Multifamily Investing Madness Explained and a New 2025 Forecast

it seems like every single media asset that I look at has some sort of headline saying that you should stay away from commercial investing or that multifam is in trouble so when did all of this negative sentiment start and why are we seeing this softness today we're covering everything on the multif family asset class hey investors I'm Dave Meyer and in this episode we are bringing back a fan favorite and a Bigger Pockets OG member Brian Burke you've probably seen him on this podcast or some of our sister podcasts he was recently on on the market and we bring him on a lot because Brian is a seasoned investor in the multifam space and today we're going to Pepper him with questions about multifam and he's going to start by giving us a little bit of a history lesson to help us understand what some of the macroeconomic some of the housing demographic trends that led us to where we are in multif family and before we jump into this I just want to clarify that when we say multifam we are specifically talking about commercial real estate assets which are defined as five or more units and that may seem like a arbitrary number but it's actually not it comes from lending and the reason we're sticking with just one side of this and just talking about those large multif Family Assets is that the residential housing market and the commercial real estate market work pretty differently and you can see Dynamics exist in one and it can be the totally opposite in the other and last thing before we bring on Brian our bigger news episode today is brought to you by rent apppp the free and easy way to collect rent learn more at rent. apppp landlord all right let's bring on Brian all right Brian to start the show from preco times can you just give us a little bit of a history lesson help us understand how we got to where we are now with multif family in the somewhat concerning State it's in today well um how about irrational exuberance maybe that's how we got here so and I think that that really applies on a number of fronts so let's break that down residents prospective residents uh got some IR Ral exuberance of wanting to move into new apartments or move to New areas and uh we're competing for a limited amount of apartment stock uh which drove up rents tremendously uh kind of starting preco actually about 2018 2019 rent started to climb and then by 2020 after covid they just really went into hyperdrive at the same time investors got irrational exuberance because they all wanted a piece of the action everybody wanted to buy buy multif family you know buy apartment complexes that was the thing and uh and then and then while all this was going on uh developers were in the background going like look at this interesting multif family opportunity demand for uh Apartments is really high demand from buyers is really high call your Architects call your land Brokers and let's get going and unfortunately as the development business is it takes two three four years before those projects Co from concept to reality and now kind of here we are postco and you know post inflation and all these other things and you know rents are a lot higher than they were preco uh pricing for apartments went really really high and then when the developers projects all started coming online and inflation became a headline uh interest rates went up and all of this stuff collided at exactly the same time to find us where we are now all right that's a great summary but I do want to dig in here because the whole point of this conversation is to really understand some of the context and history that's led us to today so you can understand the Dynamics that are going on and what might happen in the near future so you started by saying that there is irrational exuberance among renters which is not where I thought you would start so can you tell us a little bit more about that uh you said even back to 2018 renters were starting to move and move particularly into multif family yeah and renovated Apartments you know there was a lot of demand for renovated Apartments there was a lot of demand for apartments in general and that was just because we have a housing shortage in general there's a housing shortage in a lot of markets and when people are moving around especially if you're moving to a new city um you know you're moving out of California because cost of living is so high or New York because cost of living is so high and you're moving to new area you most people don't just move to the new area and just straight out buy a home usually they'll go rent an apartment and when you have limited amount of Supply uh you know these these units will get bid up by tenants not like the tenants are standing at an auction going you know another hundred another 100 it doesn't work like that but those rents will go up as the occupancies start to get squeezed you know when when occupancies are 98 99% uh landlords are emboldened and they can increase rents and that all started long before Co came along Co just put it in Amplified hyperdrive okay got it so people were moving across the country and they wasn't an availability or desire to rent a single family home and I also think one of the interesting things about multif family especially when people are moving is that often they have multiple units on the market it's easier to see them sight on scene they're more you know preset layouts so people who are moving are often a bit more comfortable with multif family than you know getting sort of a unique oneoff small mty family or something like that at that point in 2018 2019 that sort of thing what was the supply level sounds like it was relatively low or stable in multif family if vacancies were going down and you know occupancy was so high is that right yeah it was relatively stable