There has been great talk over the last couple years of the commercial real estate crash which made itself evident in asset class of Office real estate. Multifamily has taken its own beating itself. The quick ascent of multifamily values during the low interest rate periods of 2020-2021, and bad investment decisions made during that time are starting to create cracks in the multifamily market. We are now in the opposite kind of environment as interest rates have been “higher for longer” as the Federal Reserve has promised they would be.
Many people hoping to be rescued by low interest rates and “easy money” have found out that their expected lifeline won’t arrive at the time they expected. There has also been much talk about multifamily crashing in relation to decreased rental rates due to increased supply. As the income of an investment property is directly connected to the value of the property the conclusion here is that multifamily valuations would fall.
As experienced investors who have been here before all understand, real estate investing is local. In fact, rental rates are already starting to rebound and stabilized in many areas. An investor must understand the macroeconomic context as well as the microeconomic context of where they are investing. There are opportunities to make a good investment and profit at every point of the real estate cycle.
Based on all these headwinds that multifamily is facing it has created an unexpected benefit to one group of investors in particular – limited partners (i.e., passive investors).
Now is the time for limited partner investors to take the reigns as the balance of power starts to shift in multifamily real estate syndication. The limited partner has more advantage to invest now than before because of several reasons. We will dive more into that within this article.
Capital Is Harder To Find
The current lending market is very tight. Banks are requiring investors to bring more capital (i.e., limited partner equity investments) to the table to close deals and interest rates are the highest they have been in recent years.
Not only is it hard to get debt for multifamily deals, it is also hard to find equity capital. Multifamily cap rates (a measure of potential investment returns) are lower than the cost of capital and lower than the returns that passive investors can get from other assets that are less risky (such as a US Treasury Bill). With out the benefit of a risk premium, and more negative outlooks on their economic future many investors are parking their cash in other locations or staying completely out of investment markets. This means that syndicators have a harder time to find potential investors and raise capital. As it is hard to raise capital these days, deal sponsor would be incentivized to offer better terms to passive investors. However, be careful of the deal sponsor that is over promises and they will likely underdeliver.
Good Deals Are Harder To Find
Quality versus quantity will be the winner in the current market. If you are connected to a deal sponsor who you trust and know provides only quality opportunities, then you won’t have much issue here. As good deals are harder to find, you can have more confidence to strike once you find a good deal. Take caution however and take advantage of the fact that the market is moving slower to ensure that what you think is a good deal, truly is a good deal.
The Market Is Moving Slower
There is one clear crash occurring in the real estate market. This is related to the crash in transaction volume. As there are less sellers and buyers there are less deals being done. Sellers and Buyers are still trying to find a middle ground for what appropriate pricing is. As markets are moving slower it means that passive investors are going to see less deals presented to them for investment. As the volume of deals for review has reduced (and the competition from other passive investors) there is not the FOMO (Fear Of Missing Out) that may lead you to invest without adequately reviewing the investment opportunity. Now that there are less deals to review you can spend more time reviewing the investment opportunities you receive and select the best.
The Tide Is Washing Out
As the market is turning down you will begin to see the difference between the good and bad operators. Those who were not good operators and were only supported by an easy market will not be able to sustain themselves much longer. This is not an expectation that all deal sponsors must be perfect and can’t make a mistake but rather, an opportunity to see how deal sponsors manage adversity. The way that the deal sponsor manages the issues they are facing in the current market will provide you timely insight if this is an individual/team you would want to invest alongside.
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