. Bears make money, bulls make money....pigs get slaughtered. When blood is running in the streets: that's when you buy.

I'd you don't have a strong financial cushion, you have to look at your overall risk profile. If you really want to get balls deep and ride out the storm, make sure you actually have the means to do so. You're saying you worry about that, so maybe listen to that voice instead.

As far talk of recessions go, that people are even having the conversation is indicative to me that all is not well. There was no headline in 2013 asking when shit was going to hit the fan. Now? Turn in any money channel and folks are twisting themselves in knots trying to shit everyone, how things are fine. Bullshit.

Through the lens of where I sit, the economy in 2014-5 was a person who had been up for theee days and caffeine no longer worked, they needed sleep, a manageable recession. As of 2016, that person is still awake and has been blowing fat lines of coke. The longer they put off coming down, the more downtime they're going to need. Bye bye recession, hello full blown crisis. Back out the S&P500 chart all the way and take a guess where things are realistically headed.

Stop and think, if you're really planning or just getting caught up in everyone else's excessive greed.

Hope my 2 shekels is helpful

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Most Helpful
Mar 5, 2019

$2,000 1 bedroom is definitely sustainable and multifamily fundamental is stronger than ever

It might be difficult for you to imagine people renting $2,000 1 bedroom, because real estate doesn't have high entry-level pay. But I can tell you the 22-24 years old new hires here have no trouble paying 2,400 a month for a bedroom in DC metro area working in quantitative and tech

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Mar 11, 2019

+1 for the reference to overpriced shitty apartment in Georgetown and Adams Morgan. Lots of interesting developments in Noma though

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Mar 12, 2019

I wasn't of working age when the GFC hit, so don't call me an expert. But here's two thoughts.

  1. Everyone is talking about a recession. My econ professional wouldn't shut up in 2014 about the incoming inflation due to QE. My company took a pause at the end of 2015 because the executives thought there was an imminent recession. Today, what's the contrarian view? A) We have room to grow or B) Long and steady, like Japan. The fact that everyone is talking about a 2020 recessions makes me wonder if the crowd is wrong.
  2. I haven't looked up MF rents, but the S&P/Case-Shiller Index should be looked at. On a nominal basis, we're higher than we were in 2006. But adjusted for inflation, we're something like 25% under peak SFR prices on a real basis. (Link). The mortgage crisis caused the last recession and it looks like that's not going to be the thing that cracks the bubble. I do not know how relevant this point is to the discussion, I would be curious what others' thoughts are. Perhaps if there's a correction in the commercial side of multifamily, perhaps 1-4 residential homes will remain expensive and out of reach (as they are today for many people) because it looks like that side of the market will remain less volatile.
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Mar 5, 2019

Most people have no idea about the big picture

Cumulative GDP growth is only 25% in the current run vs 43% in the last run, despite the current run is the longest run ever. Economy is growing at a much slower pace in the current run and there is still plenty of room to grow.

Then MF never crashed, not even in last crisis, other than the junk shit from La salle. MF tranche in CMBS also performed very well except for stuyv town but people who bought the deals that has stuyv town are still made whole after years.

Mar 14, 2019
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