there weren't a lot of housing units under construction I think if you look at uh construction Trends over the last decade there's always been well actually you can go back two decades maybe even three there's been dialogue about how construction isn't keeping up with household formation increases in population and that sort of stuff and you know population of the US was increasing preco actually postco it came to a grinding halt uh but preco we had population growth and you know I know you're surprised that I started with irrational exuberance from tenants but all of this has to start somewhere investors aren't interested in buying apartments no one wants but when people want apartments and that's driving up incomes investors then want a piece of that and so that's what drives buyers and then the buyers and the uh tenant prospects is what drives the developers so it all has to start somewhere if the tenants didn't have IR rational exuberance early on none of those other things would ever have happened and let's take a quick break here from the history lesson I want to know what you were doing and thinking at this time the 2018 2019 time because you once on a previous episode of the show said something I always remember you said there's a time to buy there's a time to sell there's a time to sit on the beach so which of the three were you doing in 2018 and 2019 that was the time to buy and uh we were buying we were buying in 20 well all the way from 2011 uh all the way through 2020 we were buying uh 2018 19 we were buying a lot of units hundreds of units per year uh maybe even thousands in some of those years and we were renovating and you know improving revenue and doing all the things and what was funny is every time we did that I would always get a comment by someone where they would say something like how is it even possible to make money in this market you know prices already went up uh you know they're just going to go down and it's impossible to make any money and it's like all right all right watch this and then would we would get another one and then 6 months later you know we'd get another one I'd get the same comment well how is it possible uh and so you know that's when I think it's a good time to buy is when some people are still questioning whether or not it's a good time to buy is a lot of times a good time to buy well that makes sense and good for you I think that that was probably very wise in in retrospect so right after this maybe 18 and 19 is that when the investor irrational exuberance kicked in it really started kicking in in 2021 it was when it really went overboard so there was there was a lot of investor interest in 2019 in multif family because I think a lot of people were saying like all right for the last 5 years I've been saying that we missed it it's too late and I keep not buying anything and the prices keep going up so they finally started to give in and say like we're going to buy and so we started to get just a threat of this irrational exuberate in 2019 and that all got erased in early 2020 as soon as covid came out everybody was like pencils down uh we don't know what's going to happen the world's going to come to an end nobody can leave their house ever again you know all this stuff uh and transaction volume plummeted very very quickly in a matter of days trans transaction volume went uh down about 75 80% from where it was just months prior so it didn't take long though to realize that the worst of the fears weren't going to materialize and actually um rents started climbing dramatically and once that happened that's when the investor irrational exuberance really kicked into hypers speed and I just want to to help people understand why increasing rents might create that exuberance because if you're not familiar one of the common ways that people think about valuing commercial real estate is based on net operation ating income a lot of how as an investor you look at is like how much revenue can it produce and so when a asset like a large multif family property starts to see rent increase a lot of investors think I should buy now because the value of that assets going to be tied to in some ways to that rent increase and is that why people were buying despite some of the warnings Brian yeah I mean when you think when you really break this down into the simplest you know of terms forget about the real estate you're buying an income stream and an a growing income stream is always worth more than a stagnant income stream or a shrinking income Stream So if rents are increasing and this income stream is getting larger and you pay X for y of income uh it stands to reason that y + 1 will be worth you know x * 2 so that's the the whole theory behind it that real estate is just the hard asset that gets you there but really it's the income stream is really what you're buying very very well said I want to revisit what you said earlier about developers and as you said it could take 3 four years to get a multif family development when did we start to see an increase in development activity pulling permits starting construction it really started um kicking in about 2022 uh in fact I'm I'm looking right now at um a chart put out by real page that shows multif family quarterly apartment Supply and the supply started really kicking in middle of 22 there was a little bit of bump in mid2 but it really started to kick in in 22 now that means that they would have started all of that process in 2017 to 2018 maybe 2019 so about the time when I said that buyer irrational exuberance was just kind of beginning developers saw that right away and like I said before they call up your architect call up your land broker they get these projects underway and then by the time they start releasing out units it's now 3 to four years later which coincides exactly with the