The market is turning rapidly...

PacNumber's picture
Rank: Neanderthal | 2,427

In the last 60 days I've seen so many deals fall out. Not just mine but other brokers across several asset classes. Buyers are hyper critical of everything. Sellers still want crazy money...Apartment investors selling at 4 caps and trying to buy retail at a 6. They see the end in sight of the multifamily run up.

Something is happening. Something weird is in the air.

On the resi for sale side, due to lack of inventory, which leads to lack of volume and lower income, I'm seeing a lot of real estate offices closing here in San Diego.

Low inventory, low volume, high prices, discount brokerages now opening, all signs of the end, lol.

I know a higher up and Trammel Crow. His words "multifamily is teetering"

Comments (91)

Jun 11, 2017

Just another anecdotal piece to back this - the MF team in my office has been boggled over pricing on deals in our market for about 2 months now. I regularly hear exclamations about the absurdity of it all. They're urging owners to get their assets to market now. This is a major US Metro area and this team has been selling these same assets for decades.

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Jun 11, 2017

I mean yeah industrial and healthcare (MOB, senior living). Multi is toast IMO. If there is another macro recession everything is done though. Just hope your shop is not a panic seller, has dry powder and is a long term investor (meaning you keep you job).

Jun 11, 2017

I'm really looking forward to a down turn. We aren't doing any deals at these prices.

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Jun 12, 2017

This. A moderate reset / downturn would actually be beneficial in a lot of ways right now, at least from an acquisitions perspective.

Jun 25, 2017
Pokemon Master:

I'm really looking forward to a down turn. We aren't doing any deals at these prices.

seriously. Call me crazy, but I can't wait for a (hopefully minor) pullback or credit crunch.

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Jun 11, 2017

I'm too young to know, but what was it like back in 08/09? Did Acquisitions guys basically just lose their jobs? Was there anything even posted on say a SeleectLeaders?

Jun 11, 2017

I'm also too young to know, but at my boutique REPE shop the guys before me tell me that instead of doing acquisitions they all had to more or less put on Asset Management hats just to keep their portfolio together. This went on for a two or three years before they were confident enough to make deals again. It was our property management branch that brought in just enough revenue to make it through the worst of times. Not the most glamorous aspect of CRE but honestly a really solid source of revenue for shops that have that arm.

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Jun 11, 2017

Long term I see myself in management as well as brokerage. Not necessarily in the trenches of daily ops, but as broker of record sourcing buildings to manage. I got a buddy with 20 years of management experience that would run the office.

Look at Greystar Multifamily. I don't know how many units they own, but the have 10,000 employees. Even if Greystar contributed only 10% equity on every deal, the most certainly retained the management...something they kept 100% of. They buy or build to manage them.

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Jun 11, 2017

Thanks for the insight. Real estate is inextricably linked to the overall economy and equity markets. It's often a precursor of what's to come. Lots of asset managers are short-biased in their portfolios. I'd be happy with half the selloff we had in 08/09.

Jun 11, 2017

For there to be a selloff in CRE there has to be a demand for those dollars elsewhere. I would be curious also how value-add investors in the renovate and sell market are doing. They are the first line of defaults in the CRE MF world.

We are on a long term down debt-cycle. You will have to have a balance of the FED raising rates and at the same time printing money to produce some kind of asset inflation to stave off a very bad fall in asset prices aka a recession.

Jun 12, 2017

Multifamily does not equal "the market". It's just one asset type within CRE.

Jun 12, 2017

To gayly respond to my own comment, I think it's important to note that there is still plenty of juice remaining in almost every other real estate asset type. Multifamily was just the "safe" asset that arose in wake of the financial collapse/real estate bubble because "people will always need a place to live." So the last decade or so has pushed up multifamily valuations to astronomical heights. But the silver lining is that all that capital chasing multifamily has left pretty good returns remaining for hotel, retail, office, self-storage, data centers, etc.

Jun 12, 2017

Kind of like malls in the 90s?

