Based on the recent statements from the Federal Reserve in August, a light may be appearing at the end of the tunnel after an extended period of rate tightening.
For now (and the past two years) interest rates have soared to their highest level since 2000. This came after a multi-year low-interest cycle following the Great Recession of 2007 – 2008 that was further extended by the global Covid pandemic.
We understand if the current high-rate environment gives you pause, but in this article, we’ll show you how this is an especially advantageous time to invest in multifamily real estate and how Colony Hills Capital plans to capitalize on it.
Multifamily Oversupply Creates Investment Opportunities
Low interest rates led to an aggressive increase in the construction of multifamily properties.
This is the case for luxury and workforce housing and is mainly concentrated in secondary markets through the Southeast, Southwest, Mid-Atlantic, and Northeast.
Higher interest rates, oversupply, and lower than pro forma rents have left fee-based merchant builders holding construction loans while attempting to sell these properties for little more than the balance of the loan. If successful, this frees them up to move on to their next project. Additionally (as you’d expect) rents in these over-supplied markets have softened.
Though the rents will eventually increase, the opportunity to buy new construction below replacement costs in a soft market is compelling.
The general return profile of deals like this would be in the lower double-digit to mid-teens. It’s worth noting that rents have risen above inflation rates in markets where oversupply is not an issue, particularly in the Midwest.
Distressed Multifamily Loans Create Buying Opportunities
There’s a bigger opportunity ahead for enterprising investors: sponsors/owners who bought with aggressive assumptions and need to offload properties.
These owners may have used high-leverage Bridge Loan financing to acquire properties and as a result, open themselves up to risk in a high-rate environment. There are $57B+ in potentially troubled loans according to MSCI. By our calculations, these properties are now valued at or near current debt levels, resulting in a wipeout of their equity (on paper).
Unless the owners can execute a cash-in refinance, the lenders will end up with significant REO (bank-owned) portfolios. As a result, we expect a healthy supply of multifamily properties to hit the market as their sponsors/owners capitulate.
These properties will sell for attractive going-in cap rates well below their replacement cost. This painful part of the cycle has also reduced the number of sponsors in the marketplace. This has made deal sourcing less competitive and terms better, especially in class B and C workforce housing in secondary and tertiary markets. We expect Core+ returns in the mid-teens and older vintage value-add returns in the high-teens to low-20s.
This opens up a clear opportunity for firms (like Colony Hills Capital) seeking value-add multifamily real estate opportunities. It also opens up an advantageous environment for investors to join in.
Since 2008 We’ve Acquired, Managed, and Exited Value-Add Multifamily Real Estate
Since 2008, we’ve identified, executed, and added value to over 12,000 apartments worth over a combined $1B.
Whether it’s the 2008 Recession, Covid, or the current high-rate environment, our experienced team has navigated difficult markets before and we’re confident in our ability to continue to find and execute great opportunities for our investors.
Our seasoned acquisition team (led by David Kaufman) are experts at identifying value-add opportunities and developing bespoke business plans for each property. Our in-house design team (led by Krista Hanson) are experts at redesigning and upgrading these properties to make them attractive living spaces.
See What Multifamily Real Estate Can Do For Your Portfolio And Download Our Track Record
Ready to start your multifamily investing journey?
Check out our track record complete with a history of returns and case studies for a few of the properties we acquired and renovated over the years.
We have upgraded and refined thousands of old, tired apartments, creating modern and bright spaces. We’ve turned drab and dated buildings into vibrant apartments that thousands across the eastern half of the United States call home. This dedication to finding the best opportunities available and turning these properties around has led to decades of strong performance and returns for our investors.
Fill out the form below to download the track record and see for yourself.