🚒 Her apartment complex caught fire. Here's what she learned.

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👋 Good morning, Best Ever Community! TPG says it has seen a “significant increase” in investor activity as it gears up to unleash $14B in dry powder toward top-shelf CRE assets. Could investor sentiment finally be on the rise?

In this week’s newsletter, an apartment complex catches fire, department stores are done, and national rents rise.

Today’s edition is brought to you by BAM Capital, a leader in innovative investment solutions aimed at maximizing returns and building wealth for accredited investors. Learn more about BAM Capital here.

Let’s ride!

_{🗞 NO-FLUFF NEWS}
CRE HEADLINES

📋 Fannie, Freddie Tighten Up: Fannie Mae and Freddie Mac are implementing stricter rules for CRE lenders and brokers to combat rising commercial mortgage fraud, including requirements for independent financial verification and property valuations, which may slow deal activity as the industry adapts to the more rigorous standards.

💸 Back in the Game: Large apartment owners are buying again, as strong demand and a construction slowdown have driven up transaction volume to $23 billion in Q2, a 40% increase from the $16.4 billion recorded in Q1, though still below historical averages.

🚓 Multifamily Fraud Scheme: Three real estate investors pleaded guilty to defrauding lenders of over $119 million in a multifamily mortgage fraud scheme, submitting falsified documents to obtain loans for two properties in Ohio and Michigan.

🏘️ Historic Housing Bill: Massachusetts lawmakers passed a $5.2 billion housing bond bill, the largest in the state's history, which includes zoning reforms and funding for affordable housing. It also includes $2 billion toward the state's 40,000-unit public housing portfolio to repair the aging infrastructure.

🚨 Big Deal: Equity Residential has agreed to acquire 11 apartment properties from Blackstone for approximately $964 million in separate transactions. The deals are expected to close in Q3.

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WHAT REALLY HAPPENS AFTER AN APARTMENT FIRE

An apartment fire is a nightmare scenario for any investor. Rachael Jones, principal at Clover Capital Group, purchased a 29-unit multifamily building in Columbia, South Carolina, for $1.65 million in June 2023.

It has been a challenging deal for a host of reasons. The 1970s property had aluminum wiring, required a Phase 2 environmental analysis, and was purchased under financial distress with just a 60% economic occupancy. Then, in January, the property caught fire, costing Rachael and her partners eight units. Seven months later, they’re still going through the insurance process to get the eight units rebuilt, all while continuing to operate and stabilize the rest of the complex, which is still occupied.

Rachael joined us on the Best Ever Show this week to discuss the property, the fire, and how she dealt with the aftermath, highlighting a few key lessons she learned through the process.

• Insurance Money: Initially, Rachael’s insurance company surveyed the damage and reconstruction costs and awarded Rachael’s team the appropriate funds to rebuild — a standard, speedy process, she says. But the process didn’t end there. Rachael hired a consultant — a public adjuster’s assistant who would charge her half what an adjuster would and who could speak the insurance company's language — to conduct an independent and ongoing analysis. The consultant highlighted what the insurance company missed — “details that I wouldn’t have been able to catch on,” Rachael says — resulting in roughly an extra $200,000 in insurance money toward a $1.4 million rebuild.

• Getting Re-insured: When insurance companies experience a large loss, they’ll likely drop you. Rachael’s did. And on a 1970s property coming off a $1.4 million fire, getting re-insured was a big challenge. So she hired two insurance brokers. Why two? Because, she says, even though they go to the same companies, some have better relationships than others. “One broker was able to get me a $30,000 insurance policy,” she says. “The other ones were at $100K, which I couldn’t possibly afford.”

• Over-Insuring: Before the fire, Rachael had business income reimbursement as part of her policy. “If you do not have that,” she says, “go get it.” Her policy covers 12 months of lost income from the eight rental units lost. “I wish I had 24 months because it still won’t cover the time to rebuild those units,” she says. “But it definitely helps a lot.”

Key Takeaways:

• Don’t take the insurance company’s word for it. Hire your own consultant.

• Use insurance brokers — multiple, if possible — to secure new insurance.

• When it comes to protecting your cash flow and your NOI, over-insure. You’d rather have it and not need it than need it and not have it.

