Ground up Development Coming Soon to Lake Vista, San Antonio, TX
Hey, it’s Tuesday and you survived tax day 2022! Or maybe you were like me and you had to kick the can down the road to October? Either way it’s always an annoying time of the year, in my opinion, when we have to play the tax code game. But, such is life and we really can’t complain living in the most prosperous nation on the planet. It’s another year of deploying capital in multifamily assets to help offset that tax bill and grow your bottom line smarter!
A SPONSOR’S RESPONSIBILITY
I’m not trying to beat a dead horse, and I do promise to get back to some non-economic articles here very soon – but with everything that’s going on in the economy, it’s somewhat pre-occupying because I take my responsibility as a fiduciary very seriously. Dumb luck doesn’t cut it in my opinion. We as sponsors have a duty to know our craft as well as understand and think through the consequences of the current economic scenario. Which brings me to a sobering side of all the recent positive news.
A SOFT LANDING: CONTAINING INFLATION
Over the past 80 years, the Fed has rarely achieved a soft landing. A soft landing means containing inflation without causing a recession. Some inflation is good (we’ve kind of agreed 2% is a good thing – more is bad, less is bad) because it helps to drive growth in the economy (which means things go up in value like real estate, stock market, etc).
A HARD LANDING: RECESSION
A recession, in broad terms, means a contraction in GDP that usually also means a contraction in spending and employment. It’s not pretty. If you look at the past few decades, the Fed was successful at fighting inflation, but it took a toll on the economy and caused the jobless rate to skyrocket. That’s what we would call a hard landing. Chairman Greenspan achieved a soft landing in the mid-90s – a rare feat in the economic space. With inflation already in full gear it’s more challenging for the Fed at this point.
SUPPLY AND DEMAND
Nonetheless, I do think there are some key elements to our current situation that make it a little unique. We’ve got a very strong job market with low workforce participation and very strong asset appreciation. In addition, we’re seeing wage growth fueling some of the inflation. The reason for inflation is both demand and supply driven – i.e too little supply and/or too much demand. If we solve the supply issue by improving the supply chain and ending covid shutdowns we’re probably ok. On the flip side, if we solve the demand issue by raising rates, reducing the money supply, and cutting jobs we’re probably ok too. Obviously, we would rather solve the problem from the supply side versus the demand side. If you want some great economic YouTube material do a search for supply side vs demand side economics.
BOTTOM LINE FOR MULTIFAMILY
Bottom line, if the Fed doesn’t pull this off and we do have a demand side correction – leading to job losses – our nice multifamily business will take a hit. The end of the world, no. Something that would cause a little heartburn, yes. Risk is always a factor even though we haven’t felt much for over a decade. That’s why you want working capital, vertical integration, experience, etc to withstand this type of a scenario.
OUR VERY FIRST REM DEVELOPMENT DEAL!
We are very excited to be under contract on a unique opportunity for our very first ground up development of 264-units of A-class product in one of the best markets in the country – San Antonio, TX.
We’ve been working hard over the past year to find a good development opportunity to complement our existing stabilized assets. We have been targeting markets where we feel there is a lower barrier to entry that still has tremendous growth upside. San Antonio, Nashville, and Tampa all fit those profiles. This project is the first of hopefully many that will allow us to add A-class product to the portfolio at a competitive cost basis that we believe makes sense given our risk-based approach to investing. Equity partners will have a chance to either cash out at stabilization or stay in the deal for long term cash flow.
DEVELOPMENT EXPERIENCE
While this is our first ground up deal as REM, rest assured we have plenty of experience in this area. I grew up in the construction business in addition to spending some of my corporate career working on some very large development deals around the country. Development is fun but it also brings some inherent risks with it. You should never invest in anything without research and especially with development. We’ll talk about some of those risks on our webinar so you can better understand the risk/reward equation and how it fits into our risk-based investing model.
UPCOMING DEALS
As of this morning, this deal is already fully subscribed (we released it via social media) but we have others in the pipeline so even if you missed out on this one, don’t worry, you’ll have another chance soon!
Also, as a side note, we’re about to go under contract on a really nice B-class deal in Atlanta, GA that I know you’ll want to set aside some investment dollars for. I look forward to sharing that with you in the coming weeks.