☎️ The truth about capital calls, and what LPs should do

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In this week’s newsletter, capital calls keep coming, dockworkers strike, and multifamily cap rates hit a 10-year high.

Today’s edition is brought to you by Viking Capital, which is proud to introduce The Townhomes at Bluebonnet Trails, a luxurious 114-unit 2021 build located in the Dallas-Fort Worth Metroplex.

Let’s CRE!

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CRE HEADLINES

🌀 Helene’s Impact: Hurricane Helene caused an estimated $26B in damage, but it likely won't impact CRE insurance rates significantly due to limited coverage. Rate adjustments will vary by location, with Florida facing the highest potential premiums.

⛏️ The Strike Is On: Dockworkers have gone on strike at 36 East and Gulf Coast ports, potentially causing significant economic and supply chain issues. Warehousing and transportation are among the first sectors affected, with possible furloughs affecting more than 1,000 workers.

🏘️ Slow (Rent) Roll: Newly built multifamily units are attracting tenants, but supply is outpacing demand. Redfin reports 54% of new units were rented within three months, the second-lowest absorption rate in four years, following a 47% rate in Q1 this year.

😴 Sleeper Markets: Dayton, Ohio, topped Realtor.com’s list of top markets for investors in 2024, highlighting rising activity over the past five years. Rochester, Cleveland, Pittsburgh, and Knoxville rounded out the top five, with prices rising but mortgage payments still below the U.S. average.

💰 Rockefeller Refinance: Tishman Speyer, owner of Rockefeller Center in New York City, is looking for $3.5 billion of debt, according to media reports. Some of the cash is needed to pay off a roughly $1.7 billion commercial-mortgage-backed-securities loan that matures in May next year.

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CAPITAL CALLS KEEP COMING. HERE’S WHAT LPS CAN DO.

Capital Calls are something of a new normal in multifamily syndication. BiggerPockets CEO, Scott Trench — a self-proclaimed super-conservative, steady-Eddie investor — joined us on the Best Ever CRE Show this week to discuss the state of the syndication space, including his experience navigating capital calls as an LP.

Trench has historically invested in small multifamily. He doesn’t raise capital, but he has invested in two syndications that have gone “very poorly,” he says, “to no fault of the operator.” The reality, he says, is that they bought at a 3-3.5 cap in Phoenix, Arizona, in 2020-21 and got caught at the market peak, like many syndicators did. “That completely blew up in my face,” he said.

Both those deals resulted in capital calls. Trench says one is still outstanding, and he declined the other. Having been through the process, Trench shared his advice to LPs who are facing capital calls:

• Do Your Homework: “If you don't understand the thesis behind the capital call,” Trench says, “don't invest.”

• Start Anew: “Treat the capital call like a fresh, new investment,” he says. “Think about what is that gonna look like and what are the returns likely to be on the capital you’re about to invest. The dilution effect can be important depending on how the syndicator structures it. But if it's truly a fresh round of pref, for example, or another tranche of equity that is truly distinct from the previous one, treat it like a fresh new investment and consider what you had in there as sunk cost.”

• Relationship Is Key: “Someone who's down today may be up tomorrow,” he says. “And you want to think about that relationship and make sure that you're approaching it with a level head. Is this person truly screwing you, or really mishandling things, or burying their head in sand, or behaving very badly? Or is this a competent person who made a bad bet or got unlucky? You want to make sure you handle yourself professionally as an LP in this context as well.”

Bonus Tip: Trench highlights the term “exit cap rate” as an essential piece of jargon that every LP should understand. 

• Definition: The exit cap rate is the projected cap rate at which the property is expected to sell at the end of the investment period. It impacts return projections, helps assess sponsor's assumptions, reflects market expectations, and aids in risk assessment 

• How It’s Applied: Calculated as NOI divided by the expected sale price, a lower exit cap rate typically means a higher sale price and potentially better returns. LPs should compare it to current market rates and consider its impact on overall investment performance.

• 📣 “It’s remarkable how many LPs don't understand what that term means,” Trench says. “If that's not instinctive to understand how you're thinking through that and how that number will impact the return on your capital call or your current investment, you are not ready to be investing in this space. Go back to ground zero and hit the books and build a basic framework.”

To hear more from Scott on the truth about capital calls, the opportunity he sees right now in suburban office, and why Jerome Powell is the “least bad central banker in the world,” listen to the full episode here.

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THE TOWNHOMES AT BLUEBONNET TRAILS

Viking Capital presents The Townhomes at Bluebonnet Trails, a luxurious 114-unit 2021 build located in the Dallas-Fort Worth Metroplex.

This newly developed build-to-rent community offers expansive floor plans at below-market rates, making it highly attractive to the key rental demographic in the DFW area, which tops the charts as the No. 1 city for domestic migration, growing at more than 53 times the national average.

With minimal new supply and a low-density design that combines the benefits of multifamily living with a single-family feel, The Townhomes at Bluebonnet Trails is a prime investment opportunity.

Learn more about this investment opportunity in a free webinar with Viking Capital on Wednesday, October 16th, at 7 p.m. ET.

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MULTIFAMILY CAP RATES HIT 10-YEAR HIGH

The multifamily market is gaining momentum, according to Marcus & Millichap's Q3 2024 report, as financing improves and cap rates rise. From July 2023 to June 2024, cap rates averaged 5.8%, the highest since 2014, stabilizing sale prices and easing buyer-seller negotiations.

Deal flow is picking up, with national trading activity increasing from July to August 2024. Lower debt costs and higher cap rates are making more deals viable. The average multifamily cap rate rose to 5.8%, up 110 basis points from 2022 and the highest since 2014. Sale prices are stabilizing as reduced financing uncertainty helps buyers and sellers negotiate.

The release of dry powder is fueling the sector as capital, previously sidelined by financing hurdles, flows back in. National vacancy rates held flat in early 2024, improving sentiment after a rise last year. Early data from July-August 2024 shows increasing institutional activity, with rising dollar volume. Primary markets, especially downtown areas, saw the most stable vacancy, further boosting investor appetite.

Buyers wary of supply headwinds may look to the Midwest, where supply pressure is mild. Cities like Chicago, Cincinnati, Cleveland, Milwaukee, Pittsburgh, and St. Louis saw strong rent growth over the past year, aided by less than 2% inventory expansion.

👉 Download the full report here.

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ADDING $100 MILLION IN VALUE TO VACANT LAND BY REZONING IT

Anita Verma-Lallian and the team at Arizona Land Consulting added nearly $100 million in value to this property in just two years by rezoning. Here's how they did it 👇

🏢 Property Details: This 2,000-acre vacant land property was purchased in February of 2022 and is located in Buckeye, Arizona.

💸 Finances: The property was purchased for $40,000,000, and the team raised $30,000,000 in capital. They were able to secure a loan for $10,000,000 at 12% interest for two years.

💼 Business Plan: The team rezoned the land from residential to industrial land over a two year period. This included working closely with the local city to amend the community master plan to allow for additional uses such as setbacks for industrial equipment, noise, commercial traffic, occupancy requirements, and more. They also had a development agreement for a residential community that had to be amended and modified for the new proposed use.

🍾 Results: They sold the land in August of 2024 for $136 million to a data center developer planning on building a $20 billion data center project. This resulted in a 3.5X equity multiple for investors.

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

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FREE DOCUMENT DOWNLOAD

Understanding Fixed-Rate vs. Floating-Rate Apartment Loans

Securing financing is one of the trickiest parts of commercial real estate investing. Understanding the different types of debt available to you as a multifamily operator or investor is essential, so you can determine the best course of action for your particular deal.