👨‍🔬 How the 'Mad Scientist' is playing the market

👋 Hello, Best Ever Community! Today is National Be Late for Something Day, according to the Procrastinators’ Club of America. Let’s celebrate … tomorrow.

In this week’s newsletter, the Mad Scientist plays the market, it’s always sunny in the Sun Belt, and life sciences threatens to go bust.

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Let’s CRE!

_{🗞 NO-FLUFF NEWS}
CRE HEADLINES

🐦‍🔥 Phoenix Rising: Phoenix has emerged as the top market for industrial development in the U.S., boasting the nation’s largest industrial development pipeline with a steady flow of deliveries and sale prices above the national average.

🔫 Shots Fired: Airbnb fired back at NYC this week one year after the city’s new STR regulations went into effect, alleging the regulations have “failed to deliver on their promise to combat the housing crisis,” leading to all-time high prices for both travelers and residents.

📈 Starts Down, Rents Up: Rent relief has been a dominant trend due to high supply, but investors are betting on a shift back to landlords' favor, as multifamily starts were down 22% YoY in July and developers’ financing challenges continue.

🏘️ Protecting Tenants: Fannie Mae and Freddie Mac have announced new minimum lease standards for multifamily, including tenant protections like rent-payment grace periods and extended rent-increase notices. The policy will take effect for new loans after February 28, 2025.

💰 Cardone’s Buying Binge: Grant Cardone is buying up multifamily property in South Florida, paying over $200M combined for two complexes totaling 850 units with another $100M deal in the works.

_{🏆 TOP STORY}
THE BIGGEST OPPORTUNITY IN CRE RIGHT NOW?

The Mad Scientist of Multifamily, Neal Bawa, joined us on the Best Ever CRE Show last week, and while discussing pref equity, the state of the multifamily market, and other mad scientist-ey stuff, he quietly snuck in what he believes to be the biggest opportunity in commercial real estate today — land squatting.

Multifamily starts were down nearly 22% YoY in July while permitting decreased 12.4% for the month and 18.2% for the year. Interest rates largely drove this trend, as elevated borrowing costs have inflated budgets and made exit values more unpredictable, quelling developers’ appetites.

The Opportunity: When interest rates rise above 5%, Bawa says, land becomes temporarily illiquid, driving down prices. And while the discounted prices are nice, the real opportunity lies in the longer closing windows one can negotiate in a low-demand environment.

• In 2022, according to Bawa, because of favorable market conditions, you’d generally have four months to close on a land transaction. That’s not enough time to get the land ready to build on.

• Today, Bawa says, because of high interest rates and other challenges developers face, he’s been able to get 21 months to close. This means he gets zoning, permitting, entitlement — all the things he previously wouldn’t have had time to do, all the way to getting the land shovel-ready. “And [I’m] doing it on someone else's dime without even actually purchasing it,” he says.

How He’s Doing This: In a word, patience. Bawa says that over the last year to 18 months, when he’d make an offer and ask for 21 months to close, sellers laughed at him “uniformly, 100% of the time.” Three months later, they’d still laugh. Six months, still laughing. Then, nine months later, when the land still hadn’t sold, their tune changed.

Now, some sellers are accepting his 21-month offer from the jump. Of the eight parcels of land he has under contract, he says, six of them are for 21 months, one is 18 months, and one is 15 months.

He plans to hold the land, spend roughly $300,000 per property to get it developer-ready, then sell late in 2025 or early 2026 when developer competition heats back up, capitalizing on developers’ impatience and unwillingness to go through the 18-month zoning/permitting process.

WHAT IT ALL MEANS

Bawa forecasts early 2026 as the best time to build, as he believes we will have experienced multiple rate cuts in 2024-25 and multifamily fundamentals will remain strong. As the development market heats up. Bawa’s properties will (presumably) be first in line to get snatched up — likely at a premium, since they’ll be shovel-ready.

“It's the best time to park yourself on assets without paying for them,” Bawa says. “Remember … you’re not buying the asset, but you're controlling it and working on improving it and making it much more beneficial and profitable by moving it towards zoned entitlement. It’s the greatest opportunity that exists today.”

🎧 Listen to Neal Bawa’s full interview here.

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🔮 _{MARKET FORECAST}
MULTIFAMILY MARKETS MOST LIKELY TO OVERPERFORM

Times have been turbulent in multifamily, and some experts expect the instability to continue. But according to a recent study from Altus Group, the economic conditions in some key Sun Belt markets translate to a more bullish multifamily outlook. Using the Capital Asset Pricing Model, the report predicts the future performance of CRE sectors in different markets compared to benchmark returns. 

Here are the Top 5 multifamily markets that are most likely to overperform:

• Phoenix-Mesa-Scottsdale, Arizona: Over the last three years, Phoenix’s population and HHI growth rate exceeded 5%, while the average city was closer to 3% for both metrics, while 2020 census data revealed that Phoenix grew at a faster rate than any other major city in the last decade.

