Bernard's Corner: Navigating Multifamily Space in 2023 and Beyond - Market Projections for the year and Business Report
Welcome to this new space and thanks for being here! On these posts, you can find my view of the current market trends, important information for the multifamily industry, and reports on our business.
Multifamily sale activity is picking up in the first quarter of 2023; however, transactions remain low due to a wide bid-ask spread that persisted past Q2 of 2022. This gap has now started to shrink. Essentially, sellers have been asking for a higher price than buyers were willing to pay, resulting in limited transaction activity. Consider that contract time in our industry can be three months+, meaning current transaction activity reflects what came under contract months ago. The best way to keep a pulse on recent activity is through constant contact with brokers and staying active in the market.
During the past year, we have noticed sellers of smaller multifamily properties are more willing to accept offers, leading to our recent success in buying smaller deals. As an example, we have a deal under contract for 17% less than a previous potential buyer had it for. We had been looking at this deal for about a year. With a lot of hard work, patience, and persistence, we were able to get it under contract for a much more favorable price after the previous potential buyer was unable to close. This is a definite change from the environment we were in just 14 months ago, where discounts, let alone 17%, were rare, if not non-existent. As for larger properties in the middle-market asset size, we're starting to see more motivation from sellers for three main reasons:
They're approaching their maturity date and want to get ahead of it as they're unsure if they will have enough proceeds to pay off their loans and meet their projected returns.
They have to renew their rate caps, which have become significantly more expensive (5x+) than they were a year ago.
They used floating rate debt (variable), and the increasing interest-rate environment stressed their debt service obligation.
Fortunately, we’ve been very mindful of interest rate risk and potential market shifts with our acquisitions. As a result, all our properties have fixed debt, and our current portfolio is not experiencing any adverse effect from the current interest-rate environment.
Despite challenges such as higher-than-expected construction costs and labor shortages, we see signs of improvement, and we expect this trend to continue. We anticipate deal activity to start picking up sometime between Q2 and Q3, with value-add, opportunistic, and even distressed opportunities hitting our pipeline. Although we expect interest rates to normalize in the next three to five years, we realize we don’t have a crystal ball and consider it prudent to finance deals conservatively, especially in this environment. Our underwriting is more strict than ever, and we are scrutinizing more deals to locate those that satisfy our investor standards. We are now looking at about 200 deals per every property we get under contract, whereas two years ago this number was closer to 100. All our new deal underwriting includes financing strategies with a minimum of 5 years fixed (or capped) interest rates and avoiding expensive prepayment penalties such as yield maintenance. We realize interest rates may decline and want to have the option to capitalize on this if it were to happen, but we are also aware of interest rate risk, especially in this environment.
Across our portfolio, we're happy to report that rent growth, which slowed down at the end of last year and the first couple of months of 2023, is now picking up again. This indicates the slowdown was due more to seasonal trends, as had been common in pre-pandemic years. In our Charleston portfolio, we're now signing leases as high as $1,400 for apartments that had projected rents closer to $1,100, and we are exceeding our previous high of $1,275. In Oklahoma City, another market we're very active in, rent growth is projected to be the highest in the nation during 2023 (Freddie Mac). We'll keep a close eye on this and keep you updated. Rent collections are also strong. According to RealPage, apartment rent collections reached their highest mark since pre-COVID during February. With this in mind, we expect positive results throughout the year.
Finally, we're excited to welcome Tomas Buitrago to the team as Acquisition Analyst. Tomas has an impressive background, including strong experience in project management, construction, and asset management, as well as a Master's in Real Estate Development from Columbia University.
Thank you for your continued interest and support. Please don't hesitate to contact us with any questions or concerns.
Best regards,
Bernard
Managing Partner