When will the multifamily deals hit the market?

Question

I'm in the market for a 15-30 unit multifamily.  I'm looking in Washington State and am particularly interested in Spokane.  Currently all the deals I'm seeing are at 2019 prices or even a premium to 2019 prices.  Aren't there some multifamily owners that are hurting due to unpaid rent?  What about being out of covenant on DSCR?  Will banks force them to bring cash to the table or foreclose?

I keep telling myself that it was several years into the Great Recession that real estate prices hit bottom so I don't want to overpay if we are on a downward trajectory.  But I haven't seen any signs of distressed owners or distressed sales.  I'm only seeing deals from brokers which I'm sure have been heavily shopped but I'm wondering if this will just take time to play out.  Of course, I'll pull the trigger if I see a great cashflow opportunity but so far I haven't seen anything close.

Todd Dexheimer · Answer

The last recession was caused by housing, so the major drop happened right away. On a typical recession prices take 6-12 months. So far, the impact is yet to be seen. Right now rents are being collected among all asset classes besides retail, so there is no pressure for operators to sell.

It's hard to say if we will see distressed assets. Unemployment rate is starting to stabilize, interest rates are low and the long term outlook for MF is very strong. Plus the government tossed out a lot of "free money" and the is bound to increase asset prices.

Erik Hatch · Answer

I think it depends on your strategy. I don't invest for appreciation, but rather invest for cash flow. I focus on cash flow, cost segregation, and then look at value add (forced appreciation).

Aaron Farr · Answer

The Spokane market does indeed receive a lot of attention which has definitely caused cap rate compression on multi-family.  Once a property hits the market it is very unlikely you will get a "deal".  In my opinion, it is imperative to have a local agent who is well connected and regularly finds off-market properties through relationships.  Although the seller may not sell at a steep discount an investor may be able to purchase at a fair price without the competition found on the open market.

Erik Hatch · Answer

@Sara Simpson I think you are maybe missing a key point. I didn't detail my value add strategy and how small increases in NOI affect value and considering cap rates. Increasing NOI has a significant affect on increasing the value of your property and then opens the door to refinancing to pull your down payment out. This is also known as forcing the appreciation as opposed to organic appreciation. It works best with commercial loans and more than 4 units.

Sara Simpson · Answer

@Shannon Robnett. I don't think there will be screaming deals like on 2011-13 but I was hoping for a modest discount off of 2019 prices.  I agree that the window to find these will be small as unemployment decreases but I'm convinced there will be some deals at slightly better prices than last year.  I only need to find one.

@Bjorn Ahlblad. My recent experience is exactly that.  Now is the time when there is maximum uncertainty and the best likelihood to find deals.  I have been watching prices in a Seattle neighborhood where I have a rental property that I intend to sell next year.  If you look at houses that closed in March, April and May, there were some incredible deals.  Not in the list price but what they actually sold for.  That was when the stock market was depressed and there was a lot of fear.  I think something like that may be playing out in multifamily.  There is a lot of fear that the eviction moratorium may go on indefinitely.  I don't see the government allowing people to be thrown out in the middle of winter and expenses go up for landlords as heating bills go up in the winter.  Now is the time to hunt down the deals.

Shannon Robnett · Answer

@Sara Simpson I believe there are a lot of really good points mentioned here and I would like to add one more for you to consider, and I can really only speak for Boise, as it is my market.  Everyone is looking for property owners to be in trouble because of COVID caused unemployment.  But as we saw unemployment covered most of those at risk for late payments all to well with the $600 weekly.  But look at the unemployment rate in the area you are looking to buy into now that this stimulus is gone.  Boise snapped right back to 5% unemployment in September, so we will likely not see any real deals happen here as we also created more housing shortage during that same time period by starting 300 less houses than 2019 YTD.  Also what has the effect of COVID had on new immigrants to your target area?  My guess is Spokane like Boise has seen a huge uptick in new residents fleeing bigger cities.

