🚚 How to combat rising material costs

👋 Hello, Best Ever Community!

In today’s newsletter, material prices are up, we master the art of vetting sponsors and deals, and one investor secures a 450% LIRR on an Oregon retail property. 

Let’s real estate!

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CRE HEADLINES

🛍 Retail Is Back, Baby: Record-low retail vacancies are prompting landlords to end pandemic rent discounts, signaling a competitive comeback in the retail sector.

🔥 Phoenix Rises: Q4 apartment demand surged in key markets. Phoenix excelled, absorbing 4,300 units — 3,500 more than pre-pandemic annual averages.

☀️ Sun Belt Bargains: Oversupply and financing challenges are creating distress in the Sun Belt, attracting investors seeking future opportunities in multifamily, office, and retail.

🥸 Rental Fraud Surges: Major landlords report more than a 70% increase in fraudulent rental applications in the past 12 months, signaling a persistent issue.

⚾️ Rubenstein-Led Group Buys MLB Team: Carlyle Group Inc. co-founder David Rubenstein headlines the group that has reportedly agreed to buy the Baltimore Orioles for $1.725 billion.

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HOW TO COMBAT RISING MATERIAL COSTS

Operational costs have been one of the biggest pain points for operators and investors since the pandemic. JLL expects a 2%–6% increase in material costs in 2024, with higher potential spikes in electrical and switchgear expenses due to availability issues. Some HVAC manufacturers have also announced price hikes as high as 10%.

Andy McQuade, Principal at The ARM Companies, recently leveraged his 20-plus years of supply-side experience to explore these challenges on the Best Ever Show. 

🧩 Contributing Factors: McQuade says that given the headwinds that the HVAC and electrical industries have recently faced, he isn’t shocked to see 10%–15% increases. While supply constraints and labor shortages are likely contributing to price hikes, it’s also important to note that large manufacturers typically renegotiate their contracts this time of year based on their profit margins, operations, and market projections — and they often adjust prices accordingly.

🗣 (Over)Communication Is Key: We're only a couple of months away from the Northeast and most of the country worrying about air conditioning and ordering seasonal materials. Now’s the time to anticipate those needs. Providing detailed item lists, specifications, quantities, and other valuable information to suppliers in advance will help them buy in bulk and pre-plan their ordering structure, making their job easier and likely saving you time and money in the process.

💌 Playing Favorites: When negotiating with vendors, investors must understand their buying power and the value they bring to the relationship. Vendors prioritize clients who consistently contribute significant revenue, and if you're a one-time or low-spending client, your bargaining position may be limited. Focus on understanding your vendor's perspective and be honest with yourself about the value you bring to the relationship because, ultimately, clients that vendors perceive as the most valuable will receive preferential treatment, pricing, and service.

📉 Avoid the ‘Race to the Bottom’: Speaking of vendor relationships … it might be tempting to seek out lower-cost providers amid price hikes. But maintaining your (good) vendor relationships will likely pay off more in the long run, especially if you’re a high-value client. The current environment favors suppliers, so keep your vendors honest. But blindly chasing lower costs and forsaking relationships for short-term savings — what McQuade calls a "race to the bottom” — can lead to extended delays, loss of skilled installers, and lost money in the long run.

What It All Means

While price hikes are unavoidable, there are ways to make them a little less painful. Initiating advanced communication with your suppliers, prioritizing long-term supplier relationships, and understanding how you can provide consistent value will be key to navigating rising operational costs in 2024.

👉 Listen to the full episode here.

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THIS YEAR’S BEST PARTNERSHIPS & BIGGEST DEALS

The 2024 Best Ever Conference agenda is jam-packed with the insights and networking needed to succeed in CRE this year and beyond… 

If you’re a passive investor, you’ll learn how to:

• Protect your investment in a GP default

• Leverage tax changes for your investment portfolio

• Make the leap from funds to deals 

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• Capitalize on today’s insecurity

• Find off-market deals

• Raise institutional capital 

And that’s just the beginning. The most valuable part of attending the Best Ever Conference is being in a room with 1,000+ experienced, humble, and collaborative investors, operators, and syndicators.

BEC is where the best partnerships and biggest deals of the year will be made. And you don’t want to miss it. 

Register with code BESTEVER2024 to secure your seat at 20% off. But hurry, these discounted tickets are limited.

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FROM EVAN POLASKI

Vetting the sponsor is a crucial and well-known step when it comes to passively investing in syndications. However, it's equally vital to recognize the intrinsic value of the deal itself. While a skilled sponsor may pursue solid deals, it's important to conduct a comprehensive deal analysis before taking on a new investment. This involves considering aspects that can impact the investment independently of the sponsor's decisions. There are several important risks to consider when vetting a deal in this manner.

👤 Submarket Demographic: Generally, income provides residents with choices, such as selecting a residence based on school district quality, proximity to employment or entertainment areas, or the desired level of safety in the neighborhood. Moreover, higher incomes lead to greater price elasticity, particularly when it comes to rent bumps or renovation premiums.

🧰 Capital Expenditure (CapEx): Given the recent market slowdown, many sponsors are holding onto assets for a more extended period than they initially intended. Longer holds increase the likelihood of encountering unbudgeted CapEx. Even if immediate repairs aren't needed, buyers are increasingly seeking higher CapEx allowances from sellers as they plan for longer-term holds. While the option to sell before CapEx becomes a concern still exists, it’s becoming less likely.

💸 Financing: Similar to the CapEx risks listed above, a comprehensive loan term analysis is crucial for assessing the deal. Will the net operating income (NOI) during amortization still be adequate to maintain distributions, and at what level?

💬 “While you should spend time vetting a sponsor, I would argue that the actual property — the purchase price, submarket strength, current condition, and financing — will make a bigger impact on your final investment than the sponsor of the investment vehicle.” —Evan Polaski

👉 View the complete article here.

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RETAIL PROPERTY SECURES 450% LIRR

Bob Thomas achieved an approximate 450% LIRR on this retail property in 11 months. Here's how he did it.👇

🏢 Property Details: 12,000 sq. ft. vacant single-tenant retail building purchased in Portland, OR, in November 2022. 

💸 Finances: Purchase price was $1,075,000 ($95 PSF).

💵 Debt Structure: 75% LTV bank debt.

💰 Capital Raised: Personal capital used for $350,000 total requirement. 50/50 Tenant in Common with one other partner. Another $200,000 for TI/LC was funded out of pocket.

💼 Business Plan: Leased up building in 10 months. Leased to an established local tenant who was adding a location at $18/SF/year NNN on a 10-year lease with 3.5% annual escalations.

🍾 Results: Bob sold his 50% TIC interest in October 2023 at a total property value of $2,780,000 (~7.3% cap). He 1031'd the proceeds into a 50-unit value-add multifamily property. Cap gain (ST) was $750,000, an approximate 450% LIRR over the 11-month hold period.

If you have a deal you'd like us to feature, share it with us!

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FREE DOCUMENT DOWNLOAD

💰 4 Non-Obvious Ways to Raise Private Money for Your Deals

I was talking with one of my clients the other day about some ways that we have successfully brought on investors to invest in our multifamily deals.

While most of the strategies were obvious and straightforward,  we also uncovered strategies that we hadn’t really thought of before or weren’t even aware that we’d been using.

Here are four not-so-obvious ways to increase your money-raising efficiency.

👉 Download now!

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—Joe Fairless