Well folks, it appears that we’re not going to get out of this economic mess without more damage. As I look back over the past four years it’s frustrating to think of all the missteps and ill-advised actions that have led us to this point. Amazing how we continue to repeat the past – over and over again. We continue to create financial headaches because of our well-intentioned yet poor decisions. Late 90s – loosen banking standards to allow greater access to investment. GFC – loosen lending standards to allow greater access to borrowing. 2020 – shut down the economy to save us from COVID. When I was a kid I learned something in physics class – “for every action there is an equal and opposite reaction” – from a 23-year-old guy back in 1666 named Isaac Newton. Maybe he should have been in politics. Nah.
With that said, happy Tuesday! There’s a bright side to all of this. When there’s damage there’s opportunity. As I’ve mentioned before, the cost of development and the scarcity of capital is putting downward pressure on future new inventory. Right now that looks scary – but look ahead a couple of years. We’ll come out of this, as we always do once the “interventions” settle down, and those who are crazy enough to build now will be in a great position.
On the value add side, it’s a needle in a haystack to find good opportunities. That being said, what would you say to a brand new deal selling at a 6.5% cap with immediate cash flow? We’ve just about wrapped up negotiations for just such a deal. 360-units. Class A. 5-7% COC year 1. Completely off-market and direct to the builder. The team here at REM continues to remind me that this is supposed to be our “off” year. And I’m completely serious when I say we’re not looking for these deals. They come to us. But I’m also an opportunistic business guy and I’m not going to turn down a great opportunity. More on that opportunity next week – but first, let me scare you a little bit…
Economic Outlook for 2H2023
As I’m sure you saw, the Fed raised rates by another 25bps last week. This was expected by just about everyone. What I found concerning was the lack of softening in the rhetoric. Yes, there was a little softening – but not much. And I get that perception can be reality – so we’re working with expectations as well as reality. But I’m concerned that the Fed is going too far too fast. Some would say this whole show would have collapsed a long time ago if not for the Fed – and maybe they’re right. But with inflation continuing to slow, layoffs on the rise, and overall economic sentiments turning sour, we better watch out.
The balance sheet mess that the increase in rates has created for banks is long from over. Here we are again – with a banking crisis threatening to take down the entire economy. $14 Trillion (or whatever amount of money it was that got dumped into the economy) had to go somewhere – and much of it ended up in Treasuries when they were at their peak (and interest rates were at their lowest). Now rates have skyrocketed and Treasury values have tanked – taking with it trillions of net worth from bank (and others’) balance sheets.
If that contagion continues to spread, we’re going to see another credit crisis. We’ve already seen a general pullback with capital. If banks stop lending, you’ll see GDP growth drop fast. We’re already at credit-tightening standards similar to 2009, 2000, and 1991. The Fed tries to separate employment and inflation from its banking system policy and you could see that in the March FOMC meeting notes which made little mention of the current financial instability. The problem is that at the end of these rate hike cycles, the two often collide with spectacular volatility. And given that the most recent rate hike cycle was the most aggressive in modern history, I’m worried we’ll see some extreme volatility.
Consumer confidence has been dropping ever since the beginning of 2020 and we’re now at a 10-year low. Again, perception is reality. On the bright side, consumer debt as a percentage of disposable income is about where it was 20 years ago. It topped out much higher in 2008 – so we don’t have that to contend with this time around – a huge bonus. The job market continues to appear strong (we’ve seen it flatten but not really diminish much) even in the face of heightened layoffs (which are somewhat concentrated in technology).
Home prices have tripled since 2000 (seems pretty slow compared to a 2X in 5 years for multifamily) but if you look at the data closer, values went up 50% in just the past 5 years. People are sitting on a lot of equity – and with mortgage rates back to early 2000s levels, no one is budging. Last but not least – the rally in stocks has been extremely lopsided with huge gains in the largest 6 tech stocks. This is always a bad sign – when people are just moving money into protective positions. So, all that being said, we’re preparing to navigate the second half of 2023 under these circumstances. The key, as always, is liquidity.
St Pete Portfolio – Insurance Cost 35% Lower Than Underwriting
And now for some really good news! Our St Pete Portfolio development received initial quotes back for insurance. Our underwriting for St Pete budgeted $2000/unit for insurance (which we felt was a conservative yet reasonable estimate). Our numbers are coming back at $1300/unit and while things can obviously change quickly in the insurance world, we feel this is a very good sign that we’re going to be significantly under budget for this line item! A continued string of positive news for a great opportunity in a legacy market – that’s how I like to start.
Where In The World Is Robert?
Just in case you missed it last week – I’ve got a few trips planned in June and would love to connect if you’re in these areas. I’ll also be doing site visits throughout the Southeast so feel free to join me walking units.
June 1-2, Atlanta, GA
IMN Southeast Middle Market Conference
- This is my favorite conference for operators, brokers, lenders, and anyone involved in the middle market (small to mid-sized companies) multifamily space.
June 7-9, Atlanta, GA
NAA Apartmentalize
- The National Apartment Association has a once/year event called Apartmentalize where you get access to probably the largest group of providers and operators in the multifamily space. Everything you could want related to property management – all in one place!
June 12-14, Charlotte, NC
MFINCON (Multifamily Investor Nation Conference)
- This is probably the largest meeting in the country of passive and active investors all focused on syndication. I’ll be speaking at MFINCON along with many of my good friends and colleagues in the business.
That’s all for now! Thanks for reading and have a great week!