All Forum Posts by: Serge S.

@Account Closed I agree and am not hating on those that deployed over that last number of years. I have been buying multifamily over last 5 years and very happy that I did. I saw the obvious in late 2021 and sold nearly my entire position and was out by March 2022. My issue is with the Q2-Q4 2022 + deals that were sold to investors under shady pretenses such as low cap rate exits, perpetual rent growth, unrealistic capex budgets etc. I feel that experienced sponsors know better and what is happening right now was obvious to foresee in advance. Regarding multiple exit strategies, I would not classify hope and prey or next bigger sucker as viable strategies. How much longer will there be 1031 buyers willing to put 50% down or syndicators in need of the promote willing to overlook whats not there. How much longer will lenders buy off on these pro formas? Nobody has a multifamily business model that anticipates 3 years of rates over 6% and no rent growth. I underwrite this way and can tell you that pricing needs to reset at least 30-40% to make the real numbers work.

@David Bilandzija low inventory as a driver of value is mostly in SFR. Mom and pop homeowner are stuck in 3% 30 yr fixed and have no incentive or ability to move, hence the low inventory. In commercial RE, loans are adjustable generally over 1/3/5 years and if rates do not settle and/OR rents don't increase significantly then the math simply does not work. Most of these loans are non recourse and purchased with investor money so when this happens investors will not throw more cash into the deal. This is already happening in many parts of the country, Blackstone has a large NY multifamily portfolio that is in special servicing as does Brookfield. This will play out over the course of the next two years in most multifamily markets.

I have not posted on BP forums in a while but had to share this article Everyone's a Genius In A Good Market

These guys were and are one of the top syndicators in the Phoenix market. They (like many others) were underwriting purchases as late as Q1 2022 with 4 cap exits and 5%+ rent growth. Remember those days of paper $300-$500 rent bumps. Depending the source of your data, rents have deflated 5-6% in Phoenix and being on the ground and in multifamily here, I can tell you that it is very real. 

I get calls all the time from limited partners that got sucked into these deals and my only advice is don't get fooled twice. Stack your cash, it will come in handy soon.

@Daniel Green you will be just fine. That Tucson market is very supply constrained and there is in place cash flow before the renovations. 

@Mike Dymski has it right. I am going back and looking at some of the deals done in the last 12 months and the assumptions used. Pretty much all inputs are wrong in a very material way but just the exit cap rate alone will sink every one of these deals. On a deal underwritten at a 4 cap exit getting revalued to a 6 cap cuts no less than HALF the value of the asset. Now combine that with the 3 year bridge time bomb AND concessions AND bad debt. People will regret ignoring cash flow or discounting it as insignificant. @Brian Burke

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.

@Shannon Robnett yes indeed Boise no different than PHX, Tuc, LV. We roll out the red carpet to our CA friends:) 

I see that I did not cite the article which was a copy and paste from a commercial newsletter.

If you are wondering what drives mf rent, noi, cap rate, prices and just about every input, here it is. population growth is the fuel that feeds the fire. for those that are invested in Arizona and phoenix, this is old news. if you want in, be ready for no less than 20 offers, multiple rounds of "highest and best", and a whole lot of dirty tricks and self-dealing. every investor, syndicator and high net worth individual is looking for the same exact asset. Yet there are still ways to find deals in this market ...
Article originally posted on Phoenix Business Journal on February 15, 2021

Phoenix’s population surge continues.

The Valley recorded net inflow of 82,601 residents in 2020, the most of any metro area last year. Net inflow — a metro area’s gain in new residents after accounting for departures — is yet another measure articulating the recent population growth in central Arizona.

Dallas (76,037), Orlando (60,977), Tampa (47,000) and Austin (46,958) rounded out the top five on the Redfin list of metro areas with the most net inflow in 2020.

Among cities with the most net inflow last year, Phoenix had the second-highest median home price at $340,000, behind Austin’s $370,000, according to Redfin, and it ranked No. 1 in the nation for the year-over-year increase in the median price at 16%.

The rankings back up what Valley residents are seeing on the ground: there is no ceiling in sight for the housing market, and housing prices have been rising steadily for months. That is creating a crunch because of limited supply. Phoenix was among metros across the country with the largest decline in active listings, with a 54.6% year over year decline in January, according to a recent study by Realtor.com.

Interesting article ... I recall when the pandemic hit, the overwhelming consensus was that all of the distress and "deals" would happen in Q4 2020 and into Q1 2021. Well guess what folks, if you took this advice then you are still searching for deals. Distress never came to MF and prices are pretty much in the nosebleeds. Every commercial RE investor is betting on residential as the safest asset class. Just as always, if your reading it in the news, its usually too late to make a move. The best bets are made when you see the trends on the ground with your own eyes and make big direct bets i.e you buy a 100 unit complex rather than investing in a REIT:) Then by the time you read it in the news you are well established and already benefiting by the time the followers jump in.

Today, everything is about multifamily’s record-breaking bounceback in Q4 2020, which has continued 2021.

Smaller cities in the Sun Belt and even the Northeast took the lion’s share of the multifamily pie as major metro areas like NYC struggle back to normalcy.

Meanwhile, international investors can't stop buying U.S. warehouses.

