Q2 2023: Michael Becker's "State of the Market"
Q2'23 State of the Market
Written by Michael Becker
Q2 2023 Newsletter
Michael Becker Here...
With summer upon us, in Texas, that means 100+ degree weather... for this reason, my family and I always plan a couple of vacations to beat the heat this time of year. With that being said, I'm actually currently preparing to embark on one of these trips, so I'll keep this article brief.
To start, as a general overview of the Texas Multifamily market, we're continuing to see operations hold up reasonably well. We're in the middle of the best part of the leasing season. Historically, demand is at a seasonal high and we're experiencing significant rental rate growth across the board. Read my interview with Greg Willett, First Vice President and National Director of Research Services at Institutional Property Advisors, to learn more about his perspective on the current state of the Texas and US markets from an operational standpoint.
On the investment sales side, we're still staying active at SPI. As I mentioned in my Q1 article, we sold several deals over the course of 2022 going into Q1 2023. Now, we're making a concentrated but conservative effort to be buyers instead of sellers, as pricing in the Class A to A- space has come in 20-25% from its peak in Q1 2022. Generally speaking, a large portion of Class A properties are now trading below their current replacement cost, which is a great entry point, historically. The multifamily inventory for sale has been limited for the past 12 months; I would estimate that transaction volume is currently 25% of what it was back in 2022 (75% off). There are some early indications that transaction volume is beginning to pick up; however, it is still not back to normalized levels. I expect around 50% of "normal" sales volume going into the second half of 2023.
As I've discussed before, I do feel like the workforce housing space has more pain in store from a valuation standpoint, but it feels to me that we are nearing a floor for Class A to A- assets in quality markets. We at SPI feel that this is generally an attractive entry point to take advantage of pricing that is at least 20-25% down from its peak. We just recently purchased 2 assets via a 1031 Exchange and are just now getting into escrow on a new opportunity in Austin that we're very excited about. This particular deal is a very nicely renovated ~10-year-old deal about 10-15 minutes from Downtown. We're buying this asset for a considerable discount on what it would have traded for just 12-15 months prior from a seller that has been forced to sell due to redemption issues in their fund, as they need liquidity badly, as I predicted might occur this year at the end of 2022. However, there are many sales comps that are $50-$80K per door higher for similar or inferior assets.
We don't have a crystal ball at SPI, so it's certainly possible some additional softening in values might occur over the next few quarters before a true bottom, but it feels like we're close to the floor. And, I don't think it's going to matter too much in 5 years if we are a quarter or two early. For me, a good indicator that we're close to the floor is that, for the past several months, we've routinely been able to get Agency Financing (Fannie & Freddie) to size to 65% LTV or higher, even with a bit of a recent run-up in Treasury rates in the last 4-6 weeks. If we start seeing deals size to 70-75% LTV routinely with Agency Financing, I think that will be a very clear signal to buy. Looking back over my career, anytime that we had deals that sized to 70% or greater LTV, it was quickly followed by an increase in multifamily values.
Looking forward, as I've mentioned, we've recently observed the Treasury rates run up a bit followed by the FOMC's first pause in interest rate hikes of this tightening cycle at their June 2023 meeting. There's debate on whether we've seen the last hike of this cycle or if there will be one or two more hikes coming in the near future. However, to me, it feels like the bottom line is that we're at, or certainly near, the end of the tightening cycle. Before too long, we'll be talking about rate cuts, if not in 2023, it appears very likely that they'll come no later than 2024, which will be here before you know it. As we see interest rates come down, we should see properties continue sizing for higher Agency LTV's, which should in turn lead to higher values.
I'm not saying this will unfold in a straight line from here to there, but we at SPI feel this is close enough to the bottom for Class A & A-, and we're going to be looking to selectively pick our spots and, like always, buy deals that we feel reflect the best relative value at that moment in time. Once it's clear that the bottom is in, the space will start to get a lot more crowded and pricing will get bid up.
If you're an accredited investor and want to receive information related to future investment opportunities with SPI, like the upcoming Austin offering, be sure to apply to join our database.
Cheers,
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