Q1 2022: State of the Market with Co-Founder & Principal, Michael Becker
State of the Market: "2022 Predictions & Key Takeaways from the Annual National Multihousing Council Meeting"
Written by Michael Becker
Q1 2022 Newsletter
Michael Becker Here...
Every year the multifamily industry has a large gathering in mid-January where owners, brokers, lenders, equity providers, and other various vendors go to meet up and try to figure out what deals to work on in the current year. Its called the National Multihousing Council Annual Meeting or "NMHC" for short. This year NMHC was held in Orlando. It's typically attended by 10,000+ of your closest friends from all over the country. This year I would estimate there were about 7,000 people or so as I think the lingering effects of COVID limited attendance a touch. For this newsletter, I thought I would share a few of my takeaways from this event.
Tsunami of Liquidity
I am starting to feel a bit like a broken record saying the same thing for the past several years, but there is so much money out there. I have heard this described as there is a "Tsunami of Liquidity" chasing multifamily specifically in the Sunbelt. This seems to have accelerated as the calendar turned to 2022. So there is more and more money chasing the exact thing we at SPI Advisory have been doing for nearly a decade. For at least the near to intermediate-term I don't see demand letting up one bit.
Limited Inventory
One of the main goals I always have at the NMHC Conference is to come away with a deal to buy. After taking a bunch of meetings with the brokers who cover our 3 target markets DFW, Austin and San Antonio, it was shocking to see how little inventory was available for sale presently. That is more acute in the Class A space compared to the Workforce Housing space. That will change in the coming months but for Q1 there isn't a lot going to trade in DFW, Austin or San Antonio.
Why is that? In my opinion, it's a combo largely of 2 factors:
In 2021 with all the talk out of Washington about the Build Back Better "BBB" bill, its associated tax hikes, and potentially the elimination of the 1031 Exchange, that got a lot of owners debating when to sell their property to speed up that decision. In short, it brought forward the listing of deals that otherwise would be out now into 2021.
I know I was super busy in the 4th quarter and everyone I talked to in the business was as well.
Typically when a developer builds apartments they also have to operate them for 12-18 months to lease up and stabilize the buildings before they go to market and sell them. Historically, there have been few deals sold pre-stabilized as the developer would have to take a discount to price to not stabilize the building. Well, welcome to the post-Covid lockdown world of Multifamily. Nowadays, these developers can sell their building upon receiving their Certificate of Occupancy typically at 30-40% occupancy at fully stabilized pricing. The impact of this phenomenon was to take deals that would be out now and brought them forward into 2021 further limiting supply today.
Interestingly enough SPI has a deal on the market right now that we just called for offers on after marketing for nearly 5 weeks. It's a 2017 built Class A Wrap deal (has a parking structure not surfaced parked). I think for the first 3-4 weeks we were on the market we were the only Class A deal 5 years or newer on the market in DFW period. I am not aware of another Class A Wrap deal that is calling for offers in DFW within weeks of ours. That is an amazing statement considering DFW had nearly $25B of Multifamily sales in 2021 representing tens of thousands of units. This is the most active apartment market in the entire country. We hit 50 tours (normally I am excited if we top 20 tours), had 32 offers and well-exceeded our pricing expectations. It was unbelievable to see the depth and quality of the buyer pool.
Interest Rates
For the nearly a decade that I have been raising money to buy apartments, During that period I have had a ton of conversations with you our investors. For that entire time, our investors have been concerned about rising interest rates and what negative impact that will have on their multifamily investments. Also for that entire time rates have basically fallen, cap rates have compressed and our investors who invested have gotten fabulously wealthy along the way.
Here we are again, the Fed is banging their drum about raising interest rates, it appears there are several hikes in our future with 100% probability of that happening in the near term. As a result in almost every conversation I have with our investors, I talk about the impact of rising interest rates on their multifamily investment holdings.
So while I am the last person you should be taking advice on about what is going to happen to interest rates as I have been wrong for 20 years on this topic. What I can tell you is in the 100+ conversations I had out in Orlando, not a single one was about interest rates. So to the people who are buying, selling, and financing multifamily properties, rising interest rates isn't a major concern out of the gate in 2022 to their ability to get deals done. Maybe that should be a bearish sign that no one was talking about it. I guess time will tell on that one.
With the risk of being wrong and looking stupid, here is our house view on interest rates today. We think that we will see 150-200 basis points of increase over the next 12-24 months and then stuff will start to break in the economy, the yield curve will likely invert and we get back into rate cuts and more QE. Again I have been wrong on this topic for 20 years so take all of this with a grain of salt.
What does all of this mean for SPI Advisory in 2022?
We are still bullish on Texas Multifamily. We are still going to buy deals in 2022. We are committed to being a firm that can do good deals at any point in the cycle.
I have learned that to win in the business it's all relative. Our main objective at SPI Advisory is to buy well-located high-quality deals at a relative value to the rest of the market. So in 2013 when 1970's deals were trading at $40K a door and we found the deal at $30K a door, we bought it and I felt like we were winning. In 2021 when Class A deals were trading at $220K a door and we bought for $190K a door, I felt like we were winning. So that will remain our objective going forward and our track record proves that we are really great at acquisitions.
Please stay tuned and bear with us. We expect to have some new opportunities to invest in soon, however, it might be Q2 before they are available due to the market conditions I covered above.
Cheers,
