Metro Phoenix Multifamily flashing red

[Serge S.]

Phoenix multifamily can't lose right? We have been purchasing based on three primary inputs:

1. Perpetual rising rents.

2. Perpetually low interest rates/ability to refinance.

3, High occupancy/low economic vacancy.

Unfortunately, none of these 3 pillars are  holding up. Take a look at the exit cap rate on deals from 2021 into peak Q1 2022. Try not to cry. Yes those are 3.5-4% projected exit cap rates. Now revalue your exit price at 5%, 5.5%, etc etc whatever you think that rates can and will get to. 

At least those rents are still rising right? Nope, most submarkets decreased. AZ Rent price drop
Now look at that investment prospectus and change the topline growth to decreasing and/or concessions over any time period of your choice (I am underwriting 3 years rent concessions and NO growth and and minimum 15% economic vacancy). 

The interest rate picture is a disaster and I don't have a clue in the world how anyone can sleep at night knowing a 3 year bridge time bomb is ticking. I am very long on this market and have assets in play, but the smart money is on the sidelines right now. We are in the 1st inning of a long term devaluation of multifamily.

[Nick Robinson]

@Serge S.
Agree with your points especially about the syndicators. I have sat through a lot of presentations over the last year where they were projecting 8-10% rent growth over the next 2-3 years and then down to 6% in perpetuity. They estimated record low interest rates and CAP rates. I am waiting to see what happens over the next 6-12 months b/c like you I assume when these bridge loans come due, they will not be able to refinance to permanent debt. Like @Daniel Green I bought a property 18months ago, only a 14-unit, in Phoenix and ran my numbers very conservative, about $200 under market, and I got a construction loan that rolls into perm financing. Even though there were better financing options I took this b/c economic data has looked terrible for the last 2years.

Unfortunately, I think a lot of RE investors do not follow Macro and just believe headline numbers. Great example is on Friday the jobs numbers came out and showed a "great" number adding 260k jobs. People do not realize those numbers are skewed b/c it is run through logarithms to smooth the data out. If you look at the Household Survey #s, which is raw data, it was the 5th time in 7 months that there was a loss of FT jobs and increase in PT. This last month was a loss of 490k of FT jobs!! BP over the last 2-3 years has been caught up in this craze telling people just buy property it doesn't matter if it CF just buy it. RE is an inflation hedge. Now we are seeing housing slow down dramatically and we have not even started the fall out of AirBnB, syndicators, etc. When you have a monthly expense for those rentals, long and short term, it can create massive damage to your personal balance sheet. Throw in if you are one of the white collared workers who are on the chopping block this can get ugly quick. Too much speculation.