Institutional Capital Exercises Caution

Good morning,

Institutional capital exercises caution as private buyers remain relatively active, multifamily syndicators face debt maturities yet investors are bullish on the asset class, and Yardi’s National Multifamily Report summarized. Let's delve into today’s topics.

📈 Market Update

👎️ Transaction Volume Decline Points to Institutional Investors Exercising Caution

Caution Ahead: Amid economic turbulence and market uncertainty, institutional investors are playing it safe. They've taken a step back from the real estate frenzy, as rising interest rates and an unpredictable market have made them wary. Deal volume of properties over $25M has fallen 79% from Q4 2021, whereas property transactions of $3M or less have fallen 53%.

Hedging Bets: Institutional capital is trying to reduce risk via smaller check size and diversification. Deal size has decreased and some secondary markets have seen increased deal flow. This is a result of institutional capital hedging against local economic downturns from oversupply and to capitalize on the smaller, higher growth markets.

Private Buyers Step Up: In contrast to institutional investors, private buyers have been relatively more active, viewing real estate as a safe haven against inflation and a better bet than the equity and fixed-income markets. Private capital prioritizes tax-advantages and has longer hold periods, rather than immediately benchmarking for ROI.

🎯 Multifamily Syndicators Face Debt Maturities, Yet Investors Remain Bullish on the Sector

Syndicators in Trouble: We’ve all heard about the groups buying deals at prices that only penciled with cheap debt and high leverage. Tides Equities, GVA Investments, Nitya Capital, ZMR Capital, and Rise48 Equity have a total of $3.6B of loans maturing in the next 30 months. Of that $3.6B, 96.3% is floating rate debt, with a weighted average debt service coverage ratio of 1.04 (for reference, a 1.25x DSCR is typically the standard minimum requirement). 80% of these loans mature within the next 18 months, by the end of 2024. This leaves a couple of options for these groups: 1. refinance at lower leverage via capital call which drags returns, 2. sell at probably a loss and hope to return some equity, or 3. hand the keys to the lender and lose all equity.

Investors Remain Bullish: Despite these challenges, investors believe multifamily price declines will be the lowest of any CRE sector. Fundamentals are expected to remain stable, particularly across the Sun Belt. The top multifamily markets are Dallas/Ft. Worth, Austin, Miami/South Florida, Nashville, and Raleigh-Durham.

🏡 Yardi’s National Multifamily Market Report

Speaking of solid multifamily fundamentals, Yardi released their June National Multifamily Market report.

Rents Rise, But Slowly: Asking rents rose 1.8% YoY through June, marking four straight months of rent growth and bringing the national asking rent to $1,726.

Occupancy Holds Up: National occupancy has remained at 95.0% due to gains in the job market and the high cost of debt slowing home sales.

📊 Chart of The Day

✍️ Further Reading

• Home Prices Fell Year-Over-Year in May (WSJ)

• SoftBank’s $3B Fortress Sale Under Scrutiny (RealDeal)

• If Recession Lurks, Here Are the Signs (CoStar)

• The $1 Trillion “Wall of Worry” For Commercial Real Estate Spirals Through 2027 (Morningstar)

• Resort Near San Diego Trades in Region’s Biggest Hotel Sale of 2023 (CoStar)