Is it too Early to Buy Multifamily? | A Student of the Real Estate Game

We all know the famous Warrant Buffet quote, “be fearful when others are greedy and greedy when others are fearful”. It’s a saying that gets thrown around often these days, but not one that’s applicable to the current multifamily market.

There’s general optimism in the market and plenty of capital waiting to be deployed for the right opportunities.  

However, owners of high-quality multifamily assets are unwilling to sell for ~20% discounts, especially when NOIs are up, there’s considerable dry powder, and there are expectations of rates falling. They may sell at ~5%-10% discounts, but not 20%, which results in ~75% of equity being wiped.  

Instead of selling today, they’ll scratch and claw to keep optionality alive. This includes a mix of capital calls, preferred equity raises, and loan restructuring.

In today’s environment, we’re not looking for extreme discounts from peak pricing or seeking significantly distressed deals. Instead, we’re looking to acquire high-quality assets in good locations at a discount to replacement cost, which have an attractive value-add story, and can be stabilized at yields which are ~200-250 bps above today’s cap rates.

As opposed to the Buffet quote, we believe in acting with conviction when others are hesitant.

This approach is driven by the following underlying factors:

Demand remains historically strong. 2024 is on pace to be one of the best years in decades for apartment demand, only trailing 2021. Our belief is that underlying asset performance will only improve as supply is absorbed, new deliveries slow in 25’, and we experience some expense pressure relief on major line items such as insurance (our premium was down 5% YoY).

Any seller today is a forced or highly motivated seller. Those are the sellers we want to buy from. With the belief that rates will come down at some point, owners will do anything needed to kick the can down the road and not sell for a loss, especially with NOIs being up. Every good transaction starts with a forced or motivated seller.

There is significant dry powder on the sideline (with incentives to be deployed). There is $250B in dry powder in private equity shops with more in sovereign wealth funds, pension funds, and $3T in excess bank reserves. Money continues to move away from out-of-favor asset classes such as office and into multifamily, keeping a floor on pricing for high-quality properties. Institutional capital remains on the sideline, waiting for the ‘all clear sign’. This money is getting impatient and will eventually seek assets.  

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If we believe performance will improve, capital will flow into multifamily, and squeezed owners will become forced sellers, today is a great time to be actively pursuing opportunities.

The challenge is figuring out how to position yourself to take advantage of the opportunities that exist today.

Here’s how we’re thinking about it.

• Be operational experts. In today’s environment, there’s little room for error. Operators need to know which improvements drive returns, how to stabilize occupancy/collections in competitive environments, and how to intelligently minimize opex.  
• Have discretionary capital at your disposal and unique equity relationships to close quicky. Having a mix of discretionary capital to close all cash and flexible partners who can stroke large checks for unique stories is a competitive advantage.  
• Know where assets are trading and where they’re not trading. When speed and surety of close is paramount, you need to be able to quickly identify deals that are worth your time and deals that aren’t. We’re underwriting multiple deals a day and tracking to see where they shake out.
• Offer creative solutions to stressed owners. Many owners are in a difficult position and can no longer bide their time.  Bring creative solutions such rescue capital, hope notes, and equity participation to structure the best deal for everyone involved.

Multifamily Man said it best in his newsletter:

There are incredibly unique deals being taken down off-market with strong yields on quality assets. You’re just not going to see or hear about them. The sponsors running these types of deals have the operational chops and equity relationships. They see everything (or close to). They know exactly where deals are trading, and more importantly, where they are not. They are looking for well-located deals at below-market basis and finding unique stories from motivated sellers. They are not buying to buy. Or because “it’s time”. No, the savvy groups are doing what they always do. They are sifting through 10 levels shit to find the diamond. And that is exactly what it takes right now.

What are you seeing out there? Hit me up on Twitter.