increases and deliveries uh that we saw in middle of 22 yeah and I I just pulled just to help us out here I just pulled up the number of multif family building permits so basically when they start construction and you know through the early 2000s it was 400 450,000 it totally plummeted during the financial recession and leading up to co we were back to that level 450 470,000 when we got to 2021 it went up nearly 50% to 600,000 and in 2022 it went up to nearly 700,000 so it seems like even p P the point where you were feeling irrational exuberance people were still starting projects which I think we'll get to in a couple minutes but may lead us to why we're still seeing sort of this increasing amount of Supply but before we go there I want to get back to this 2021 2022 era and return to what I guess we'll call the Brian Burke index were you buying selling or sitting on the beach during that time in 21 and 22 I was selling uh I could clearly see the irrational exuberance on behalf of buyers and when someone wants something really really badly and you have that something that they want you should not deny them the opportunity to have it how generous of you yes of course so uh I was I was aggressively selling in 21 and 22 sold about 3qu quers of our portfolio during that 18-month period of time well good for you it sounds like you timed the Market very well so with that history lesson in mind uh can you maybe just bring us up the last year to 2023 2024 where it seems like things spilled over from EXA irrational exuberance to sobering reality or I don't know what you would call it yeah that's a really good term I like that a lot I I say either it's that or it's a you know a traffic accident that spread glass all over the intersection God because because everyone showed up at the same time and nobody stopped at the red light oh wow uh and they all hit each other right in the middle of the intersection and so so who who got in the crash interest rates got in the crash uh Insurance prices got in the crash general costs of doing business such as payroll office supplies building materials everything else got in the crash uh rent's gotten the crash because the developers are in the car too and they started releasing all these units and now there's so many apartments to choose from uh that vacancy started to increase so there was this kind of Perfect Storm where apartment owners were getting hit from all directions this is a four-way intersection and there was a car coming from every single Direction and they all collided in the middle because you're getting hit from your debt service expenses and income all at the same time that is a very good and gra some of graphic description of what's going on but I think it does paint a very good picture of how challenging things are right now and so H how does this play out if you were someone let's just say who bought in 2021 or 2022 how would this you know Confluence of negative events impact valuations rent everything well it a lot of it depends on how your capital is structured if you have a loan maturity coming uh Within in the next year or two or you already have faced a loone maturity and you're on some sort of a Kick the Can down the road extension uh this situation could play out much differently than if you have a longterm time Horizon uh because if you if you have the ability to wait as always has been the case with real estate Time Heals all wounds and eventually uh these things will normalize things will come back rent growth will come back uh I I kind of see the the path of progress to look something like this uh the uh High number of apartment deliveries meaning new construction is going to decline uh because these developers can't continue to get financing for these projects at today's interest rates material costs are higher uh you know a lot of the reason some of these projects still went off the ground was because they were past the point of no return they kind of had to finish them uh that's that's going to come to an end and that and that once that Supply starts to come down that's going to help uh the other thing that I think will happen is uh with less to choose from residents are going to fill the apartments that remain and that's going to solve to a degree the occupancy problem uh perhaps insurance rates will normalize some perhaps This Is The New Normal it's hard to say uh that depends a little bit on natural disasters and um and you know insurance companies and that sort of stuff uh and I think at some point uh inflation will finally moderate not because the Fed was brilliant and used the best tool in their toolbox to to Tamp it down but just because eventually that's going to happen and that will force interest rates to uh normalize now what normalize means is anybody's guess it does it mean zero interest rate policy again probably not is today's higher rates The New Normal maybe maybe not quite as high it's you know a little tough to say but I would assume that the way this kind of plays out is over the next 3 to 5 years you're going to see demand improve Supply reduce interest rates normalize costs normalize and then the apartment Market will begin to accept the current reality uh get back on its feet uh go to the body shop and get the car fixed and get back on the road okay super helpful context there thank you I'm curious because you said so much depends on the debt structure and the capital stack do you have any sense of what percentage of multif Family Assets are in some sort of distress well this is a little bit all over the board if you look at um agency statistics like Freddy Mack they have a delinquency rate right now double what the delinquency rate was preco however double Is 4/10 of 1% uh versus where it used to be at 2/10 of 1% so it's very very low so but agency financing is kind of like the you only the