Jun 12, 2017

MF's "remaining juice" also varies from market to market. It's overly simplistic to even say that MF is "turning rapidly"

Jun 17, 2017

Data centers are extremely hot. DLR just picked up DFT for 20x EBITDA.

Jun 17, 2017
Dances with Dachshunds:

To gayly respond to my own comment, ...

*gaily

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Jun 12, 2017

MF Development has become absolutely insane. Developers building these luxurious complexes in middle of suburban nowhere and charging astronomical rent. A pop was/is bound to happen.

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Jun 12, 2017
Nousernamehere:

MF Development has become absolutely insane. Developers building these luxurious complexes in middle of suburban nowhere and charging astronomical rent. A pop was/is bound to happen.

Totally agree with this.

GoldenCinderblock: "I keep spending all my money on exotic fish so my armor sucks. Is it possible to romance multiple females? I got with the blue chick so far but I am also interested in the electronic chick and the face mask chick."

Jun 12, 2017

Delete.

Jun 12, 2017

Let me prepare popcorn

Jun 12, 2017

The difference today is that there is so much equity out there chasing deals and leverage is not out of control. A minor reset of asset prices would be beneficial to the overall CRE market.

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Jun 12, 2017

What I find fascinating is massive capital pumping the breaks in multifamily (sales volume 50% from previous year) when there is still renter demand (decreasing but still positive) and employment trends that are fairly strong. There's a ton of dry powder waiting for discounts and plenty of groups raising distressed funds.

The question is...Is there enough pent up liquidity on the sidelines that will capitalize on falling asset prices that actually keeps asset prices from falling too much?

I have my thoughts, but glad to hear others first.

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Jun 17, 2017

Yes, the smart money/dry powder is all waiting for a slight dip and will enter, keeping prices high....the only thing that would pop this market is renters not being able to afford current rents because of a "REAL" downturn.

Funniest
Jun 12, 2017

Hey everyone!

Wanted to bring you this super exclusive call for offers on an MF deal that I think is a once in a lifetime opportunity to get in on the ground floor on a generational trophy asset:

Lizard Brain is pleased to present Oak Glen at Millennium Oaks, a 500-unit, twenty-two-story ground-up apartment development opportunity. It is located in the prime, millennial-friendly, tony neighborhood of Barstow, California. This outstanding location is minutes away from major freeways, entertainment, shopping, dining, local schools, employment centers, and several major tech startups. Oak Glen at Millennium Oaks will feature a new Las Vegas day-club-style swimming pool, outdoor fire pit, barbecue area, dog run, dog wash, doggy daycare, fitness center, fitness trainers, five-story clubhouse, event and business center, WiFi cafe/bar, pet park, putting green, dog walkers, gated entry, covered parking, modern laundry facilities, bowling alley, a Quiznos, movie theater, sporting clay range, and a start-up incubator. Unit interiors will feature such amenities as stainless appliances, quartz countertops, wood plank-style flooring, smooth texture walls, new cabinets, modern lighting and smart home technology.

We are seeking JV equity in the amount of $50MM. We are conservatively projecting an IRR of 1,000%. DM me if you wanna make some $$$

Jun 12, 2017

You had me at quiznos, where do I send the check?

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Jun 12, 2017

I'm willing to make a commitment but my investors drive a hard bargain. I need a 4% pref and the amenities room named after my girlfriend's dog.

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Jun 12, 2017

Barstow is the next Tech city!

Jun 12, 2017

Those not in CA are like, "Barstow"???

What's worse, Barstow or San Bernadino?

LoL

Jun 13, 2017

I do not see this working without the dog amenities available for cats. Also, there is no mention of a community garden. Fix these and make sure the Quiznos is locally sourced and free of cultural appropriation. Then I may consider other updates.

