One of the great things about sharing my thoughts in a public is that I have a record of how I was thinking about things at specific points in time. I can easily revisit old posts to see how wrong (often) or right (10 predictions for multifamily in 2020) I was.
Today, in January 2021, multifamily real estate is at a crossroads. Despite a pandemic causing massive unemployment and impacting property performance, low rates, excess capital, and a search for yield has compressed cap rates and increased demand for multifamily. In today’s economy, any asset that generates predictable income is incredibly valuable.
But those income streams are at risk. Shifting consumer preferences and expectations, along with new competition, is forcing landlords to adapt and embrace technology. Multifamily owners must focus on a niche audience, invest in branding and marketing, and embrace technology partners.
While it is critical to evolve, fundamentals are more important now than ever; buying good dirt, not over-levering, eliminating interest-rate risk, stabilizing at a good basis, developing a product with inherent competitive advantages (location, price point, product etc.), and maintaining significant reserves.
Things don’t stay good forever. That may be a hard concept to grasp if you started working in the multifamily business after 2010 (like I did), but it is true. With that in mind, here are some friendly reminders.
Lock in fixed-rate debt for as long as you can without worrying about prepayment fees. Rates are at historic lows and, although the consensus is that they’ll stay low for a while, nobody really knows. No one can predict interest rates, so lock them in now.
Buy good real estate. A property is only as good as its ability to generate consistent cash flows. Today’s economic and financial conditions will not last forever. Buy real estate in markets with barriers to entry, economic tailwinds, and pro-growth policies. A rising tide lifts all boats.
Basis matters. Stabilizing at a basis below replacement cost and below the comp set is a major competitive advantage. It provides the flexibility to lower rents or offer concessions as needed, without putting undue stress on the investment.
Don’t over-lever and hold reserves. Multifamily is a relatively safe investment due to strong/consistent demand, consistent cash flow, and availability of cheap debt. However, cheap and plentiful debt can be a double-edged sword and lead to over-levering and the easiest way to get hurt in multifamily is to over-lever while not holding sufficient rainy-day funds. Over-raise equity and hold more reserves than you think (ignore cash drag). You’ll never regret having too much cash on hand.
Know your competitive advantage. If your property appeals to everyone, it appeals to no one. Have a clear view of who your target renter is and what is important to them. Tailor your marketing strategy and programing to appeal to that renter.
None of these concepts are novel or new, but this is a reminder. It’s a reminder that things don’t stay good forever; fundamentals matter, don’t get greedy, and know your competitive moat.