Why are you buying?
For anyone either working at a RE company (REPE, Family office, REIT, small shop) or even buying for yourself, what specific factors convince your investment committee to buy properties in today's environment?
How do you make money in the 9th inning of even extra innings of a cycle? When the acquisition guys make their decision to buy a property, how do they justify and what metric do they look at? Do the numbers just make sense so it is worth buying regardless of the late cycle we are in?
Anyways, to conclude, if anyone can share the mentality at your firms and what the executive management think of the period we are in with prices at all time highs depending on the market.
How do you tackle this problem? Is there even any value add deals to chase after? Is development too risky today? Buying in different markets? Thanks.
Nothing in California Multifamily. The threat of Costa Hawkins getting repealed is killing potential developments and acquisitions everywhere. I've talked to a handful of brokers who said they are starting to see significant restraint from institutions and equity groups until the political dust clears. Scary times in California.
I was reading in the WSJ the other day that 0 apartment units have been built (except for gov't units) in Venezuela in the 58 years since they started enforcing rent control laws. I'm preaching to the choir I'm sure, but rent control is only good for a select few people; it's horrible for society.
And yet, tens if not hundreds of thousands of rent controlled units are built in the US every year, so... you're kind of stretching if you have to reach for a banana republic to justify your point.
Rent control laws are like any other law; it can be extremely beneficial or extremely harmful, depending on how it's written, implemented, and ultimately, abused.
"Rent control" units are built with tax payer money (or tax subsidies) every year, yes, not by free private sector capital. Rent control has been a complete and utter failure in every place it's been tried. NYC and San Francisco come to mind as places that thought rent control could supplant the laws of supply and demand, but have ended up in housing affordability crises. The Section 8 slums all over the country are just a step above a banana republic--I would know because I used to work in the Section 8/LIHTC business right out of college, and a key part of my job was site inspections.
Rent control (in any of its forms--rent control laws, LIHTC, Section 8, public housing, etc.) is NEVER beneficial to society, just for the record.
Yes, I remember you despite your name change, you were the guy alleging that most of the people living in Section 8 housing are driving Mercedes and BMWs and keeping the whole "welfare queen" myth alive.
I'm also not entirely sure why you are singling out subsidized housing as being the only type built with taxpayer money. As of 2005, over 50% of home realized a tax savings on the mortgage interest tax deduction, but you obviously are unwilling to call that out as the subsidy it is. Free private capital has rarely built or achieved anything at all; to take NYC (a market I know and you referenced), free private capital has barely built anything in the last few decades. Only a vanishingly small amount of rental product is produced anymore that doesn't benefit from a tax abatement, and until very recently the same went for condominiums.
And knowing your views on poverty, governmental responsibility, and all that, I won't even bother to argue with you about what constitutes "beneficial to society"; it's very obvious you view social benefit through the exclusive lens of what gives you personally the biggest return on the smallest outlay.
At the end of the day its a cost/benefit analysis. Funding affordable housing now means not having to deal with having all your shit taken from you later; capitalism unbounded by government restraint (which has never existed, capitalism requires government intervention to succeed) is always met with pushback from the very people it tries to turn into commodities. It's why the periods of human history in which capitalist values have been most in the ascendant, were simultaneously the most corrupt and followed by swings in the other direction.
Here we go...
When you can't defeat the arguments, go after the individual. Also, when personally attacking, completely misrepresent what the individual said. For example, when somone says "a lot" you say "most."
For someone who has stalked (and misrepresented) a comment of mine going back 5 years(?) it's amazing that you've failed to stalk the dozens of times I've specifically called out the mortgage interest deduction as being completely counterproductive. It's genuinely amazing.
Right.
Right, and NYC suffers among the most severe affordable housing crises on Earth. Because you know rent control is intellectually indefensible, you're kind getting off topic from rent control, but yeah, the gov't shouldn't be subsidizing the real estate industry because the law of supply and demand is immutable, and subsidizing an industry simply shifts costs, which is why housing, healthcare, and higher ed costs are snowballing out of control.
Again, attack the individual when you can't defeat the arguments. I'm a monster because I believe that the gov't distorting the market actually doesn't help people it's intended to. I'm Hitler.
I have no idea what you're talking about, and I don't think you do either.
So nothing about rent control? Ok.