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Jun 13, 2017

After you get your equity lined up I would love the opportunity to source construction financing for your project. Our relationships with foreign, alien and galactic federation lenders give us access to very competitive loan terms. We have seen 90-99.1219% LTC financing with spreads in the L +10 to L+12.53743 range that automatically convert to perm debt with 99-103.8 year amort common. This financing is completely non-recourse (not even carveout guarantees). We have placed 41 loans on earth this year (U.S. submarket) and look forward to discussing.

Jun 16, 2017

Good to know Ozarks are still offering competitive rates, I knew there was a reason they were doing so well...

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Jun 14, 2017

The scary thing is that all you're missing is a reference to '50-yard-line' location or 'irreplaceable asset', and then it would be pretty close to a current market OM.

Jun 12, 2017

On the office side transaction volume has fallen off a cliff but fundamentals: Job Growth, occupancy, absorption, rental rates are all strong.

I think a lot of potential sellers rather just hold onto office assets and clip the cash yielding coupon rather than liquidate assets.

I agree with above poster. Looking forward to a downturn to actually see value-add deals back in the marketplace at prices where you can create value.

Jun 13, 2017

The sky is falling!

I think many people have seen the day for reckoning for MF for quite some time now. But that doesn't mean it's the end for CRE as a whole. Will some banks/investors who are over-allocated to MF get burned and cut back on new investment spending, no question. But, you have to keep in mind that so many investors have targeted funds (both debt and equity,) so if one get's hammered it doesn't mean every other asset class will too.

As a few posters above have mentioned, there are plenty of other asset classes that are signing along right now. We are doing deals, conservatively, at a 9-10 ROC with a 200-300+ risk spread.

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Jun 13, 2017
coolhandlucas:

I think many people have seen the day for reckoning for MF for quite some time now.

People have been predicting it's imminence for the past two years. I suppose at some point they're bound to be correct, but the unbridled pessimism is exhausting.

Jun 13, 2017
CRE:
coolhandlucas:

I think many people have seen the day for reckoning for MF for quite some time now.

People have been predicting it's imminence for the past two years. I suppose at some point they're bound to be correct, but the unbridled pessimism is exhausting.

Yeah, my boss is calling for the collapse of the U.S. Dollar due to American debt. I'm like, "Boss, you have to give a time line on something like that because given enough time you'll eventually be right. Are we talking 6 months or 600 years?"

Jun 13, 2017

I don't know about MF specifically, but my last shop (heavy in hotels) was waiting for a sell-off as most of the buyers were holding cash waiting for cap rates to move with borrowing rates.

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Best Response
Jun 13, 2017

Multifamily value-add is very frothy right now. This has resulted in the displacement of a lot of new construction core/core+ deals as institutional capital chases value-add yields. Pricing is dropping on these assets--in some cases, dramatically. As in, marketed for $400k/door, trading at $360/door with brokers telling buyers that the seller wants to sell, drop in pricing be damned. There's an opportunity to take on the lease-up risk of these types of assets, purchase at a very attractive basis, hold for what (probably) will be a few years of volatility, and do well on disposition.

I'm with you that a correction could be near, but don't think multifamily is going to collapse. Maybe certain types of MF assets are "teetering," but the asset class as a whole has a lot going for it. If we see a correction, we could see moderate pullback before things pick up again. The demographic trends supporting multifamily demand well into the next decade are striking:

