What an incredible week in Las Vegas, Nevada. All the major players in the Multifamily industry met at the Aria Resort and Casino for 3 days of Multifamily action.
This was my first year at the National Multifamily Housing Council (NMHC) annual event and it did not disappoint. Check out the highlights in this trailer below:
Getting out to the conference was difficult for the Dallas players due to inclement weather. The only flights to make it out left early Monday morning. Flights on the way home mid-week were also delayed or canceled.
Most of the Old Capital team made it out and set up shop right in the middle of the action where we could talk to people as they went by.
Capital Calls
One of the early themes that emerged from NMHC was capital calls. There are a lot of groups that are currently doing capital calls or need to do them.
The reason behind this is mostly due to rate cap replacements or rate cap escrows. In 2021 rate caps were fairly inexpensive and the escrows were only a couple thousand a month.
Now that $100K rate cap in 2021 costs over $1 million and the monthly escrows goes from $2K per month to $100K per month. This is a negative cash flow situation that is catching investors off guard.
James Eng with Old Capital interviewed Mark Allen, a local Dallas listing broker with GREA, and he said even the more experienced and well capitalized groups are making capital calls right now.
Bid-Ask Spread
Another takeaway from the conference is that 98% want to buy and only 2% want to sell. This is proving difficult as the bid-ask spread is still wide enough to keep transactions to a minimum.
There is a lot of dry powder and Pref Equity readily available to enter back into the market when the bid-ask spread narrows. A lot of groups are in alignment this is going to happen in the second half of the year.
Someone at the event had a chart showing the maturities of bridge loans this year and it increases dramatically each quarter.
I got a chance to talk to Michael Becker with SPI Advisory and a host of the Old Capital Real Estate Investing Podcast. He was in agreement that we will see transaction volume pick up in the second half of 2023.
Interest Rates
There was a Fed meeting during NMHC where the Fed hiked another 25 basis points. The market expected 25 basis points so there was no surprise there.
They again remained hawkish and signaled further rate increases in order to prevent inflation from coming back. JP Conklin with Pensford thinks that there is one more 25 basis point hike and then a flattening until 2024.
Refinance is the best option for borrowers on floating rate debt. Looking for options with shorter yield maintenance terms or even refinancing with floating rates with higher caps might be a good strategy.
Current caps are deeply in the money so you could sell your cap, refinance, and buy a higher strike to free up some cash flow over the next 12 months.
Pref Equity
The two most used words at the conference were Pref Equity. With a lot of deals on floating rate debt where the cash flow is being suffocated, Pref Equity sounds like a welcomed suggestion.
Capital Calls are going to be challenging. There has been little to no distributions as well as little transactions. Investors money is tied up in deals that are losing money. A lot of investors just won’t have the cash.
Some are terming this Pref Equity as Rescue Capital but be careful. Rescue Capital may be the Trojan Horse that takes over your deal.
We talked about Pref Equity in the latest Old Capital Podcast episode 275. The analogy made was in reference to Pref Equity being 1st Class on a flight.
They can also fly the plane if they need to meaning they can be in control of a deal if certain agreements are not met.
They get front seats on the plane and get off the plane first. This is the same with their position in the capital stack. The lender gets paid first (senior loan) and Pref Equity gets paid right after.
The common equity or the Limited Partners (LPs) in the back of the airplane get off last. This is important to know as an investor and what the game plan is of the General Partners (GPs).
Lessons Learned
- Game Plan – understand what maturities or rate caps are coming up and how to tackle them.
- Shore Up the Balance Sheet – capital calls may be necessary to get you to the other side.
- Be Ready to Buy – there is a lot of capital ready to come back into the market at 5.25% to 5.50% cap rates.
- Competition for Smaller Deals – a lot more demand for deals in the 50-100 unit range than in the past.
- Take Care of Existing Deals – make sure current deals are going to make it in order to go after the opportunities.
Conclusion
If you get a capital call be sure to ask what the plan is moving forward. Is the sponsor kicking the can or are they solving the problem?
There is a lot of money on the sidelines right now waiting to come back into the market. We may hit a bottom this year or early next year if rates start to flatten. Be ready to buy!
Be careful when choosing to use Pref Equity and only use it as a last option. Reach out to us at Old Capital and we can help you with options for your deal.
