Remember the days when you could throw a dart and find a profitable apartment complex?
Is It a Good Time to Buy Multifamily?
Do you ever wish for the “good old days?”
That typically means something different to each person.
One might long for the days of childhood, with no responsibility and knowing someone else would always take care of you. Others wish for a simpler time without the pressures of juggling work, family, and social relationships.
I miss the days when you could throw a dart and find a profitable apartment complex!
It’s been tough the past four years.
First, there was Covid, with restrictions on eviction and supply chain issues that affected multifamily buyers and developers. Then came the boom market pricing during 2020/2021, which made it difficult to buy at a good basis, despite appearing easy. This period was followed by a historic rise in interest rates that caught even seasoned real estate professionals with their pants down.
This resulted in low transaction volume in 2023 due to a mismatch between buyers and sellers. The numbers simply did not support the prices sellers were asking, so they did not sell. Multifamily transactions were down 61% in 2023.
In fact, Carbon underwrote over 1500 potential acquisitions in 2023 and none of them transacted. Buyers simply would not accept our offers, which were based on the real numbers and current cost of capital.
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Things are changing.
Transaction volume was down in the first quarter of 2024, but that has started to turn around. Global investment firm KKR believes there is huge opportunity due to a lack of forward-looking supply, which they expect will lead to strong increased yields. They recently consummated a $2.1 billion transaction for 5200 apartment units at an aggressively low 4% cap rate.
Their thesis is that they can acquire assets at a discount due to the current dislocations. Returns could be in the low single digits in the first year, but they believe that rising rents and appreciation will boost yields as time goes on.
Additionally, sellers are beginning to capitulate to the realities of a slower transaction environment, making pricing more attractive to value investors.
You don’t have to be a billion-dollar private equity firm to find and purchase good deals.
At Carbon, we underwrite an enormous number of deals. Many are thrown in the trash heap. Those that have promise are put through the second phase of diligence. If they make sense, a Letter of Intent is produced that reflects a price that works for us and our investors.
Most of those offers are rejected, but some reach best and final. Occasionally, we win a deal that is based on OUR numbers. The old adage is, “You make your money on the buy.” Our philosophy is to keep making offers that make sense and not to waiver from our investment thesis of cash flow and hedged risk.
We believe that we are entering an opportunistic buying period for existing multifamily assets.
The affordability gap between renting and buying remains high and demand has rebounded to robust levels.
It’s also no secret that supply has been increasing dramatically over the past four quarters and is projected to do so through the end of the year. This has put downward pressure on rents and occupancy.
However, supply is expected to drop just as dramatically as we enter 2025. This should put upward pressure on rents and occupancy, increasing NOI and allowing well-positioned assets to thrive going forward.
Source: Carbon Real Estate Investments
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