  • Unemployment continues to decline and the Federal Reserve projects stabilized unemployment of 4.5% through 2019--these are historically low numbers
  • Homeownership continues to decline and is projected to fall to 60.8% by 2025, the lowest level since the 1950s
  • As younger generations age, homeownership will rise, but still remain 7-11% below the levels of prior generations at the same age...where will these people live? (JBRC report)
  • Student debt is getting out of control. In 2003, outstanding student loan balances were $243 billion. The NY Fed just put out a report pegging the recent number at $1.3 trillion. In a 2017 report by the National Association of Realtors, student debt was the most cited reason young buyers under the age of 36 cannot afford a down payment on a home, beating out CC debt, car loans, and health care costs by more than 20%
  • The US Census projects that the age cohort of 18-44 year olds will expand from roughly 115M in 2015 to more than 126M in 2030; virtually all of these additional 10M residents will, at one point or another, be a renter
  • Household formations continue to be delayed (a major historical marker signaling a shift from renting to owning), and the median age of marriage continues to increase for both men and women (currently 29.5 for men, 27.4 for women)
  • One area I agree could be problematic: 2017 is the year of peak supply for multifamily completions, but these are projected to fall below the historical average of 336,400 in 2018/2019
  • There isn't enough single family supply. Freddie projects demand for SF housing will be roughly 1.5M units/year over the next decade, while the National Association for Home Builders forecasts yearly avg. SF starts in 2017/2018 to be just 908K. Part of the reason behind this is that builders are having trouble making affordable entry-level product pencil, so they're building more expensive homes that large swathes of the US population can't afford.
  • Related to the previous point, resale homes are increasingly unaffordable as well. The historical spread between new and resale pricing is $19,000. As of 2017, this has ballooned to more than $80,000. Again, if single family is increasingly unaffordable, where will people live?
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Jun 13, 2017

Good post, thanks.

Jun 13, 2017

I think all these anecdotal posts, although good for perspective, could use some detail on asset class (a, b, c) and market (austin, norfolk va, LA). Great posts tho

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Jun 14, 2017

Absolutely agree. Asset class in my post should be self-explanatory, but I was specifically referring to Southern California. That being said, I've seen similar situations elsewhere on the west coast.

But the data points I used to argue in favor of multifamily are national in scope, so I'd disagree that portion of my post is anecdotal.

Jun 17, 2017

also Warren Buffet has gone into single family home sale brokerage

Jun 17, 2017

- Related to the previous point, resale homes are increasingly unaffordable as well. The historical spread between new and resale pricing is $19,000. As of 2017, this has ballooned to more than $80,000. Again, if single family is increasingly unaffordable, where will people live?

lost me here. normally you can only save <20k buying a resale instead of new. but today you save 80k. how is that bad for buyers? not criticizing, i just don't follow for-sale so i am curious.

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Jun 19, 2017

Sorry, I worded this poorly and need to add clarifying detail for it to make sense.

The point with the spread between resale and new home is that it's historically been ~$20k. Since the recession, builders have increasingly been constructing more expensive new homes, significantly widening the gap. So, not as many entry level new homes for first-time buyers to purchase, meaning they have to look at the resale market.

But the resale market is made up of a large chunk of homes people purchased during the run-up to the recession. A lot of these homes haven't recovered their value, and their owners are reluctant to sell, unless you're in hot markets like LA, the Bay Area, etc. So the amount of available resale supply isn't as robust as it has been historically, and the amount that is available is increasingly more expensive. When you have relatively tough options in both new homes and resale homes, your main alternative is to rent.

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Jun 16, 2017

Gotta Say Monkeys I am a little disappointed. No one has gone full Michael Lewis on this one yet by pointing out the correlative markets that are already in downturn. Nothing on the manufactured housing market......

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Jun 16, 2017

I'll bite. What are your concerns related to the manufactured housing market?

Jun 16, 2017
Jun 16, 2017

Does this mean that reits are going to crash?

Jun 16, 2017

Quick short EQR ESS AVB.

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Jun 17, 2017

When I read Bank of the Ozarks commercial loan strategy in the current market I was kind of shocked and it sure seems like it's a decent short candidate. Expanding lending in this market where CRE is already having issues and rates are supposed to rise is not a good idea. That said, NYC's market is a different animal than the corner mall in the Midwest, but still we've got a flattening 2-10 year yield curve, slow to no economic growth and eventual higher rates coming along with a jobless 'recovery' and zero productivity or wage growth - not good news for RE. The FED seems really intent on blowing up all these bubbles with their dot plot rate hikes too.