• Durham-Chapel Hill, North Carolina: With one of the highest productivity rates of any city, Durham’s Gross Regional Product (GRP) per capita is 1.5x the U.S. average, and its GRP grew at twice the rate of the average U.S. city from 2021 to 2024.

• Fort Lauderdale-Pompano Beach-Deerfield Beach, Florida: Higher-than-average rents that have increased at double the pace of other cities and population growth ranking in the Top 10 nationally over the last two years promises to keep the Fort Lauderdale market strong.

• Tampa-St. Petersburg-Clearwater, Florida: With population and household growth slightly higher than the average city, Tampa has had the third-highest inbound migration over the past two years. That trend should continue.

• West Palm Beach-Boca Raton-Delray Beach, Florida: The West Palm area has all the draw of the previously mentioned Florida markets, along with high median renter costs that have grown at two times the rate of the average city.

The worst-performing cities from the report were “gateway cities” — think San Francisco, Seattle, LA, and NYC — where the multifamily sector is still struggling to find its footing in the post-pandemic landscape.

👉 You can view the full report here.

📈 _{CRE TRENDS}
LIFE SCIENCES WAS ON FIRE. NOT ANYMORE.

The Life Sciences sector was having a moment. In the wake of the pandemic,  as companies raced to develop a Covid-19 vaccine, the sector became an investor favorite and one of the hottest in CRE. Now, that moment may have passed, leaving record vacancy in its wake.

Since Q1 2020, more than 59 million sqft of new space has been added with an additional 19.1 million sqft in the pipeline in the U.S., according to JLL (via the Wall Street Journal). By comparison, an average of 3.7 million annually was added in the five years leading up to the pandemic. Due to supply-and-demand pressure and high interest rates, the value of even high-quality life-sciences property is down about 15% to 20% from its 2022 peak.

• Case Study: The Boston area alone boasts over 49 million sqft, and a vacancy rate of 27.7% to go with it — that’s up from around 6.2% in late 2020. And with an additional five million sqft under construction, there’s little relief in sight. Now, owners of at least 10 life-sciences locations are offering those buildings as office space instead of lab space, with some willing to offer discounts of up to 30%.

The good news is that life sciences is much smaller than the office sector, with less than 175 million sqft of life-sciences space in the U.S. compared with 4.8 billion in office. So its impact on the larger economy is less significant. Owners and investors who were bullish on the sector after the pandemic, however, are feeling the pain.

📣 “This is the age-old story of real-estate developers over-responding,” JLL’s Travis McCready said, adding, “We cannot withstand this level of supply-demand imbalance for too long … at some point the arithmetic just doesn’t work.”

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_{🏠 DEAL OF THE WEEK}
DEAL YIELDS 382% RETURN IN JUST 34 MONTHS

Jimmy Edwards and the team at High Five Multifamily realized a nearly 400% return on this property in just 34 months. Here's how they did it👇

🏢 Property Details: The 120-unit apartment complex was purchased in November of 2019. It’s located in Lubbock, Texas, and had 76.6% occupancy at the time of purchase.

💸 Finances: The property was purchased for $3.9 million as part of a reverse 1031 exchange with $645,028 in equity. The team secured a $3.8 million loan with a 5.5% floating interest rate with built-in rate caps, 20-year amortization, and 4.5% floor. The seller self-managed for 20 years without using computers. As a result, the purchase price was negotiated to a number that the lender would be comfortable financing without detailed financials from the sellers.

💼 Business Plan: The agreement to purchase was based on the sellers' verbal detail that the property was 98% leased. However, physical due diligence revealed about 30 units were vacant but nearly rent-ready. This turned out to be a positive aspect of the purchase, as most rented units were ~$100-$150 under market. They hired a third-party property management company, which leased most of the vacant units within the first 60 days.

The team also upgraded the amenities, including the pool, office, laundry room, and basketball court, and improved landscaping. Interior upgrades included paint, flooring, appliances, plumbing, and lighting (where needed). Re-branding was finalized just before the pandemic.

🍾 Projected Results: The property was listed for sale in the first quarter of 2022 for $8.2 million. Multiple offers were received, and the highest and best offer was chosen. The returns were a 4.82x equity multiple with a 71.5% IRR in 34 months. $100,000 invested into Lakeway yielded $382,000 in profit in addition to the return of the original $100,000, resulting in an average annualized return of 135%.

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

_{🎓 EXPERT RESOURCES}
FREE DOCUMENT DOWNLOAD

19 Proven Strategies to Attract High-Quality Tenants

It’s easy to find tenants for your multifamily property. The trick is finding high-quality tenants who will respect your property, pay rent reliably, and cause as few headaches as possible. Here are a few strategies to market your rental listings, get the residents you desire, and increase overall occupancy.