Invest in Multifamily at your (or your investors) peril

Invest in Multifamily at your (or your investors) Peril ‍

Successful investments are generally predicated on investing at a basis where a margin of safety exists to insulate you for when things go wrong. Post 2015, many real estate investments were transacted without any forethought as it relates to a margin of safety due to the growth that was occurring in the market. Essentially you could throw a dart at a map of the United States and buy an asset with minimal due diligence, high leverage, stumble through the process and still walk out the other side with positive returns.  

As I have read others opinions on the market I am not coming to the same conclusions and don’t understand how others are coming to their conclusions that are making them comfortable enough to invest. The only commonality I have found is that the rationale for investing is usually predicated on a need for transactions to continue in order for businesses to exist.

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Here are the main factors on why we are avoiding multifamily investments:

1. Multifamily Loan defaults are up 185 percent from January to June
2. Lenders are not foreclosing, yet. They are modifying loans. Loan modifications are up 195%. I don’t believe these loan modifications will result in sponsors being able to successful sell or refinance.  
3. The distress rate for Multifamily loans overall is climbing and has been since the beginning of the year with 35% of all MF loans maturing in the next 18 months.
4. In many markets there is an oversupply in 2024
5. Credit cards usage is at all time highs and inflation has negatively impacted renters. We are not confident we understand the financial health of renters when they are being approved.
6. The cost of labor and other operating expenses are not predictable
   

We are at the beginning of this cycle and I recognize that the data I am accounting for is not based on overall metrics. However, I don’t think the trend can be ignored, these are early indicators and a 25 point rate cut is not going to help anyone. When rates cuts start happening it is going to put pressure on lenders to start recognizing their losses. Lenders will opt to package their loans and sell them to the institutional level players at a discount rather than foreclosing. I don’t think anyone is going to miss out on “once in a generation buying opportunities” waiting for more data to ensure there is a margin of safety.

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The market is not with you and the days of failing forward are behind us.

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