best borrowers and the best properties had agency financing uh they lower loan to value ratios so it stands to reason that those loans wouldn't be in an extreme amount of distress uh couple that up with data from uh debt funds I.E brid lenders who made short-term loans uh for the purpose of repositioning properties uh those are the ones that come due in 3 to 5 years which that's now because if people were buying in 2021 here we are it's three years later notes due someone's knock at the door uh those uh delinquency rates are I don't have data on it because it's a whole bunch of different lenders so they don't publish like oh guess what here's our delinquency rate but you can tell just by looking at things like you know Arbor uh is a big bridge lender and their stock is in the toilet and there's all kinds of stuff going on and there's major short interest in the stock and um you know you look at some of the other Clos and debt uh debt fund stuff out there and there's a lot of talk about distress there's a lot of talk about um loan extensions and you know maturity extensions even maturity extensions that the bars wouldn't really otherwise qualify for cuz the lenders are kind of hoping they can kick the can down the road a little bit and maybe the recovery will happen before somebody knocks on their door and tells them they've got to get this loan repaid uh so I think the percentage is higher than what the data is showing now having said that that's really limited mostly to the subset of properties that were purchased in call it you know 2021 to 2022 uh you know that 2-year period I think is the worst uh you know call it vintage and vintage not being year of construction but year of acquisition stuff that was bought before then is probably largely okay stuff bought very recently like in the last six months to a year jury is still out uh but I would suspect it will be better off than the 2021 and 22 stuff so it's the people who bought the properties you were unloading it was and in fact a lot of the properties that we sold have been offered back to us some of them for less than the loan amount for the new borrower so yes wow and so I mean no one knows as you said it's impossible to know exactly when rates may come down if they come down at all when inflation gets nipped but it sounds like you're not seeing a recovery or or any sort of fundamental change in Market fundamentals in the imminent Future Let's just say the second half of 2024 for me this is the sit on the beach period so yes okay this this is the sit on the beach period no I don't I I no wonder you're so easy to book for this podcast right now oh yeah I'm available you need me tomorrow yeah sure what are you do what are you doing this afternoon well nothing excellent works for us it's easy to get to get on the podcast that's for sure because there's not a lot going on this isn't a really good time to buy it's not a good time to sell and for me it's not even really a good time to get ready to buy you know we're not even really gearing up uh to buy anything right now it's waiting watch and I I think we're going to be doing that for a while I don't I don't expect we'll buy anything in 2024 25 is still a little bit further out than my crystal ball is giving me Clarity on but I think early 25 is probably not going to be all that active uh maybe we get into later 25 there I think we might have some you know some possibilities but I I'm kind of like I don't need to be the first guy to buy I I don't need to say like I'm going to start the next Market cycle I want to see some evidence that the Market cycle has shifted Direction uh before I'm ready to jump on board that makes a lot of sense it's it makes sense to be pretty patient right now you know I'm curious about the long-term implications of this we don't know when Dynamics will shift as you just said but one of the interesting things I'm curious about is we hear these reports from all sorts of government agencies and think tanks that were X number of housing units short in the United States and that number is anywhere from I think I saw Freddy the other day said 1.5 million n AR says it's something like 7 million so there's a pretty wide range but we're going from this era where we're still delivering a lot of multif family Supply but from that chart I was just talking about earlier where we look at permits and new starts for multif family it's almost completely stopped so the pendulum has swung almost the entire other way for developers and I'm wondering if that bodess well maybe for long-term multif family like once the dust settles is there going to all of a sudden be a lack of Supply again I think there will be it may take a while for that to happen because there was so much Supply to absorb so I don't think they going to see like that v-shaped recovery it's going to be a little more of a U-shaped recovery or an L-shaped recovery because it's going to take some time to absorb that amount of units I think also the growth of the US population has been declining uh I think it was 2021 was the lowest amount of population growth since like the Great Depression I mean it was the first time in a hundred years it was below a million people and so you know that that also shifts right but you know there are things to think about like you know birth rates are declining and you know there's a there's a lot of factors play and I think um you know it's going to take time for for this to to shake out it's not going to be evident immediately but long term I'm very bullish on housing I think uh you know if you look at this you know the more you zoom out the better it looks right if you look at it like what's going to happen this week nothing good uh what's going to happen this year probably not much what's going to happen this decade yeah there's probably some real opportunities