Where Are The Opportunities?
April 5, 2023
With such a shallow deal pipeline to start off the first quarter of 2023 it has provided a unique opportunity for us to slow down and assess the landscape for where we see potential opportunities in the next 12 to 24 months. I have to admit, the current set of lenses is the blurriest we have looked through in a while. Sentiment continues to change on a daily (sometimes hourly) basis and we have found it difficult to channel and moderate the pessimism when underwriting new opportunities. On the limited deals we are chasing I would compare our underwriting to the old adage “death by a thousand cuts.” No matter what the multifamily market looks like it is tough to make anything pencil when you have a pessimistic view around every variable in your forecast.
With that said, there are great opportunities in any market. Sometimes it just takes more patience and persistence to turn them up. Currently, we are finding interesting opportunities in the form of recapitalizing existing deals with new JV partners. The assets we see an ability to optimize this strategy around generally have three characteristics: were purchased mid 2021 or prior; are in submarkets where rent growth outperformed our expectations (to no surprise all of our markets); and are far enough into their value-add plan that NOI has started to stabilize so we can trade at an attractive in-place yield. Since we already know the assets inside and out and have full transparency over operations, we see these as the best risk adjusted opportunities in today’s environment. Given that values peaked so far beyond initial expectations when the deals were purchased, the recapitalization presents a great opportunity to still provide outsized returns and liquidity for existing investors. Meanwhile, for incoming LPs, the recapitalization can provide attractive risk-adjusted returns and a reduced basis to yesterday’s pricing but with a proven business plan.
On the new acquisition side of our business we are generally still seeing a moderate to high level of competition and demand for the limited stock available in the pipeline. We see the best opportunities (again to no surprise) in submarkets that have seen more muted new construction deliveries over the past two quarters. In general, this continues to be suburban submarkets that cater to a moderate income demographic. Hot spots for new construction like core locations in Austin, Downtown Salt Lake City, and northern Denver have become much more challenging to underwrite. Regardless of the market in today’s environment we still have to solve three challenging variables: debt volatility; challenges in predicting the path of exit cap rates and; the impacts of impending recession on demand. You also have to play the game of timing velocity and magnitude of ramping up and burning off a considerable amount of rental concessions. With that said, as we look further into the end of 2023 and 2024, we strongly feel that there will be a flood of new acquisition opportunities as debt originated in late 2020 to early 2022 begins its path to maturity (this seems to be the opinion of the majority in the conversations I’ve been having lately). So, for now we are remaining very patient and highly selective as we keep our powder dry to execute on that thesis.
In summary, we continue to be long term believers in value-added multifamily in meticulously selected high growth submarkets, however, to be an active participant in the market right now takes a heightened level of attention to detail and persistence. At the end of the day, patience right now may be the best virtue.
If you have read this far please feel free to reach out and let me know if you are seeing the same or any other interesting opportunities, I am always happy to share notes as we learn together.
Thanks for the read and happy deal hunting!