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Jun 17, 2017

Thanks. Why don't you dive a little deeper, find out what percentage of their loan book is speculative CRE, and get back to us with your pitch and a reco for best entry point on a short

Jun 18, 2017

Lol reminds me a couple years back when we refused to up our offer on a MF deal. The broker had a fit and kept pushing the fact that if we simply installed granite countertops, we would go from an acquisition cap of 5.5% to 6.5%. Brokers push, its their job, I have seen some pretty over the top OM.

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Jun 19, 2017

Also anecdotal, but I'm a MF developer and we are seeing lots of deals getting indefinitely 'delayed' (AKA 'falling to pieces') in DC lately. Starting a couple of years ago people would believe brokers' valuations, lock themselves into deals with sub-4 cap rates, and now they are watching in horror as deals explode all over the place because smart debt and equity won't touch them. On top of that, construction pricing is out of control. We are seeing some trades increasing 25-50% in a single year.

Jun 21, 2017

25-50%? Damn, It must be a good time to be an electrical contractor.

Jun 21, 2017

Some guys are driving by construction sites yelling out that they can make and extra $1-$2/hr if they walk across the street to another project. The labor pool is so thin, the contractors are competing heavily for the workforce. One plumber I talked to worked for 4 different contractors in the space of literally 6 months because he kept getting a bump in pay, or a truck etc.

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Jun 25, 2017

I am late to the party, but can agree 100%. I've been working in CRE on the banking side for the past 4 years now and this is the fewest amount of projects I have ever worked on at a given time - even as a newbie. I'm on our local pipeline call but it seems that our sales team and underwriters are finding other ways to propose terms, but its the borrower's balking on the term sheet, not us. Rates are competitive, L+3-4 for our small dentistry offices that we sponsor for community involvement, and in the L+2.70-85 range for actual CRE borrowers, MF included. I think the highest I've seen is 3.15. I can't really make sense of it all, at least not yet.
Meanwhile, I'm interviewing at boutique developer firms in NY ... oh I hope I don't end back up in the leasing office. Sales are my forte but damn I hate the public.

Sep 20, 2018

Funny to see this, a year later and things are still chugging along. Multifamily flat but strong, industrial the new bell of the ball. Low trade volume but strong pricing.

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Sep 20, 2018
SHB:

Funny to see this, a year later and things are still chugging along. Multifamily flat but strong, industrial the new bell of the ball. Low trade volume but strong pricing.

this is, the individuals on this forums, first cycle - be gentle

Sep 20, 2018

When I wrote this last year there was definitely a hiccup in my market. People weren't used to seeing rate hikes and investors froze for a few months. The year finished strong. Now it seems that many are on the sidelines with regard to MF until Ca votes in Nov. Prices are high but down versus 2017. We're writing offers on actuals now. Amazing, lol.

Transaction volume is off for sure in nearly all asset classes.

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Mar 16, 2019

and almost two years later, we are still discussing whether the market is turning.....

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Mar 17, 2019

There have been a couple lulls and that's it. Spring of 2017 after a rate hike the market hit the skids for a few months then went nuts. The entire 2nd half of 2018 was the same. Now here we are Spring of 2019 with no end in sight. Shit is weird for sure.

Sep 20, 2018

I was in LA this past weekend and was astonished to how little construction I saw going on. Every new building I looked at was asking high 4 to low 5 rents, which would seem to me to mean there's ample demand and pricing for new construction but there were only like 2 or 3 cranes downtown and on the West Side I only saw a couple projects.

Does anyone local there have any insight? Is it zoning and entitlement issues slowing development down, poor absorption, or ridiculous land prices? Something else I'm missing?

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Sep 20, 2018

In most markets deliveries will be down in 2019. This is due to a huge influx of supply over the past 5 years making lease ups take longer than underwritten, as well as soaring construction costs. Developers are struggling to make deals work.

I wouldn't expect SoCal to see many more proposed pojects moving forward due to the uncertainty around Prop 10.

Mar 16, 2019
Comment
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Mar 17, 2019
Sep 20, 2018
Sep 20, 2018