The Commercial Real Estate Alpha Site

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1) Short-term uncertainty is very real. And it’s almost ALL about interest rates (and by extension: debt costs, values and return targets), not fundamentals.

2) There’s still optimism and conviction on the mid- and long-term multifamily outlook. Most investors believe supply has peaked, rents bottomed, demand robust, and greener pastures ahead.

3) Sobering reality: It feels like everyone wants to be a net buyer, but at prices that don’t exist and for asset types that aren’t on the market at any scale.

4) The rebound in treasuries has had a freezing effect on the market. The challenge is that sellers are generally holding firm on pricing, and would rather hold than sell at the discounts buyers need for deals to pencil out with higher debt costs.

5) Investors and brokers are resigned to seeing an extended lull in deal flow until: a) interest rates fall or at least stabilize, b) sellers get more motivated to return/recycle some capital, c) lenders lose patience and push some exits or d) rents rebound and NOI improves.

6) Lots of groups raised capital targeting newer assets well below replacement cost, and as much as that strategy looks good on paper, it’s proven very difficult to execute at scale. There’s little of it on the market, and the discounts aren’t that big unless you’re buying in less-favored, high-risk markets.

7) More broadly: There remains a gap between what institutional capital is targeting and what distress exists (older assets in less desirable submarkets, often with economic occupancy and cap ex challenges).

8) Value-add strategies are back, but it’s typically a very narrowly defined bucket. Location and vintage matter a lot. They’re targeting high-quality, upper-income suburbs with good school districts and demand drivers.

9) And for same reasons: New construction is getting interesting again. I highly doubt we’ll see a big flurry of new starts, but more institutions are kicking the tires – looking for diamonds in the rough that actually pencil out.

10) Banks are back, and construction loan terms are improving (aside from high rates, of course). As the current wave of lease-ups complete and refinance into permanent debt, banks have little pipeline – so they’re hunting and competing.

11) Regulatory risk is MUCH bigger variable than ever. Some groups are even trying to figure out how to model future regulatory risk that could torpedo pro formas and exit strategies as occurred in places like St. Paul, MN, and Montgomery County, MD.