Not sure what you mean by rent controlled apartments are built every year but I'm assuming you are referring to affordable/BMR which is a totally different animal. I am curious how, other than the tenants who live in existing rent controlled units, you think that rent control is beneficial to society or economies as a whole?
Roughly 40 of the 41 economists in the link below tend to hold the view that rent control is bad. The institutions these economists are at not exactly right wing think tanks either...
http://www.igmchicago.org/surveys/rent-control
When it comes to MF the only way to buy something now is for a long term (10 year) hold. This is because pricing is so high but as long as it meets DS needs then it can work even when the downturn comes. For people who are looking at 3-5 year hold they will have problems.
If you are a long-term holder it still makes sense to buy in some markets. Construction cost inflation exceeds 10% y-o-y right now and most agree that number is not going to shrink considerably anytime soon, due largely in part to raw material pricing spikes and skilled labor shortages. With replacement costs continuing to trend upward, if you can buy it or build it now, you are likely going to be under replacement cost for the foreseeable future.
Agree with this in general terms, but one interesting thing to keep in mind for everyone (and something I've been tracking very closely) is to segregate rent growth based on construction vintage. For example, if you look at rent growth in the Bay Area in aggregate/in a vacuum, it's an absurd stat going back the last 5-10 years. However, if you break that down into rents achieved by product built in the last 1-2 years vs. product that's been delivered/constructed for 3+ years already, the 'rent growth' story paints a very different picture. There are a few great articles published about this and the general theme is 'skew of the new'. I highly recommend everyone check this out while they do their underwriting.
Good stuff. Will have to start bifurcating this on vintage/submarket moving forward on underwriting.
+SB This is very interesting. @monkeywrench what resources do you suggest utilizing for this type of research? Something like Axiometrics, where they break out "Grade A, B, C" etc or is there something better?
Agreed - long-term hold with a cost savings story, that's what I'm looking for right now. If you can right-size operating costs and drive NOI growth that way you can still do well. Have to find the right sellers though who haven't managed the asset well.
Buying functional, quality real estate should be top of mind. The best projects will weather the storm with moderate leverage.
Seek opportunities through unique venues. Marketed deals are tough to make pencil.
Being mindful of and understanding of how to control risk has taken the front row.
Cash in on your track record and raise/recap at a lower cost of capital
Gotta put money to work.
"Development" isn't some monolith where one day it makes sense and the next it doesn't, either. There are different product types, different markets, different submarkets, different neighborhoods, etc.
Cost of construction is the biggest problem for us - not finding tenants. We've really started to dig into modular and pre-built options.
Yes! I've been looking into this. So far, the ones I've found only make sense cost wise in the most expensive labor/cost markets (like all of California and NYC), but I do think eventually this is the wave of the future.
The company I work for is selling their multifamily development sites and putting that cash toward self-storage developments, which have excellent yields (in the high single digits to low double digits).
Interesting. We know what happens when everyone chases a high yield though...
Wonder how long it can last before everyone realizes, (which I think we are almost at that point).
Yep, they're trying to get in while the gettin's still good. (I say "they" because I've been largely un-involved with the self-storage investments or decision making, so I can't take credit or blame.)
To a mid level Chinese bureaucrat, overpaying by 30% for U.S. real estate is better than losing 100% of your money when the regime changes, you find yourself on the outs, and in prison.... So for all of us that actually want yield we should be praying daily to the Flying Spaghetti Monster that the massive ponzi scheme that is China experiences a huge setback sooner rather than later.
Most people either have tons of dry powder they need to place, are financially engineering deals, or are buying for long-term holds. The most recent deals my firm has done (publically traded RE company, $8B enterprise value, pseudo private-equity) have been off-market so we've been making our money on the buy.
There is so much equity out there right now that needs to be placed. Many of our buyers are looking to place equity to make their fees and taking lower leverage options. Deals are thinner now, so lower returns are the new normal.
Ultimately it comes down to being able to place equity using moderate leverage, and either accepting a moderate return or implementing a value-add strategy to force appreciation. It also doesn't hurt to have dry powder laying around during a downturn.
Have to put capital to work. Its tough out there. Have a difficult time hitting a 6.50% RoC on garden deals these days. Someone needs to tell the contractors to chill out and give us better pricing......
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