💥 The great apartment supply boom

👋 Hello, Best Ever Community!

In today’s newsletter, apartment supply surges to a record high, passive investors ask the tough questions, and a mobile home park deal yields a 22.64% cash-on-cash return. 

Plus, if you haven’t already, make sure to sign up for the Best Ever Book Club led by Joe Fairless. January’s book is The Road to Character by David Brooks.

Onward!

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CRE HEADLINES

⚰️ Is Build-to-Rent Dead?: Wall Street fell in love with build-to-rent during the pandemic frenzy, but as higher debt costs put pressure on the market, the honeymoon may be over.

🥊 Class B vs. Everybody: Rent growth rose by 1.4% in 3-star (identified as Class B) in 2023, outperforming every other category, largely due to improved consumer confidence, lower inflation, and lack of a recession.

🏢 Office Vacancy Surges: A staggering 19.6% of office space in major U.S. cities wasn't leased as of Q4 2023, up from 18.8% a year earlier, as America's offices are emptier than at any point in at least four decades.

🛸 Occupancy Outliers: Apartment occupancy dropped 80 basis points year-over-year nationally, coming down from 2022 peaks and returning to its long-term normal range. San Francisco leads a shortlist of markets that saw something different.

❄️ Rents Still Cooling: The median U.S. asking rent fell 0.8% year-over-year in December to $1,964, marking the third straight month of rent decline following a 2.1% drop in November — the largest since 2020.

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THE GREAT APARTMENT SUPPLY BOOM

Apartment supply surged to a 36-year high in 2023 due to a flood of new completions from projects that started when occupancy rates and rent growth were around record highs. Nearly 440,000 apartment units were completed in 2023 and even more are scheduled to be delivered in 2024, according to RealPage.

☀️ The bright spot for investors is that apartment demand rebounded in 2023 as inflation cooled and consumer confidence rose. Especially strong was Q4 2023, in which net absorption totaled 58,200 units (meaning there were 58,200 more occupied apartments than in the previous quarter), the third-highest Q4 total in 25 years. This significant increase in occupied units signals strengthening fundamentals after a sluggish 2022.

🏃 Still, demand couldn’t keep up with supply. The national occupancy rate dropped 80 basis points year-over-year to 94.1% as apartment supply surged to its highest level since 1987. While still in the normal range historically, the 2023 occupancy level was much lower than the 2021–22 peaks.

📊 High supply has slowed rent growth, as renters had more options in 2023 than in recent years. Rent growth peaked at 15.7% in March 2022 before dropping to 0.3% in August, where it has held steady for five months. Rents fell in 2023 across 40% of U.S. metro areas, nearly all of which experienced significant new apartment supply entering the market.

So, What’s Next? 

🔮 Another 671,000 apartment units are set to be completed in 2024. After that, RealPage’s Jay Parsons expects supply to thin out dramatically. “Occupancy and rents should rebound (though not to 2021–22 inflationary highs) in 2025–26,” he writes. “But in all likelihood, 2024 will bring another year of more supply than demand — adding another challenge for apartment investors also confronting higher expenses and elevated debt costs.”

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FROM VYZER

Even experienced private equity investors should continue honing their due diligence checklists. Using a set of key questions allows you to dig deeper into new funds and avoid pitfalls obscured by private markets' lack of transparency. Asking the right questions also enables better confirmation that complicated fund structures align with your specific return needs, timeline preferences, and risk tolerance.

Here are some important questions all private equity investors should use to see through the marketing hype and gain the solid grasp required for wise commitment decisions:

📈 How consistent are your returns across prior funds and vintage years? As an experienced investor, you know verified IRRs across a GP's past funds indicate the reliability of future outcomes. Examine returns for steady results over multiple economic cycles, drilling into drivers.

🏆 Is the fund’s strategy sustainable and aligned with my investment goals? Performance is just half the equation — the other critical aspect is whether a GP's strategy seems sensible for the current environment and your personal portfolio aims.

🚩 How does the fund address risk management? Private equity investing involves substantial risk not only in individual portfolio companies but also at the fund structure and operations levels. It’s crucial to assess how portfolio company risks will be managed post-investment.

👤 Who are the key people behind the fund? It's said that you don't just invest in a fund but rather the GP running it. So gather in-depth background on the key decision makers — what are their qualifications, areas of expertise, track records, and alignment incentives?

👉 Discover the full list of questions every investor should ask here.

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MHP DEAL YIELDS 22.64% CASH-ON-CASH RETURN

Jason Postill, Tyler Lekas, and MHCI Group added $1.5 million in value to this mobile home park in just over a year and achieved a 22.64% cash-on-cash return for investors. Here's how they did it. 👇

🏢 Property Details: 122-unit mobile home park purchased in Arkansas in October 2022. Class C, 100% occupied. 

💸 Finances: Purchase price was $2,050,000 with $500,000 capital raised.

💰 Debt Structure: Bank financing with $500,000 seller-financed at 4% interest over seven years.

💼 Business Plan: Resolved 30% delinquency within a month, saving $75,000–$100,000. Community cleanup — spent only $3,500 of projected $15,000 thanks to resident participation. Repaired and repaved lift station. Raised rents from $150/month to $245/month.

🍾 Results: 22.64% cash-on-cash return within 17 months. Property is currently valued at $3.66 million.

Jason's team plans to refinance in three years and hold this property for the long term.

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

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FREE DOCUMENT DOWNLOAD

🎙 How to Nail Your Podcast Interview

Your CRE business will benefit in many ways when you’re interviewed on other real estate and business podcasts. You’ll tap into a new network of listeners, which means more potential followers of your thought leadership platform, potential passive investors, team members, partnerships, etc. You’ll also likely form a new relationship with the host of the show, who is obviously as motivated as you since they have their own podcast. And finally, you’ll have the opportunity to display your expertise. Implement these interview tips to maximize these benefits to your business.

👉 Download now!

🙏 Thanks for reading!

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Wishing you a Best Ever day!

—Joe Fairless