Syndications - pivot to new builds ?

Question

So we all know the story by now that high interest rates and slowed rent growth have made it very difficult for sponsors to put together attractive multi-family deals on existing properties. The value-add or operational efficiency models are not necessarily strong enough to counter the headwinds. So, I'm seeing a few syndicators like BAM Capital getting into new builds and wondering how these will play out for us LPs.

Here are some questions that come to mind:

- Are construction costs are getting more manageable now that COVID supply chain issues are getting smoothed out?

- Cost of capital is still going to be high, but held for a shorter period, as a construction loan. So does this reduce interest rate risk?

- When the time comes to recapitalize (sell or refi) in a few years, will sustained higher interest rates significantly impact the profitability of the deal?

What do you guys think? Time to pivot to new builds, switch to another asset class, or stay on the sidelines?

Chris Seveney · Answer

@Steven Rosenfeld

When I see funds pivot like that first thing I wonder is if they are experienced in its

Right now I don’t see new builds be any better than other real estate asset classes

Today it’s about what is your competitive edge, not the asset class. Still money to be made in real estate but competitive advantage i believe is what differentiates companies

Alecia Loveless · Answer

@Steven Rosenfeld I agree it’s whatever asset class you can get a competitive edge in. Whether that’s another syndication, or some sort of an actual property purchase that you can get either insider knowledge on/or some sort of extra bang for your buck on I feel that’s the best way to make money right now to help combat these high interest rates.

For instance I bought an 8 unit apartment building that was being mismanaged and in 6 months have renovated 4 units, raised rents, turned management around, and done some other maintenance work and have doubled its value to close to $1M and increased gross rents by $36K per year.

Account Closed · Answer

Depends on the fund's management configuration;

>Ground up construction requires a different scope from typical value add

>Timeline is longer longer duration

>More moving parts means more failure points; lending, land acquisition, site package, permitting, inspections, construction, lease up team

>Construction management required; cost overruns, change orders, agreement

Lane Kawaoka · Answer

You know, the MFH value add deal with new appliances, a fresh coat of paint, playground equipment and so on—for about six grand a unit. The goal? Bump that net operating income by a measly 20% over four or five years (to then double our principal investment).

But here's the kicker: you pour in all that cash, maybe even double your capital. And what happens? All it takes is a shift in the cap rates—no one's fault (or Jerome Powell throwing salt on the situation lol recently saw a meme of him like Saltbaw)—and suddenly, you could see 30% of your property value vanish.

So, what's the move? We're seeing a pivot towards development plays. They're about crafting real value from the ground up. It's more than slapping lipstick on a pig and hoping the NOI boost sticks.

But, you've gotta partner with folks who know the ropes. Lenders aren't handing out loans for this kind of work unless you've got a solid track record. Many new operators might score a loan for a value-add on a 100 or 200 unit complex after a weekend boot camp, but when it comes to ground-up development? That's a whole different league.

Ronald Rohde · Answer

I'd say new construction is more attractive all things equal. But you have different risks

Ron Dancy · Answer

New builds for sure. GC fees and plus cost on materials kill the deals a lot of times.

Acquisition of land lot are a killer too. If you can get cheap money (IRAs, 401ks, Family and Friends) you can save a bit. Interest payments on construction loans can be manageable, if you get a loan that you only pay interest on the money you utilize or draw from.

Good luck on your journey!

John McKee · Answer

MF syndications are a bit risky, especially if they are borrowing money at high rates.  Construction costs are still high and rents are softening.  Everyone is banking on refinancing in a few years which I find comical like it's a foregone conclusion.  I would switch to a new asset class like flex industrial or mortgage notes which is what I am doing right now.

Henry Clark · Answer

I like getting dirty and what I call dirty properties, so this might not be Passive enough for you.  Or you could partner with a GC.  Start looking where other people don't look.

We are full steam ahead even though we have been backing off.  Doing more Cash deals versus loans.

Use google, loopnet, crexi etc.  Look up daycares, banks, school buildings, warehouses, etc for sale.  Pick your town, pick your poison, then develop.  Example:  Google Schools for Sale, Connecticut, close to you.  20 Gorham Ave, Hamden CT.  Obviously, all properties need due diligence, but all I see is good bones and plenty of parking.

See 27,637 sqft at $1,100,000 asking.  Off the cuff see another $1mm input.

Basically, keep looking where others don't, or it requires a different business model.  Otherwise go with Bonds.

Nicholas L. · Answer

@Steven Rosenfeld

congrats for taking action, that's awesome.

Steven Rosenfeld · Answer

I’m in one syndication right now and looking for the next one … carefully!

Syndications - pivot to new builds ?

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