TOP TAKEAWAYS: GlobeSt. Multifamily Fall Conference

Event:
ALM/GlobeSt. Multifamily Fall Conference
October 16-17, 2023
JW Marriott Los Angeles L.A. Live

The Fed’s Role:

• Fed must buy so much in bonds in times of crisis, but in this cycle, the Feds are letting it mature instead of selling them.
• 80bps is the narrowest spread between cap rate vs 10-year US Treasury in 2023 compared to previous years.
• We are headed into a recession within the next 6-8 months. The positives of that—will reset costs and interest rates.

The Current Multifamily Market:

• Despite all the negative headline news, overall multifamily market fundamentals are still strong. Core markets are still under supply for housing needs.
• 42% of new inventory is being built in just 10 markets.
• Very little product is available right now; there is a focus on improving older buildings rather than building brand new ones.
• Rent growth has dramatically slowed down. Over the past year rents have been flat or negative.
• Generally, prices are down 15-20% since 2021 depending on the submarket.
• Delinquencies are creeping into the Southwest market.
• Transaction value has been down 70-80% since 2021.

Concerns of the Multifamily Industry & Its Impact:

• In some cases, insurance costs are higher than real estate taxes. Focus on getting an insurance quote prior to going under application for lenders to underwrite effectively (generally, insurance anticipated to go up another 30-50% in 2024).
• Inflation is going to be a driving factor of rent growth and consumer decisions moving forward.
• Sellers making decisions based of the Mansion Tax in LA.
• Tech and AI will help shape new ways for revenue maximization
• Becoming more challenging to refinance bridge loans maturing in 2023, 2024, and 2025

• • More deals will have to be pieced together through the capital stack.

• On cash-in refinances, some alternatives will be to cross collateralize or pull cash out from other properties to cover the difference.
• Lenders, investors and equity providers are spending much more time analyzing a deal up front to nail down underwriting assumptions, such as insurance costs, proforma rents, and higher interest rates.
• Life Companies can sometimes be more competitive than agency on the lower leverage stabilized assets; less covenants and restrictions than what Fannie and Freddie offer.
• Delta between renters and mortgage payments still ~$1,800. You compound that with lack of supply, people will be renting for longer.

Investor Sentiment:

• Future opportunities for investors look like purchasing note sales outside of CA.
• Value add investors are seeing a slowdown in the number of units renovated monthly, they are not wanting to over renovate a location. Some have gone from 10 units a month in renovations to 3-4.
• Seems like long-term holding periods, 7-10 years are working for some investment shops – able to weather the storm a little longer with fixed rate debt and moderate leverage.
• Preferred equity is filling the cap stack when there are gaps between the senior note and equity from the sponsor.
• Real estate investors are going back to fundamental analysis; understanding the performance of a property – times like this make it harder to derive an intrinsic value (until the intrinsic value has been agreed upon there will be a disconnect between lenders and borrowers).
• Investors are noticing rent growth slowing down. Renters start to move away from the markets that experienced a rapid growth post Covid due to lack of affordability and coming back to work.
• Cap Rates for equity underwritten at around 7%.
• Favorite Multifamily locations: Suburban.
• It is a time of evaluation and a time to plan for the next steps of one’s business model.