❄️ Is the Sun Belt boom finally cooling off?

👋 Hello, Best Ever Community!

In this week’s newsletter, the Sun Belt cools off, passive investors ask questions, and one investor adds $5 million in value to a mixed-use property in just 33 months.

📣 Last call: If you haven’t already, save your seat to join Travis Watts today at 2 p.m. EST as he presents Ashcroft Capital’s latest investment opportunity, Braxton Waterleigh, a premier Class A trophy asset in Orlando, FL. Register here.

Today’s edition is brought to you by Viking Capital, a multifamily boutique firm with nimble investment sourcing, structuring, execution, and asset management capabilities. Learn more about Viking Capital here.

Let’s CRE!

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CRE HEADLINES

🧽 Near-Record Absorption: According to RealPage, year-ending Q2 2024 apartment demand pushed absorption to one of its highest points in 24 years, with the 390,000 units absorbed representing the eighth-largest figure since 2000.

🚨 State Farm Distress Signal: State Farm has requested significant home insurance rate hikes in California, seeking increases of 30% for homeowners, 36% for condo owners, and 52% for renters, citing the need to avoid potential insolvency.

👮‍♂️ Fraud Crackdown: Recent drops in property values and rising defaults have exposed a wave of commercial mortgage fraud, as landlords and brokers have been inflating property values and income to secure larger loans. Fannie Mae, Freddie Mac, and U.S. prosecutors are taking action.

📈 Coworking Is Working: National coworking investment expanded by 7% in Q2 after a 6% bump in Q1. Dallas-Fort Worth leapfrogged Manhattan for the first time, trailing only Los Angeles in total coworking spaces.

🚪 Opportunity Knocks: Private equity firms reportedly have around $256 billion of cash on the sidelines earmarked for distressed CRE as values have been on the decline, including the steepest drop recorded in 13 years.

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IS THE SUN BELT BOOM FINALLY COOLING OFF?

Sun Belt markets have been the darlings of multifamily for nearly a decade. But at this week’s Midyear Economic Update hosted by the Best Ever Conference, our panel of experts discussed why the migration trend to the Sun Belt may be slowing down, and what it could mean for investors moving forward.

☀️ The Sun Belt Boom: Primarily driven by a higher quality of life including lower taxes, affordable housing, and good weather—and fueled by the remote work movement—the Sun Belt has been a migration magnet. Over the past decade, domestic relocations to the Sun Belt totaled nearly five million, largely driven by outflows from the Northeast and Midwest, and many projections indicate another decade of the same.

🛑 Not So Fast: Texas, Florida, and Arizona have been forecasted to grow by 3.5, 2.6, and 1.1 million, respectively, by 2033. But John Chang, senior vice president and national director of research and advisory sales at Marcus & Millichap, said this week that current data shows that the pattern of migration to the Sun Belt has slowed, even with the oversupply in some key Sun Belt markets.

🔑 The Affordability Factor: Part of what's driving this migration slowdown, according to Realty Mogul Managing Director Todd Hansen, is the normalization of affordability. Historically, the Sunbelt was more affordable than markets like California, New York, and Chicago. Now, having seen a run-up in rents in markets like Austin, Phoenix, and Florida as high as 30%, the dynamic has changed. It's no longer a no-brainer in terms of affordability to migrate to the Sun Belt, says Hansen. “If you're coming from those [more expensive] markets, it no longer feels like everything's on sale.”

WHAT IT ALL MEANS

There are still a lot of good things going on in the Sun Belt, but if rising property taxes, skyrocketing insurance costs, swelling payroll expenses, and other factors continue driving up rents, according to Chang, the migration momentum may turn. Add to that the fact that some Sun Belt markets face oversupply issues while markets in the Northeast and Midwest aren’t seeing a lot of new construction, and it could create opportunities for investors in non-Sun Belt markets in the very near future.

