As I've mentioned before, I work in the real estate investing business focused on multifamily. Recently, I was talking with one of my colleagues about the state of that universe and where the opportunities exist. He is someone who's been buying and managing these kinds of properties for about 40 years, so he's seen it all -- and when he decides to opine on the lay of the land, he's definitely the guy in my office that it's worth paying attention to.
Generally, the big institutional markets (i.e., population and job centers that are the most constrained) are back to major league pricing. Most assets sell for a 4-cap, and I actually heard about a deal in the Seattle area that is expected to price with a 3-handle. In other words, you can't make these investments and expect much pop -- they probably have to be longer term holds and there are no real bargains to be had.
The middle ground, as in the slightly less expensive assets in less constrained markets that are still on the radar of smaller institutional players, definitely hit a speed bump following the US debt downgrade. I witnessed several deals that I was involved with get pulled or fall apart. Still, with all the liquidity that's out there, these deals also have a lot of money chasing them and are getting bid up (to the extent they are closing).
Which leads us to the third group, which is where the conversation turned, because it is probably the only area that provides interesting return levels. The view is that the entrepreneurial buyer is going to have to move further out of the risk curve. We're talking C-assets in unconstrained markets, where price per pound is very attractive relative to repro, and the strategy will be to manage efficiently and intensely with no additional capital put in -- a few years down the road, you can probably re-finance and pull out all your original equity. These are the assets where the institutional buyers won't venture, which means they have less money chasing them, and cap rates are at meaningfully higher levels. Again, there is something more binary to these trades, because you're talking about sketchier properties in scarier places. But, the adventurous and experienced shouldn't care and will be able to take advantage.
Anyway, in the big picture and thinking about it in terms of the conversation that this blog regularly tries to have, that the category described above is where investors probably have to go, is seemingly another symptom of monetary policy run amok. We are forced into speculation and greater risk -- and if things get worse, every category above will probably see damage.