🎧 Listen to Rachael’s full episode here on the Best Ever Show.

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_{🛍 CRE TRENDS}
THE SLOW DEATH OF DEPARTMENT STORES

Department stores are dying. Historically the anchors of malls and shopping centers across America, major department stores now occupy less than half of all anchor spaces at enclosed shopping malls, and there are roughly 500 vacant department store spaces nationwide, according to the Wall Street Journal.

The primary culprits are off-price retailers like TJ Maxx and Marshalls and online shopping, which have eroded department stores' customer base. Meanwhile, retailers are increasingly opening their own stores to control the customer experience, reducing the need for department stores as intermediaries. This direct-to-consumer shift has boosted retailers’ profit margins, further undermining the traditional department store model.

• The Past: Department stores' sales peaked in the late ’90s and have been in long-term decline since, despite a pandemic-driven bounce-back. Sales fell in 2023 and remained flat in early 2024.

• The Present: Department stores, which used to draw mall traffic and pay low rents while smaller tenants competed for nearby space, are now among the weakest drivers of foot traffic. After 50 total closings from 2021-23, Green Street projects 100 department store closings in 2024, while Macy’s alone plans to close 150 in the next three years.

• The Future: The demise of the department store is one of the key drivers changing The Face of American retail and the primary reason regional malls continue to struggle while the rest of the retail sector enjoys record-low vacancy rates. Bleeding customers and no longer seen as magnets for shoppers, the department store era is all but over.

Mall owners are adapting, redeveloping big-box vacancies into healthcare facilities, apartments, and even swim schools. An old Macy’s in Richmond, Virginia, was even converted into an indoor pickleball facility. It’s this kind of creativity and reinvention that will determine whether or not mall owners — and the general concept of the mall — can survive.

_{✍️ RENT REPORT}
NATIONAL RENTS UP, SUN BELT REBOUNDS

The national average rent rose for the sixth straight month in July, up $4 to $1,743, with year-over-year growth rising by 20 basis points to 0.8%, according to Yardi Matrix's latest National Multifamily Report.

• While YOY growth is weak by historical standards, a recent rent rebound in some Sun Belt markets is an encouraging sign of future performance, though the heavy delivery pipeline has slowed rent growth in this region.

• Rent growth is highest in gateway markets in the East and secondary markets in the Midwest, led by New York City at 5.2% YOY and Washington, D.C., at 4.0% YOY.

• Many metros that have posted negative growth for several months, driven by heavy new supply, saw advertised rents rise in July, including Austin, Dallas, Charlotte, Raleigh, and Phoenix.

Download the full report here.

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_{🏠 DEAL OF THE WEEK}
MHP PORTFOLIO VALUE INCREASES 4X

Brian Spear and Sunrise Capital Investors quadrupled the value of this mobile home park portfolio (and returned all investor capital) in just a few short years. Here's how they did it👇

🏢 Property Details: The property, located in Eastern Maryland, was purchased in September of 2017. It consisted of two separate mobile home parks with 180 total units and 89% occupancy at the time of purchase.

💸 Finances: The total purchase price for both parks was $2.6 million. The team raised $1.1 million through private investors and secured a $1.69 million loan at 6% interest rate with 25-year amortization.

💼 Business Plan: Sunrise Capital Investors replaced on-site management, pumped septic tanks, demolished unsalvageable abandoned homes, renovated salvageable park-owned homes, and power-washed units. They also improved aesthetics and addressed underground infrastructure issues, including well and septic system maintenance. They were able to increase lot rents from $250 to just below the market rate of $400.

🍾 Projected Results: the property is currently valued at $10 million. The team refinanced after two years and returned 100% of the original investment to investors. Investors now have infinite cash-on-cash returns while retaining equity. The projected returns, which have since been exceeded, were 10% CoC, 18% IRR, and 8% preferred annual returns.

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

_{🎓 EXPERT RESOURCES}
FREE DOCUMENT DOWNLOAD

26 Multifamily Value-Add Opportunities

The higher your NOI, the higher your cash flow and your property’s value. To increase the NOI, you can either increase income or decrease expenses. This is a list of 26 simple and effective ways to do both!