In times of change, learners shall inherit the earth, while the learned find themselves beautifully equipped to deal with a world that no longer exists
-Eric Hoffer
Times are changing. In fact, the speed at which change occurs is increasing. If you sit on the sidelines for 3-6 months, you might be entering a whole new world.
Capital Markets
The market is choppy right now
-A lot of investors
We hear this phrase often as of late. This means that the capital markets are changing constantly. Deals quoted at the beginning of the year were getting bridge loans with 80% leverage, 100% of rehab. Spreads were low and SOFR and LIBOR were near zero.
Fast forward 6 months and the leverage is 10 to 15 percent lower. Spreads have moved up a point. SOFR is at 2.3% so your all-in rate for bridge debt starts at 6.5%. Rate cap costs have gone up 10x. Pricing on multifamily assets is down 10 to 15 percent in some cases.
Term sheets provided 2 weeks ago are already out of date. The market is constantly changing and will likely continue to change at an increasingly rapid pace. In times of change, learners shall inherit the earth—active investors shall inherit more property.
Multifamily Status
One of the big challenges today in the multifamily space is raising capital. Even the real estate celebrities that are well known on social media are having a hard time raising money. Any deal that has been advertised for several months and keeps adding names is struggling.
Conservative underwriting has been stretched to the max to make deals pencil. Some of the details I have seen overlooked are the interest rates and the expenses. This is assuming that the rent increases projected hold up.
Having a floating rate and just plugging in the spread into a pro forma will affect the overall performance of an investment. Boasting inflation on rents and not accounting for it on expenses will also lead to lower performance than projected.
All these nuances affect an investment. What it all adds up to is stagflation. Rent will continue to increase but so will cost of debt and expenses leading to less than desirable investment results. At least less than past performance, and hopefully only in the short term.
This is where price is starting to be affected. Someone unaware of the changes previously mentioned might think prices are still high. I would argue that they are down 10% or more across the board. Price must give to attract more capital.
Opportunity Knocks
Despite the current headwinds in the multifamily space, there are plenty of reasons not to be on the sidelines right now. There is still a shortage of housing supply that is not keeping up with the population. That is going to be exacerbated by all the housing starts that have been cancelled recently because of the market.
Eventually the market will cycle back and the window of opportunity to get a good deal may pass you by. We will see where interest rates go but just a 2.3% rise in fed funds rate has already slowed things down quite a bit. Some are calling for rate cuts as early as 2023. We will see.
When rates do start falling, I believe capital and buyers will come flooding back into the market and break the stagflation mentioned previously. If you can grind through the hard times and pick a deal up it could be a great opportunity.
Conclusion
It is not a good time to be inactive if you are a real estate investor. Keeping your skills sharp and staying in the game could have huge upside. This does not mean you have to overpay or overextend for a property.
The beginning of the year there was 20+ offers on deals with several rounds of best and final—deals were going for over asking. Now there is maybe a few offers and deals going for asking or below.
