The latest dramatic downturn in real estate values has been top of mind for many investors.  

A while back, I was talking with one of our investors who asked a fearful question about whether they should pull out of their real estate investments since it looked like overall real estate values might continue to decline. And it wasn't long after that that another investor asked me whether they should reserve all their dry powder to wait until there's a huge wave of distressed sellers where he could get a "great deal" at big discounts under market value. 

For those of us who have experienced prior downturns followed by some great buying opportunities, it is easy to let fear or caution be overshadowed by the hope of a tidal wave of great investment opportunities emerging out of those troubled waters. But after doing this for a few decades, I now believe that neither fear of the falling knife or salivating over the possibility of some great buying opportunity is the best path to sustainable success. 

In this last year, there were relatively short periods of time when real estate investors were able to scoop up some great buys in some asset classes like hospitality and office. However, for multifamily investors, the tidal wave of great buys never really materialized. Although there were ripples of some unique multifamily buying opportunities, the demand continued to outpace supply, rent outstripped inflation, and overall valuation pricing continued outperforming prior periods.

Many conditions have to be met for a flood of troubled assets to create that wave of great investment opportunities. Some would say that it’ll be two or three more years until we see the full impact of loans that were originated 3-5 years ago with interest rate caps expiring or mortgage loan maturity dates approaching, and owners finding it difficult to recapitalize on terms that work with the original acquisition price and underwriting. 

Some postulate the next few years are the period where recaps just won’t work and investors and lenders will take a loss. Yet we also don’t know what the economic conditions will look like in a few years. Maybe interest rates and cap rates will move back in line toward original underwriting and divert that potential future storm.

The truth is that if the supply and demand ecosystem is strong, as it is in multifamily, forecasts of huge waves seen on the horizon rarely culminate in the tidal wave on the shore.

I am seriously questioning whether that tidal wave of distressed properties and extraordinary buying opportunities in multifamily real estate will ever exist, this year or for years to come. It didn’t come as a result of the pandemic-induced recession and it may not come as a result of Fed-induced disinflation or recession. Sure, there will always be those unique opportunities that present fantastic buys, and if anyone can find those needle-in-a-haystack opportunities to buy right and create great value, it’s us. The reality is that the strength of the overall dynamics of the multifamily asset class continues to bode well for sound investments now and for years to come.

Most markets are experiencing decelerating rent growth, but that is simply adjusting the rent growth forecasts closer to historical averages and closer to the low single-digit growth we forecasted in our underwriting. Whether we experience a recession or a soft landing it seems likely that rent growth in favorable markets will continue at some reasonable single-digit level.

The fact is, there is still a national housing shortage and rising mortgage rates are pushing even more would-be homeowners into the rental market, creating a larger pool of renter demand. With the relatively strong employment market, wages are expected to continue to increase and support reasonable rent increases. Overall, the big tidal trends in multifamily are likely to overcome the current headwinds that might otherwise cause that tidal wave of distress.

What that means for us, is that we continue to do what we have done for 30 years. In all market cycles, we look for opportunities to buy right, create value and manage well for long-term sustainable success. At some points in the market cycle, it is easier than others to “buy right”. In seasons like this, we may need to underwrite over 100 deals to find one that meets our criteria, but the basics remain the same. Find a property that we can buy at a price that with current interest rates, conservative underwriting standards, and a compelling business plan, enables us to confidently project a return that is in line with our investment expectations. 

Once we find that opportunity to buy right, rather than waiting for market conditions to produce value, we create value by driving operational performance or capital improvements. Ultimately, it is day-in-day-out diligent management of every aspect of the investment that produces the consistency of investment success that we’ve enjoyed for many years. So rather than waiting for that flood of great opportunity in the ocean of uncertainty, we stick with the fundamentals to build our own wave pool, creating value one property at a time.