🏘️ Multifamily risk is on the rise. Here's why.

👋 Hello, Best Ever Community! As of Thursday, the CME FedWatch Tool shows an 87% chance of an interest-rate cut to a range of 5% to 5.25% at next week’s Fed meeting. It’s all happening.

In this week’s newsletter, insurance companies tighten up, investors bet big on “onshoring,” and rent growth picks up.

Today’s edition is brought to you by HotelSHIFT Capital. Capitalize on the vastly undersupplied affordable housing market by transforming underutilized hotels into vibrant apartment ecosystems with HotelSHIFT.

💻 FREE Live Event: Join Best Ever and Agora today, September 12th, at 2 p.m. ET for a free webinar: Understanding Limited Partnership Agreements (LPAs). Save your seat here.

Let’s roll!

_{🗞 NO-FLUFF NEWS}
CRE HEADLINES

💥 Factory Boom: Global and domestic companies have committed nearly half a trillion dollars to build new factories for EVs, semiconductors, and other products in the U.S., and investors are betting big on microcities springing up around these “onshoring” projects.

🌊 Industrial Waves: Rising e-commerce and supply chain demand pushed warehouse rents up 3.06% in Q2, while flex space rents rose 2.91%. Warehouse cap rates also increased by 23 bps to 6.42%, while flex industrial properties rose by 17 bps to 6.93%.

🆘 Distress Signals: The Trepp CMBS multifamily special servicing rate rose 60 bps to 5.71% in August, the highest since December 2015. The overall Trepp servicing rate increased 16 basis points to 8.46%, while CMBS delinquencies also increased for apartments, rising 67 bps to 3.30%.

🤕 The Unemployment Effect: The national unemployment rate reached a three-year high of 4.3% in July, potentially stunting renter/homeowner mobility and stifling the seller market. Rate cuts could boost buyer demand, but limited inventory might keep prices high, offsetting lower rates.

💸 Ready to Pounce: As major funds prepare to deploy institutional capital toward distressed CRE assets, private equity firm Lone Star Funds has raised roughly $2.7 billion for value-add opportunities, including operating companies, debt portfolios, and direct CRE equity.

_{🏆 TOP STORY}
INSURERS TIGHTEN UP ON MULTIFAMILY, INDUSTRIAL

As the U.S. property insurance market shows signs of softening, insurers are pulling back from multifamily and industrial properties on the heels of record losses in 2023, enacting increasingly strict underwriting standards to offset increased risk.

The multifamily sector is feeling the brunt of these tightening standards. 

• Insurers’ Biggest Fear: New housing construction reached a 36-year high in 2023, with builders completing 440,000 apartments. Of these units, roughly 356,400 (81%) were built with wood framing, which insurers have traditionally viewed as higher risk.

• And with good reason: Losses from residential fires in 2023 amounted to approximately $10.8 billion, according to the U.S. Fire Administration. The rise in remote work is a key factor, as nearly half of the 374,000 residential fires in 2023 were caused by cooking accidents.

• Other High-Risk Claims: Insurers are also increasingly cautious about liability risks such as violent acts, sexual abuse, and even dog bites. Many are implementing exclusions for incidents involving canines, assault, abuse, habitability issues, and firearms. Some underwriters demand up to 7-10 years of loss history, while crime scores have become increasingly scrutinized.

The industrial sector hasn’t escaped scrutiny. The post-pandemic e-commerce boom sparked 1.8 billion sqft of industrial construction since 2020, more than the total built in the previous decade. Older buildings with subpar fire suppression face tighter underwriting scrutiny, while insurers are prioritizing properties with tenant diversity and adherence to fire protection standards, such as NFPA 13 sprinkler systems.

WHAT IT ALL MEANS

Property insurance has grown to the second-biggest contributor to multifamily expense growth since 2019, now representing 17% of total expenses. With stricter underwriting, primary liability rates are expected to rise 10% to 20% for multifamily portfolios. As rents continue to grow and the cost of borrowing (likely) comes down, the balance of operational costs will continue to shift, and insurance will likely occupy more of the pie, especially in multifamily.

_{🛏️ HOTELSHIFT CAPITAL}
TRANSIENT STAYS TO THRIVING COMMUNITIES

HotelSHIFT Capital is changing the conversion game. By transforming underutilized hotels into vibrant apartment ecosystems, they provide C-class investment opportunities in the vastly undersupplied affordable housing market, fostering a win-win for residents and investors.

Right now, HotelSHIFT Capital is engaged in a five-part webinar series in which they break down everything from the hotel death spiral to the truth about the economics behind the undersupply of affordable housing. To gain exclusive access to their webinar series and save your seat for the next webinar, register here.

With more than 500 hotel rooms in their pipeline, HotelSHIFT Capital is expanding, so they’ve teamed up with Sage Investment Group to co-sponsor multiple upcoming projects. To learn more about opportunities with HotelSHIFT Capital and Sage Investment Group, click the button below to schedule an introductory call.

_{💰 CRE TRENDS}
RENT GROWTH IS PICKING UP STEAM

Multifamily transactions rebounded in Q2 to $38.8 billion, matching pre-pandemic levels. Major investors returning to the market and large transactions like the Blackston/AIR deal are breaking market stagnation, while construction starts have cooled.

Investors have renewed confidence in underwriting as market recovery becomes more predictable, according to Colliers, which projects rent growth — which has been slow, but positive — to accelerate. Buyers are focusing on neutral leverage and basis plays, Colliers says, with many deals offering below-replacement-cost acquisitions. Land deals are also gaining popularity for future development.

Backing It Up: To start Q3, the median U.S. asking rent rose 0.9% YoY in August for the fifth consecutive month to $1,645 — the biggest annual increase since April 2023, and in line with Colliers’ projections.

_{🏠 DEAL OF THE WEEK}
$5 MILLION VALUE BUMP, STABILIZED AND CASH-FLOWING IN JUST 2 YEARS

John Wei and his team stabilized this two-property portfolio and got it cash-flowing in two years, all while adding $5 million in value. Here's how they did it👇

🏢 Property Details: The 167-unit Class C portfolio is comprised of two properties in the Dallas-Fort Worth area. It was purchased in December of 2021.

💸 Finances: The property was purchased for $15 million. The team secured a $14 million loan with floating rate interest and five years interest only. It was 78% LTC, and they bought rate caps for less than $60,000 for both properties. They also raised $4 million in capital.

💼 Business Plan: Most of the value-add work was exterior: fixing the foundation, installing security gates and cameras throughout the property, and cement/striping work in the parking lot. There wasn’t much interior work done aside from minor repairs when units became vacant. Rents at time of purchase averaged $875. They now average $1,275.

The plan is to hold onto the property and sell once cap rates have compressed.

🍾 Results: The property was refinanced in 2023 and the team cashed out 40% to pay back to investors. The property is now stabilized and producing 6% annual cash flow. The most recent appraisal came in at $20 million.

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

_{🎓 EXPERT RESOURCES}
FREE DOCUMENT DOWNLOAD

8-Step Process for Selling Your Apartment Community

You’ve acquired an asset, completed your value-add business plan, and have been distributing returns to your satisfied investors for the past few months and/or years. You’re thinking it might be time to sell, but how and when do you do that? When the market conditions are right, here are the eight steps to follow.