Trying to make sense of multifamily (acquisitions) right now

For those working in the multi space, are you worried about the declining profitability of the asset class given how competitive deals are and where cap rates continue to go? I just looked at a deal in an "ok" part of the Tampa MSA and the thing got 40+ offers with best and final pricing at a 3.3% tax adjusted cap rate. 

Am I missing something? I believe the fundamentals are strong for multi demand, so much so that the asset class could be considered much lower risk relative to others, but I worry this asset will turn into what NNN Arby's are, essentially a low risk bond with extremely limited profitability. 

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Comments (29)

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Sep 7, 2021 - 1:51pm

Its tough for sure. We're UW deals left and right and can't make it work simply because our equity is not willing to accept those returns. In general, this has all been exacerbated by the Fed. I know everyone is quick to blame them, but in reality we have fundamentally made it so difficult to earn a return on savings, that the only buyers that are getting these properties are large institutions or UHNW individuals. MF is a great asset class, but my concern now is that it is so bid up that the returns are not worth it, even if you can try to do some value-add. Remember you get in a 3.3 cap, you're saying you will have to exit at a lower cap than that. Some of this stuff is priced so thinly that a 10% decline in occupancy would put the deal at negative debt coverage.

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Sep 7, 2021 - 2:44pm

Assuming there are no meaningful changes from the Fed, what is your outlook? Do value-funds / middle market buyers focus elsewhere, which would balance out the competition?

Sep 7, 2021 - 4:06pm

Too much liquidity in the market for cap rates to rise. With leverage the returns are par for the risk curve based on how low treasuries are. Unless you're doing value add Multifamily is low risk and bond like and institutions are treating these stabilized deals as a viable diversification out of bonds

Sep 7, 2021 - 4:11pm

Unlikely that buyers go elsewhere because technically every asset class is bid up. I think the only real changes that happen are that LPs and other equity have to take a lower return. Eventually they will bite the bullet and do it because it beats staying liquid in this market. Some other funds that have stricter underwriting guidelines will just stay out of the market. The problem is that buyers are not going elsewhere they are sitting on liquidity hoping to jump back in which is creating large reserves of capital. These same buyers will then just suck it up and end up overpaying for some deal. Anyways this is what I have been seeing, we're one of the those buyers with stricter underwriting guidelines and its been tough for sure.

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Sep 7, 2021 - 4:20pm

Agreed with Teddy. 

I think there will be a set of consolidation for those firms that can consolidate debt and equity. A huge reason why we've lost out on deals to Starwood and BX for example is because they just get better financing...because they do their own financing (at least with the few deals we had looked at) and they finance it at extremely low rates, so it works out for them offering stupidly high prices for deals. So I wonder if other firms will try to go this route too.

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Sep 9, 2021 - 1:38pm

Short-mid term your concerns of MF assets becoming no more profitable than bonds is valid, due to excess liquidity, low rates, competition, etc. Even worse is RE, though MF less so, is prone to swings through small occupancy changes.

Long term, it's likely that, through consolidation, divestment, rate rises, etc. we'll see a return to larger margins. Consider the post-GFC environment in commercial RE and how BX et al benefited tremendously through the next decade by scraping the barrel during the GFC. Probably see a similar trend with long term margin growth.

Or we'll see new strategies take hold of the MF market. Either way, probably gonna be larger equity firms that win out.

Mind you I have zero experience in RE and am saying this as somebody who did some quick reading on the topic.

Sep 9, 2021 - 2:17pm

One thing American buyers have a difficult time comprehending are the cap rates in other highly developed, Western countries. Canada, Western Europe, Australia, Japan - all these have cap rates that are in some cases much lower than cap rates in the US. If our monetary policy continues to look more like the monetary policies of other countries, you're going to continue to see cap rates for core product trending into the low 4's and high 3's. And the crazy thing is, cap rates at those levels will still look attractive to foreign buyers relative to other options (I'm not including any hedging/currency costs in that equation because I'm too dumb to think about those but I know that they can have a meaningful impact). 

Sep 9, 2021 - 2:31pm

Agreed.  We have a European partner that is buying industrial and resi on the continent at mid to high 2-caps and they're financing it at all-in rates of 0.90% or below.  The 3-caps on US multifamily deals are still very attractive to them.  While things feel tippy toppy, the fundamentals of multifamily are incredibly strong and have great structural tailwinds vs the universe of other investment opportunities.  That said, returns will undoubtedly compress, and we all know it, but no GP or LP will say that out loud.

Sep 14, 2021 - 11:18am

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