I have analyzed over 250 multifamily deals, spoke with dozens of brokers, lenders, and other operators across the country this year.
The last 6 weeks is materially different.
Multifamily pricing this year is already +25% of peak values. Now, nearly every marketed deal is missing pricing expectations by +20%. This month alone represents 5-10%.
That means what was a $40m deal in 2022 is now asking $30m and receiving bids at $24m - IF they catch a bid.
There is an entire class of deals throughout the sunbelt that can’t even get equity interest until the lender takes over. We are talking deals worth $.50 on the debt for an appropriate risk-adjusted return.
This covers core urban towers to class C suburban garden-style deals.
Equity expectations has shifted to year-1 positive leverage at minimum for a well located class B deal. 6 months groups were ok taking 100bps of negative leverage. So what was a 5% cap is now a 6% cap.
From a pricing standpoint, that 1% of cap rate movement (the difference between positive and negative leverage in this instance) would represent about a decrease of $10m on a $40m (now $30m) deal.
Brokers are no longer trying to save face about this issue. They are well aware of pricing expectations. Furthermore, since volume is down 50-70%, they have no time to waste. The focus is now finding willing market sellers. They don’t want to process deals that sellers will pull if pricing misses what they think - because it inevitably will miss.
The issue is most of these “willing”, now forced, sellers aren’t actually in the driver seat. The equity on their deals is worthless. Zeroed. It’s now up to the lenders on how to process. But most haven’t foreclosed yet.
Lenders have kept it cool up until about 4 weeks ago. They refused to acknowledge the elephant in the room. Now news is breaking on restructurings, foreclosures, fraud, and missed pricing expectations. Up to this point, lenders have been current on loans.
Now they are not. Lenders are waking up. They realize if they do not move right now then the issues only multiply. We are just starting to receive loan sales. But this is just the beginning because fundamentals in the market have remained relatively strong. But things are changing.
Operators are in full asset management mode. Rents are slipping, expenses are up, and loans are maturing. The goal today is maintain quality occupancy and fight against delinquency. Most operators have stopped high-end renovation plans as the premiums are commanding the same rents pops as the past. What was a $10,000 interior renovation for $200 rent pop is now a $13,000 renovation for a $100 pop. It just isn’t worth it.
Once (if) we start processing the bubbling issues in the broader economy, and the glut of supply releases at the same time as fundamental softening, there will be massive issues near term in the multifamily space.
Get ready because it is about to get spicy 🌶️
The last 6 weeks is materially different.
Multifamily pricing this year is already +25% of peak values. Now, nearly every marketed deal is missing pricing expectations by +20%. This month alone represents 5-10%.
That means what was a $40m deal in 2022 is now asking $30m and receiving bids at $24m - IF they catch a bid.
There is an entire class of deals throughout the sunbelt that can’t even get equity interest until the lender takes over. We are talking deals worth $.50 on the debt for an appropriate risk-adjusted return.
This covers core urban towers to class C suburban garden-style deals.
Equity expectations has shifted to year-1 positive leverage at minimum for a well located class B deal. 6 months groups were ok taking 100bps of negative leverage. So what was a 5% cap is now a 6% cap.
From a pricing standpoint, that 1% of cap rate movement (the difference between positive and negative leverage in this instance) would represent about a decrease of $10m on a $40m (now $30m) deal.
Brokers are no longer trying to save face about this issue. They are well aware of pricing expectations. Furthermore, since volume is down 50-70%, they have no time to waste. The focus is now finding willing market sellers. They don’t want to process deals that sellers will pull if pricing misses what they think - because it inevitably will miss.
The issue is most of these “willing”, now forced, sellers aren’t actually in the driver seat. The equity on their deals is worthless. Zeroed. It’s now up to the lenders on how to process. But most haven’t foreclosed yet.
Lenders have kept it cool up until about 4 weeks ago. They refused to acknowledge the elephant in the room. Now news is breaking on restructurings, foreclosures, fraud, and missed pricing expectations. Up to this point, lenders have been current on loans.
Now they are not. Lenders are waking up. They realize if they do not move right now then the issues only multiply. We are just starting to receive loan sales. But this is just the beginning because fundamentals in the market have remained relatively strong. But things are changing.
Operators are in full asset management mode. Rents are slipping, expenses are up, and loans are maturing. The goal today is maintain quality occupancy and fight against delinquency. Most operators have stopped high-end renovation plans as the premiums are commanding the same rents pops as the past. What was a $10,000 interior renovation for $200 rent pop is now a $13,000 renovation for a $100 pop. It just isn’t worth it.
Once (if) we start processing the bubbling issues in the broader economy, and the glut of supply releases at the same time as fundamental softening, there will be massive issues near term in the multifamily space.
Get ready because it is about to get spicy 🌶️
https://twitter.com/mu2myoc/status/1723794913727324229
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