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AVONDALE HILLS

Viking Capital presents Avondale Hills, a luxurious 240-unit, Class A asset surrounded by vibrant development and economic growth in the Atlanta, GA, MSA.

Strategically located in a hyper-connected area directly across from the MARTA transit station, Avondale Hills offers a modern living experience with premium amenities, positioning it as a best-in-class property.

Avondale Hills also offers a lower-risk strategy to add value by increasing below-market rents and stabilizing expenses and occupancy. At a 30%+ discount to replacement cost, Viking Capital is buying this property at an extremely competitive basis for a standout investment in one of Atlanta's premier submarkets.

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PASSIVE INVESTOR TIPS

In his recent book, Passive Investor Tips, Travis Watts created an investor’s guide to shaping a passive-income mindset. With syndications serving as a cornerstone of many passive investors’ strategies, Travis shared the 10 questions you should ask yourself before investing in a syndication.

1. Does this investment align with my goals? Depending on your aspirations, immediate cash flow or long-term equity growth may be the priority. For others, it may be both. Decide up front which aligns best with your goals.

2. What is the track record of the syndication team? Past performance is a key indicator of a syndication team’s ability to deliver successful deals. Analyzing their history—including deal outcomes and experiences during recessions—is crucial in making informed investment decisions.

3. What is the property’s location and market assessment? Understanding the property’s location within a growing and diversified market is vital for the success of the investment. A strong market can boost a deal even if execution challenges arise.

4. What are the tax implications of the property’s location? Exploring tax-free states or low-tax regions can preserve your capital when it comes time to sell. Choosing a state with a 5% income tax means 5% less in proceeds upon selling the asset. With a $100,000 gain, that leaves $5,000 on the table.

5. What is the property’s debt and leverage? In a high or rising interest rate environment, fixed-rate debt or capped adjustable-rate loans can offer protection against potential interest rate fluctuations. A good rule of thumb is to have a longer debt term than you anticipate holding the property for. This provides a cushion should the business plan take longer than expected.

For the next five questions and to discover other Best Ever strategies, tools, and investing lessons that will elevate your financial game as a passive investor, pick up your copy of Passive Investor Tips today.

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A MIXED-USE PROPERTY THAT HAS EVERYTHING

Chris Larsen and the team at Next-Level Income added $5 million in value to this mixed-use property and completed a refinance in just 33 months. Here's how they did it 👇

🏢 Property Details: This 163-unit mixed-use property was purchased in September of 2021 and is located in Spartanburg, SC. It consists of an 89-space mobile home community, a 65-unit self-storage facility, six single-family homes, and a three-unit commercial office building.

💸 Finances: It was purchased for $2,670,640, and Next-Level Income raised $2,372,113 in equity. The team secured a $4,750,000 loan with a 6.392% interest rate, five-year term, and full-term I/O.

💼 Business Plan: Next-Level Income plans to hold the property for seven years and refinance in Year 3. The business plan included remodeling the vacant mobile homes as well as the six single-family homes, office units, and self-storage facility. They also upgraded the exteriors of all homes, installed in-house property management, and improved landscaping, driveways, and private roads as needed.

🍾 Results: The team refinanced in June 2024, three months ahead of schedule. Investors received a 93.8% return of capital, 114.6% total return, 1.15x multiple, and 41.7% annualized return to date. LPs still retain 50% ownership and distributions. The current property valuation is $7.6 million.

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

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FREE DOCUMENT DOWNLOAD

Guide to Evaluating a Property In Person Before Making an Offer

Before you put an offer on the table, you need to nail the in-person property tour, not only so you know what you’re getting yourself and your investors into, but so you can make the most accurate offer.

This guide includes some key things you don’t want to miss when evaluating a property in-person, including who you should bring with you, questions to ask property managers, questions to ask residents, how to tour the units, and how to evaluate the competition.

🙏 Thanks for reading!

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Have a Best Ever day!

—Joe Fairless