Setting New Records: Multifamily Sees Historic Demand in 2020

We’ve seen plenty of big multifamily bets over the past few weeks. But now we have some hard data confirming what we’ve expected for some time—multifamily plays are officially hotter than ever. In fact, Q4 2020 saw historic multifamily investment sales volumes.

By the numbers: In the fourth quarter of 2020, multifamily investment sales volumes reached $56.7 billion—a 115.2% increase from 2019. Nearly half of that volume came from December alone, which saw nearly $25 billion in sales (or nearly the same volume as all of 2019).

Big picture: With numbers like those, you’d think that multifamily sales last year must have blown previous years out of the water. Of course, that’s not what happened. On a year-over-year basis, 2020 ended with $138.7 billion in investment sales volumes for multifamily properties—down 27.6% from 2019.

Why it matters: All that Q4 volume probably came from real estate investors who usually buy hotels, offices, and retail properties. All that money had to go somewhere, and many of them turned to multifamily for the first time ever. Notably, multifamily allocations hit 34.2% in 2020, 8.1% higher than the long-time average of 26.1%.

Trend of The Day: Multifamily Investment Surges In Smaller Cities

Thanks to millions of renters relocating to the Sunbelt, multifamily investors are clamoring for more supply in smaller, historically underpriced metros. A staggering 75.8% of multifamily investment in 2020 happened outside major metros like NYC—another record.

By the numbers: According to Newmark, multifamily allocations were gradually increasing in smaller cities before 2020, increasing by nearly 14% over the past 5 years. Major cities with a denser urban concentration, like NYC, are still seeing some love from investors, and have done better than urban sprawls like Seattle and San Francisco.

Great relocation: Texas and Florida aren’t the only hot spots for remote workers. Arizona, Nevada, Idaho, and Utah have seen significant numbers of incoming migrants. Even Maine and New Hampshire were popular destinations last year. Phoenix, Philadelphia, and Kansas City enjoyed rent growth of 2.8–5.5%.

Why it matters: It pays to pay attention. Some of these states (Idaho, for instance) were on no one’s radar before the pandemic hit. While property plays in Texas and other Sun Belt states are still heating up, they may become crowded markets before we know it.

@Jai Reddy and @Carlos Gonzalez my story is out there, check out the 2-3 BP Podcasts and various other podcasts out there.

In short I started in 2008 with Arizona SFRs, grew that business through the great recession and then slowly sold out of SFR and into small multifamily in secondary markets. I was a 28 yo with a $30k loan from family used to buy a $50k SFR as my first deal. Every SFR I purchased cleared out my account to close to 0. I drove the city buying used appliances and materials on Craigslist. I used cheap, unqualified and unlicensed contractors. I deferred all major personal spending and drove an old Chevy Truck so that every dime earned at my day job could go to buying undervalued RE all around me. I chose risky projects with very high cash on cash returns and held until they were stable and attractive for the next buyer. I sold out of those slowly and into larger multifamily, also in secondary, unknown and risky/cyclical markets. Once those were stabilized and the multifamily market fully recovered, I was able to sell out of the secondary markets (at primary market prices) and move back into primary growth markets with large multifamily as the vehicle of choice. Primary lessons learned along the way:

1. Do something that others are not doing. Pick a niche that you can dominate and specialize in a way that builds barriers to entry. 

2. Only pick the very best projects. Real Estate is not for fun or vanity unless you happen to be a Russian Oligarch. 

3. Never stop learning. Never get set in your ways. Be ready to cross asset classes and borders. Once educated enough to be dangerous, listen to everyone but trust yourself. Second guessers don't last long in RE. 

4. Understand market/asset class cycles like your life depends on it. Specifically, understand the business cycle in your specific state/city. News, politics, tax policy all matter. Be a real estate historian, history repeats itself as do cycles. 

5. Get in front of the cycle and the long term trends. Learn how relevant statistics today drive future results tomorrow. 

6. Just do it! Some of my worst RE projects led to some of the best relationships and lessons learned. Knowledge is worth so much more than money, never forget it. 

7. Never stop networking. Value and respect everyone's opinion. Nobody is your "competition", this is a land of plenty and there is enough gravy for everyone. Be happy for other's success, show gratitude and respect and don't forget that nobody owes you anything. Most people are just one connection away from success. Keep looking for that connection and if you don't find it then be that connection for someone else. 

8. Bigger is better. This is simple fact you hear again and again. The point is not to skip the small stuff along the way, its to keep your eyes on the prize. The smaller, self managed RE should be seen as a conduit to the larger more passive assets. I learned the hard way that a portfolio of small assets is not sustainable or profitable in the long run. 

9. Be a long term thinker. What will your prospective asset look like next year? What will your tenant class be in 3 years? Who will want to buy your complex in 5 years and why?  

@Ola Dantis I have done two conversions in the same state, different cities and all I can say is YMMV. I have not had to do any structural conversion and probably would not buy a property that needed that, life is too short. I am using a sophisticated GC for the road work and city planning. Its a challenge underwriting these assets and projects, I will admit that I vastly missed on both revenue and expenses in my DD underwriting. The pure multifamily asset on the other hand is very simple to underwrite and execute in comparison.