We made it. 2023 was by far the most difficult of my professional career which started in 2011.
I dealt with a myriad of deal and market-related issues; uncapped floating rate debt straining cash flows, raising preferred equity behind an agency loan, inability to access construction financing, complex capex challenges in an environment with no liquidity, and general market pessimism which makes everything feel worse.
In the past, rents/values kept growing and with interest rates at zero, we’ve been able to continually refi deals at higher valuations, and sock proceeds away as reserves or send to investors as distributions.
It was easy to mask mistakes, but that’s no longer an option.
The momentum came to a screeching halt.
When momentum is propelling the market, people focus on your strengths and forgive your weaknesses. When the momentum stops, they scrutinize everything.
However, each new challenge is an opportunity to progress and there are countless lessons I’ve learned over the past year.
As a long-term focused real estate investor, I have unbridled optimism. That hasn’t changed, but the world certainly has.
As we kick off 2024, here are some of things I’m pondering.
(1) How do we resist the pressure to follow established playbooks and maintain creativity at scale?
As we grow as a company, we’re putting in more systems, people, playbooks, and generally standardizing processes to allow us to scale. This is critical, but I’m concerned it could stimy our creativity which is a major differentiator.
Over time, multifamily operators seek growth and get pushed toward best practices and doing things the way others do. Screw that.
The world is changing. Renter expectations are changing. We’re going to strive to stay a step ahead and deliver renters what they want. It’s the only way we can be successful long-term.
(2) Thinking long-term remains the biggest advantage in real estate.
In real estate, aligning a long-term mindset with a long-term investment strategy and capital is a superpower.
You can eliminate all major risks in real estate investing through long-term holds and low leverage, but so few do this because of the desired returns of capital partners.
This is an issue.
We’re raising a fund structured specifically for long-term minded HNW and family office investors who want exposure to a diversified pool of value-add multifamily deals in the Southeast, without the incentives to trade in and out of deals.
(3) Is there such thing as a differentiated strategy within value-add multifamily?
Most people think value-add multifamily is simple. Find an overlooked property, make some improvements, lease it for higher rents.
On the surface, it is relatively easy. But as an operator, seeking to outperform, it’s hard.
While it’s impossible to operate your way out of a bad buy, you can turn a good by into a great deal through pinpoint execution.
The combination of great design, tailored amenity selection, and incredible service can lead to long-term outperformance.
I genuinely believe in the value of operations, especially in the class B/A space where resident expectations are increasing.
The proliferation of flexible work and growth of the high-income renter segment is further driving the importance of operations.
(4) When will the broader real estate community accept that cap rates are not tightly correlated to interest rates?
The real estate community continues to ignore all the empirical evidence that clearly shows the relationship between cap rates and interest rates is tenuous at best.
Are they correlated? Yes. The significant rate hikes we just experienced proved that.
However, long-term price drivers of apartments (and other asset classes) are supply and demand driven.
(5) What will happen in 2024?
Predictions are fun!
At the very least they give me something to look back on and brag about if I’m right. Here are 5 predictions for 2024.
(1) Multifamily performance in 2024 is going to be worse than 2023. The combination of peak supply, booming single-family sales volume, increasing expenses, and modest growth in the economy is going to lead to lousy operating performance.
(2) There will not be any widespread multifamily distress. There will be opportunities, but you need to move quickly, and most will miss them.
Distress: The RealDeal will highlight a few distressed deals that everyone talks about, but those will be few and far between. The combination of preferred equity, flexible lenders, healthier capital markets, renewed optimism, and dry powder on the sideline will minimize any widespread distressed sales.
Opportunities: There will be some opportunities to acquire high-quality deals at a good basis, but the opportunity set won’t last long, won’t be obvious, and you need to move now. Many will miss the narrow window and view 2024 as the year that got away.
(3) Inflation will fall below the FED’s 2.5% target. Inflation is no longer an issue and in 2024 it will fall below the FED’s 2.5% target. Higher interest rates have slowed demand, without causing a recession, and supply chain issues are a thing of the past. Well done Chairman Powell. The lagging housing inflation data will continue to decline.
(4) The STR business will finally collapse and consolidate. This isn’t a novel prediction as it’s already happening, but pureplay STR operators will continue to go out of business and the management of STR’s will be brought in-house with owner/operators and management companies. Greystar, Sentral and others are already rolling out this model.
(5) New development won’t pencil in 2024. The cost to build new multifamily projects is significantly up since 2019 and shows no sign of falling. Meanwhile, values have reverted to ~2019 levels. We need to see significant price appreciation for new developments to pencil. This is the biggest tailwind for multifamily.
With the turning of the calendar and some time off to reflect also comes a renewed sense of optimism and excitement.
Let’s do this.