@Brandon Pelfrey you are correct in 2008/2009 our crash was much different but we also had inventory going into that recession.  Additionally we saw a ton of people move out of houses they never should have been able to afford into what they could pay for, but they were not homeless.  There is a lot that happens in a persons life before they actually lose their shelter, meaning that people will fight harder to stay put than the media gives them credit for.  Even those that are struggling to pay are aware that as soon as they stop paying the land lord will have 2 people waiting to take the unit as soon as it is vacated which is a bigger motivating factor in a supply constricted market like Boise and Spokane.  This economic situation that is currently disrupting our economy is certainly disrupting but the jobs are returning almost as soon as the government restrictions are lifted.  That leads me to believe that we are seeing an artificial market cycle interruption.

This article (https://bankingjournal.aba.com...)about record credit card pay downs in the first 2 quarters of 2020 would also paint a picture of consumers having additional resources for the days ahead than they have been given credit for.  Maybe rents not being paid is being over hyped by media?

Last thought on this is that while banks are requiring larger interest reserves to be brought to the deal interest rates have dropped significantly enough in the last 9 months to offer a decent exit point to most 2019 buyers regardless of the situation and I believe there will be LOTS buyers way before the bottom given the 2019 buyer is inclined to take a small loss vs total foreclosure.

Sara Simpson · Answer

@Steve Morris. Yeah, Spokane seems to be pretty popular.  I'm also looking in the Tri-Cities but haven't seen much inventory there in my price point.  The ones I'm looking at in Spokane have gone under contract a few times and haven't yet sold.  One has dropped the price a couple of times (although still insane).  Maybe that's a sign of a slow down.

@Mack Benson. Yeah, it's the multifamily operators that have overpaid or bought with low equity when lending was loose that I am thinking about.  You're right about price being a lagging indicator.  Waiting takes patience and watching the cash I have set aside earn 0.05% interest in the meantime isn't fun.

@Erik Hatch I'm not sure that my strategy is much different than yours.  I expect to not put in any money after my initial downpayment and start with $100/month/per door in cashflow.  I also look for value-add opportunities to raise rents over time.  That said, in my experience, I have made the most money through appreciation so I would only invest in an area with a diversified economy that has good growth prospects as opposed to a stagnant economy that might net me $200/month/door.  Would you classify me as investing for cashflow or for appreciation?

Shannon Robnett · Answer

This is similar to the way I see things also @Todd Dexheimer

Bjorn Ahlblad · Answer

@Sara Simpson unfortunately the deals may already be here! LL with commercial properties, malls etc are hurting, inner city high rise apartment buildings are or will be causing pain to their LL.

Low rises, row housing, complexes without common areas and lacking elevators will be in demand. Suburbs will do well.

The ridiculous reporting in the media '47% of residents have not made a housing payment for September'. Has built up anticipation of all sorts; but it is just click-bait. MF is way over priced for anything I have underwritten recently; but I am only looking within driving distance. All the best!

Brandon Pelfrey · Answer

Hi @Sara Simpson I think you bring up some good points/questions that lots of us have been thinking of as well. The points above that really resonated with me were a) price is a lagging by-product of the whole supply/demand system, and b) with stimulus money and how long it can take for us actually see change in the market the effects of COVID on the housing market are likely still coming down the pipe.

Another thought that I've had over the past few months is that people seem to be expecting more or less the same type of thing to happen to the housing market that happened in 2008/2009. While we may see a good recession from everything that's happened since March, I think we shouldn't expect a repeat of our last housing crash. Not saying that it will be necessarily better or worse than that, but it will be different because it's a completely different issue with completely different causes. The crash of 2008 was brought on because of the flaws within the housing market, whereas what we're facing right now is being brought on largely because no one left their house for months on end and it has disrupted our entire economy.

I'm with you though - hoping this creates opportunity and that I can see it when it comes. Thanks for the post!

When will the multifamily deals hit the market?

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