👀 The surprising trend emerging in 2024

Plus: The best of the Best Ever Show this week, and one investor's $11M value-add deal.

Author

Best Ever CRE Team
June 13, 2024

👋 Hello, Best Ever Community!

In this week’s newsletter, multifamily occupancy stabilizes, supply surges, and one investor scores a 21% IRR.

This month, in the Best Ever Book Club, we’re reading Crucial Conversations: Tools for Talking When Stakes Are High. If you haven’t joined yet, go to bebookclub.com today and join us for our June meetup.

Off we go!

🗞 NO-FLUFF NEWS
CRE HEADLINES

🧟 Back from the Dead: WeWork emerged from bankruptcy this week after renegotiating 190 leases and exiting 170 locations. It has also named Cushman & Wakefield executive John Santora its new CEO.

🔥 Industrial Rising: Industrial loans were up 63% in Q1 while lending volumes across most other assets declined, as the sector has maintained steady rent growth and leasing demand despite the Fed’s tightening.

💰 Amazon’s $3.6B Pledge: Amazon has committed $1.4 billion to its Housing Equity Fund with the goal of building 14,000 affordable homes in select metro areas, bringing the company’s total housing pledge to $3.6 billion.

📈 Distress Rate Record: The CRED iQ distress rate moved up 14 basis points in May to 8.49%, setting a third consecutive record high. The special servicing rate sits at 8.09% while the delinquency rate is at 5.8% through May.

🥞 Let’s Eat: Low unemployment, rising wages, and the millennial foodie culture have restaurant sales on track to increase 5.4% from 2023’s record high, making restaurants a surprisingly reliable tenant option.

⭐️ TOP STORY
THE SURPRISING TREND EMERGING IN 2024

The U.S. apartment market held firm in May, with occupancy and rent-change fundamentals remaining stable, according to data from RealPage. Occupancy levels, which had experienced a decline throughout most of 2022 and 2023, have stabilized and aligned with readings observed throughout 2024, standing at 94.2% in May.

👀 A Surprising Trend: According to Madera Residential’s Jay Parsons, we’ll add more new apartment supply in the first half of 2024 than we did in most 12-month stretches over the last 30 years, yet demand is keeping pace. Yes, supply is (way) up, but while occupancy rates — which trended down in 2022-23 — are stabilizing, it now appears that occupancy is actually going up, despite the supply surge.

🤔 Wait … but Why?: Parsons cites a few catalysts behind this trend, including new resident household incomes hitting record highs, income growth outpacing new lease rent growth, and younger adults benefiting from above-average wage growth. Meanwhile, renter turnover is slowing down and operators continue to focus on occupancy and retention over rents.

💸 About Those Rents: Supply is putting downward pressure on rents in a high-demand environment. Yet still, the national average multifamily rent rose by $6 in May to $1,733, according to Yardi Matrix, well above the previous all-time high of $1,727, which was set in the summer of 2023. Year-over-year rent growth remained unchanged for the second month in a row at 0.6%. Despite the supply surge, renters are absorbing new units at healthy rates.

WHAT IT ALL MEANS

📣 “Apartment demand appears to be tracking well above most expectations so far in 2024, and that's especially good news for operators in high-supplied markets,” Parsons writes. “It's another encouraging indicator that the apartment market (and renters!) is proving to be more resilient than given credit for.”

🎙️ BEST EVER PODCAST
THIS WEEK ON THE BEST EVER SHOW

The world’s longest-running daily real estate podcast is back at it this week with another run of dynamic guests with experience across multiple CRE assets. Here are some of the best of the most recent episodes of the Best Ever Show.

Brian Spear, co-founder of Sunrise Capital Investors, is a mobile home park investor who has gone full cycle on 15 deals with an average IRR of over 40%. Pretty impressive. In this episode, he discusses the supply/demand gap in MHP investing, what he looks for in motivated sellers when acquiring new parks, and his biggest regret from his 15 full-cycle deals.

Dave Wolcott, CFO of Pantheon Investments, is an alternative asset specialist with more than $2.6 billion AUM across multiple asset classes. In this episode, he discusses the opportunities available for real estate investors in the energy sector and in private credit, including the skyrocketing demand in energy, the symmetric yields in the private credit market, and why private credit actually one of the favorite asset classes billionaires are looking to invest in right now.

Paul Coonrod, founder and managing principal of Pagewood, a real estate investment firm with a data-science approach, is a real estate entrepreneur with a diverse portfolio spanning over two million square feet. In this episode, he discusses the disconnect between the office leasing market and capital markets, his data-driven blueprint for acquiring properties with high growth potential, and the dynamic adaptive reuse projects he’s currently working on.

🏠 DEAL BREAKDOWN
MULTIFAMILY DEAL DOUBLES VALUE IN 4 YEARS

The GSH Group added over $11 million in value to this property and delivered an average CoC return of 11.91% over the course of four years. Here’s how they did it 👇

🏢 Property Details: The 266-unit workforce housing property was purchased in February of 2018. It is located in Utica, MI (a suburb of Detroit) and was built in 1968.

💸 Finances: The property was purchased for $11 million, and the GSH Group raised a little over $4 million in equity. They secured a 6.62% floating rate bridge loan of $10,930,000 for the remainder.

💼 Business Plan: The team used the $2.7 million CapEx budget to carry out a thorough interior and exterior renovation plan, which included new roofs, gutters, flatwork refurbished hallways, paint, flooring, cabinets, appliances, and fixtures. The overall business plan was to stabilize property occupancy and collections, refinance, and sell.

🍾 Results: The GSH Group refinanced in July of 2020 with a $13,500,000 15-year loan fixed at 3.55%. They sold the property in May of 2022 for $22,250,000. Over the course of ownership, GSH Group delivered an average 11.91% CoC, and upon selling, secured a 21% IRR and 2.45x equity multiple for investors.

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

🎓 EXPERT RESOURCES
FREE DOCUMENT DOWNLOAD

How to Hire the Best CPA

If you don’t want to have a heart attack in 10 years, or maybe even sooner, it’s highly recommended to hire a CPA or bookkeeper. But not all CPAs are familiar with the multifamily syndication model, or even commercial real estate in general.

In this document, Joe Fairless provides a list of questions and interview tactics to help you find the best CPA for your business needs.

🙏 Thanks for reading!

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Wishing you a Best Ever day!

—Joe Fairless