what's going to happen over the next 50 years if you own property right now you'll be the the king of the world in 50 years you know there's there's a lot of growth potential over that period of time and I don't I don't think it will disappoint anyone uh but you have to be able to have that kind of staying power that's a great insight and I totally agree I think it's it's this is a game where you just have to be patient and and look long term and not try and jump in at an at an unideal time that's not to say there's not some deals possible Right right now but it is a challenging Market that brings me to my last question uh you know you're a syndicator or you have in the past done syndications and I hear a lot of things these days about syndicators with capital calls you've come on on the market to talk about Capital calls which we greatly appreciate but can you offer perhaps some words of advice on how investors listening to this who are interested in passive investing May vet or think about participating in syndications in this current environment yeah and you know you could have a whole show on Capital calls and by the way didn't we just we think we did one we did one we'll link to that one in the show it was on our sister podcast on the market so if you guys want to learn more about Capital calls Brian came on the show with Kathy we did a great episode about that so check that out in the description below as well yeah we did do a whole show on Capital calls and and you're right there there are syndications that are running into trouble but you know this same thing happens every cycle and it's not unique to syndications uh even owning real estate directly syndications is just a method in which you own real estate so when people say oh there's all these failing syndications it's really failing real estate Investments and in most cases it's failing real estate investments in large part due to in inappropriate capital structure such as you know loan maturities at a inopportune moment is really what's causing the majority of the pain that you're seeing out there so I think you have to approach syndication investing in the future the same way you always approach it in the past but with the awareness that I've been trying to spread for years I started with four years ago writing the hands-off investor to try to spread the awareness of what to look for and and that is you need to look at how the capital is structured you need to really dig into what the investment plan is and make sure that you're buying at a good basis with enough staying power to be able to ride through a market and staying power means longer loan maturities plenty of cash reserves a really strong sponsor who knows what they're doing preferably one that's survived a market cycle in the past and if you have all of those things you can set yourself up really well and it's the same as if you were to go buy an apartment complex on your own and you're the only investor in it you're going to buy it yourself you would look for the same thing you would get a good loan with long-term uh maturity you would get uh you would have cash on hand in case the unexpected things happen all of those things uh you would look for the same thing in a syndication investment that is absolutely true the syndication is just the way of collecting money and what's failing is the real estate I do think though the focus has been somewhat on syndications because it does seem that a lot of less experienced syndicators may have been involved in this most recent cycle I.E the irrational exuberance I was I was talking about earlier fair and and I think that's true I think that they drove a lot of the irrational exuberant and they were fed by investors that had irrational exuberance and gave them the money to do so uh you know that's one of the things about you know syndications and multif family investing is that through syndication small investors can buy large properties uh without syndication only big investors can buy large properties and generally big investors are going to have a little bit more discipline and there's a lot of money at stake uh but as with anything if you remember the DOT stock bubble of 2000 when all the little so-called little investors got into the stock market is when uh stock values inflated and then came crashing down so the same thing happens in real estate you know when you make real estate accessible to people that don't really know what they're looking at or looking for uh these kinds of dislocations can happen where they feed groups that are taking their money uh to make bad Investments and they end up predicting ably uh in the situation we find some of these in uh now so hopefully the takeaway from all this will be for the smaller passive investors to use discipline when making these Investments and not just fund any business plan that they see uh crosses their email inbox well it's great advice Brian thank you so much for sharing this history lesson we've now coined the Brian Burke index and we're going to have to monitor this over time maybe we'll public it on the Bigger Pockets uh blog uh but we really appreciate you you sharing your insights and experience here thanks a lot good to see you again Dave [Music]

Channel: BiggerPockets

Views: 10,611

Keywords: multifamily investing, multifamily, multifamily real estate, multifamily real estate investing, multifamily real estate market, multi family real estate, apartment investing, apartment investment, apartment investor, multifamily crash, multifamily real estate crash, real estate crash, housing market, multifamily residential news, multifamily news, how to invest in apartments, multifamily syndication, real estate syndication, biggernews, biggerpockets, biggerpockets podcast

Id: 5nYsn7Cra58

Length: 31min 26sec (1886 seconds)

Published: Fri Jun 07 2024