Marbach Park, San Antonio, Texas
“Be fearful when others are greedy, and greedy when others are fearful.” -Warren Buffett
Happy Tuesday! Hope you had a great weekend. I know for me the past couple weekends have been super important down time given our pace of things at REM. Definitely looking forward to spending Father’s Day with my dad and then July 4 with my sister, brother-in-law, and their family. Work hard, play hard! Today I’m headed back to the Big Apple – where it all started some 23 years ago. Haven’t been back in a few years (last time was pre-Covid when I took the kids to Ellis Island and Statue of Liberty). Today I’m meeting an old friend for lunch, getting some face-to-face time with a new lender, and catching up with a good friend in the business. Then it’s back home to Tampa before jumping on a plane tomorrow night headed to Houston, TX for the Multifamily Boardroom mastermind. There are some serious hitters at this event but it’s also about giving back and adding value. Really looking forward to catching up with many friends in multifamily and swapping notes as we all navigate these interesting and challenging times ahead.
Speaking of challenging times, it’s tough to pick just a couple items to write about these days. I look at crypto, stocks, inflation, jobs, wars, politics, rate hikes, government spending, gas prices – you name it – and feel like it’s easy to get swept up in the emotion and fear. I’ve been talking a lot about “defense” recently. Our second, new development deal that we’re working on for later this year is now three phases instead of one. Why? Well, just in case things get ugly, and we have to put the show on pause, I want to be prepared. I joked with my wife yesterday that if the economy crashed, we could always live in the barn and be fine. I suppose it’s easier to joke about things that you don’t really think are going to happen. Realistically, though, we’re looking at a Fed policy that is aimed squarely at cutting inflation and potentially causing a recession. Housing, particularly single-family housing, is ground zero for this program. Locally here in the Sarasota/Bradenton area we’re seeing record numbers of new SFH listings as well as a record number of price cuts. Nationally, new home sales are down 13% year-to-date (even if that’s 13% off of pretty high levels). Construction starts are down as well.
On the flip side we are millions of units behind in terms of the supply of new homes. Coming out of the Great Recession, developers and builders were more cautious and the end result has been a 50% shortage in our housing stock. Furthermore, from a lending/credit standpoint, 21% of outstanding mortgages were adjustable back in 2008. Today 2% of mortgages are adjustable. So we have a scenario where fewer people are at risk from rate hikes AND those who are in their homes are pretty much locked in – they can’t move because their debt cost would skyrocket if they sold. This all points towards a fairly stable housing market going forward.
For those looking to buy and those coming into the housing market there’s a potential “problem”. Home prices are so incredibly high AND interest rates are now also high. Ouch. Additionally, the spread between cost of renting versus owning has dramatically tipped in favor of renting. I’m not a rocket scientist, but I can do the math here – I think multifamily is going to plow through even a recession with resiliency. And as a conservative sponsor/operator who normally runs pretty conservatively, I see an opportunity! As I mentioned a couple weeks ago, I think we’re seeing a couple of things leaning in our favor right now. First, fix and flip operators are on pause – the expectation is that cap rates will at least remain flat if not expand over the next year or two. Second, cost of debt vs cap rates mean that unless you’re an integrated hands-on operator, buying in today’s market usually doesn’t make sense – the cash-on-cash returns are just too low and the risk is too high.
Which leads me to our deal update! Cash flowing deals with lots of upside that are actually pricing in our conservative model!
ATLANTA: Avenue33 is just about fully subscribed! Closing is on target for the end of July.
SAN ANTONIO: We’ll be rolling out our new deal in San Antonio over the next couple weeks. Looking forward to sharing more info soon!
ATLANTA2: We were just awarded a second deal in Atlanta that is also about 15 minutes from the airport in a prime path-of-progress location with plenty of upside potential. We’re completing due diligence on it next Monday and look forward to sharing more info shortly thereafter.
Atlanta and San Antonio are two of the best markets I can think of being invested in right now. Both hitting records for job growth and population growth. That’s where we want to be.
Last but not least, if you’ve got questions about multifamily investing or you would like to get to know us a little better, we would love to have you on our Multifamily Investing Q&A on June 15th at 5p PST / 8p EST. Here’s a link to the replay of that conversation.
On next week’s CEO blog, I’m going to dig into what it means to be a well-capitalized operator (and why that’s especially important now) and what it means to be “defensive” in times of uncertainty so that you can reduce your stress and make critically better decisions during times of uncertainty.