Out Competing the Competition

Competition in multifamily has been stiff for the last few years and especially after the pandemic hit. Multiple factors really played into this.

First, there’s been chronic underbuilding since the global financial crisis. Many developers lost their shirts, couldn’t take the pressure, and got out of the business. That meant less supply coming online with more demand from people who needed places to live. Rents went up and many investors wanted a piece.

Next, there were demographic moves. Populations shifted from older, larger gateway cities to the Sun Belt and West. But unless people live in RVs, their housing doesn’t go with them. The shifts needed new multifamily housing and many newer developers and investment funds scrambled to snap up chances for profit.

Easy monetary policy drove up investment in real estate as low interest rates drove fixed income investments into the ground. Oceans of cash needed somewhere to sit, and commercial real estate became a favored outlet. Investment funds that had never put much attention on the asset class saw an opportunity to deliver the types of returns that their investors wanted. More money and competition for deals meant higher prices, falling cap rates, and the need to ensure rent growth to justify investments.

The pandemic then shook everything up. Forgetting the ups, downs, and inside-outs for a moment, the ultimate result was that multifamily valuations skyrocketed and rents that grew even faster pushed by aggressive sponsors pursuing value-add strategies.

But all of this depended on a mechanism in which cheap money and low inflation would continue to be in place. That world is over. Inflation is up and the Federal Reserve has made it clear that even more interest rate hikes will be coming. Rent growth leveled out and turned flat in September, according to Multifamily Executive. As we keep saying, because this is critical, valuations have fallen upwards of 15% to 30%. Refis are not possible for many projects because, between much higher rates, lower LTVs and tighter lending standards, mandatory DSCRs won’t be achievable.

Then comes the real problem for many of the late-comer investment funds whose backers expected high IRRs—they won’t be possible and now the funds have to look elsewhere, because they can’t go back to these people and say, “Oops, we were wrong.”

At the same time, as we’ve heard from many, there is a lot of dry powder out there. Plenty of cash to go in on deals that make sense.

The multifamily business is, in part, a story of competition, where you can look to get a better selection of deals without fending off others trying to cut in. How much you’d have to pay for a property? Which competitors are dropping out, either because they’re distracted by deals going bad or by investors who aren’t satisfied? Which ones have a lot of capital ready to go but are aiming for things more on the distressed front, leaving more room for decent details.

There’s likely more room than there has been, but with the amount of capital still floating about, there are organizations that have the ability to bid for what they want.

The good news is that with falling values and signs of financial problems showing up for many projects, a lot of the capital will probably look to go further by picking up distressed properties. There will be competition there, but here are some ideas for navigating the churning waters.

Start with data

If you want to get an advantage in identifying potential opportunities, using data is critical. That’s why Offerd has its data and analytics platform that provide deep insights into markets and specific properties. Turning data into deals is Offerd’s strong point.

Scenario planning

With the speed at which markets are changing, having alternative strategies for different environments is important. This is the next step beyond having the data. Use it to create a variety of paths as things change. Part of that may be taking to private marketplaces like the one Offerd has. At least one of your options should include an inside ability to source deals that won’t be made broadly public.

Watch the conditions and act

In the next few months in particular, timing will be more important than usual. Opportunities might get snapped up—a party might step back, thinking that something better will come along, only to change its mind a little while later. But with the right data, planning, and channels, you can buy or sell at the optimum time for the current conditions.