😰 The toughest job in CRE today

👋 Hello, Best Ever Community!

In today’s newsletter, appraisers are under fire, Joe Fairless simplifies apartment community sales, and one investor scores a 10% cash-on-cash return on day one from their mobile home park property. 

➡️ Plus: Want to promote your business to 20,000+ investors? Here’s your chance! The first reader to refer 30 new subscribers to the Best Ever newsletter by March 31 will win a dedicated branded email sent to our audience of 20,000+ subscribers. Learn more below!

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

Here we go!

_{🗞 NO-FLUFF NEWS}
CRE HEADLINES

⚖️ Cap Rates May Stabilize: The average cap rate increased from 6.4% to 7% in the second half of 2023, and investors are optimistic that cap rates have peaked and will stabilize soon.

⚠️ Sudden Caution in Retail: The special servicing rate has reached 7.14%, topping 7% for the first time in nearly three years. Retail is a big reason, causing caution in the previously surging sector.

🤑 Bitcoin Halving, Explained: The next Bitcoin “halving” event, which is designed to maintain Bitcoin's scarcity, will take place in April. Here’s what it means.

💼 DOJ, FTC Support Yardi Suit: Federal antitrust agencies are again interfering in the fight against price fixing in rental software with a statement to oppose dismissing the lawsuit against Yardi Systems and others.

🏢 The ‘Office to Anything’ Play: With millions of square feet of older offices now obsolete, Washington, D.C. developers and city officials recognize the need for dramatic action.

_{⭐️ TOP STORY}
THE TOUGHEST JOB IN CRE TODAY

It’s no secret that the office sector has been in disarray. But its future could rest in the hands of an unlikely player. With office values plummeting as much as 70% and vacancy rates hitting 25% in many markets — and with approximately $117 billion in office loans maturing later this year — property valuations are critical for owners who are hoping to refinance. This puts pressure on appraisers, who could be the key to the future of office.

🔥 Dangerous Biases: Appraisers can sometimes skew results — often unintentionally — due to a heavy reliance on historical data or their own biases regarding the state of the market. And inflated values will only prolong market uncertainty. Green Street analyst Harsh Hemnani says that the office market is overvalued by 15%, indicating a discrepancy between appraisal values and market analysis. This has translated to fewer sales as buyers wait for prices to drop and sellers resist markdowns.

🏢 The Catch-22: Appraisers require transactions to mark values down. But while buyers are waiting for prices to drop, sellers who believe their properties are worth more are reluctant to sell at discounts until the appraised values fall. The result is a stalemate. With transactions down, values have remained static. So those with loans coming due may be out of luck, which could add more distress, driving values down even further. Because when there are too many distressed sales, they cease to be “distressed” — they become the actual market. 

🧑‍⚖️ Seeking Scapegoats: Given the stress appraisers are currently facing, many fear becoming the subject of litigation. Similar disputes appraisers faced during the Global Financial Crisis often revolved around contested valuations, with parties even hiring their own appraisers to challenge past assessments. And with the bulk of commercial work done by major firms, which can be easier targets for litigation, some urge extreme caution. 

Final Thought

A reckoning is coming for the office sector. What’s on the other side, we’re not sure. But when a 1% valuation difference can make or break a deal, there is little room for error as investors wait for transaction activity to resume. So whatever the future holds for the office sector, it appears that appraisers will be at the center of it. “There’s a lot of money and control rights at stake, all depending upon the appraiser’s determination,” said Joseph Cioffi of Davis+Gilbert. “So you can imagine the pressure.”

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_{✍️ BEST EVER BLOG}
FROM JOE FAIRLESS

You’ve acquired a new asset, completed your value-add business plan, and have been distributing higher than projected returns to your satisfied investors for the past few months. Think your investors are satisfied now? Well, they’re going to be ecstatic when they receive that massive distribution upon sale! So, when and how do you sell your apartment community? 

📬 Send Your Lender a Notification of Disposition: When you decide to sell your apartment community, you’ll need to send your lender an official notification of disposition. This is typically two months before listing the apartment for sale to the public. Work with your experienced attorney to draft the notification and send it to your lender.

👀 Request a Broker’s Opinion of Value: Find a listing broker who is the best fit to sell the property. Loyalty is important in this business, so I recommend using the same broker who represented you when you purchased the asset. But there might be reasons why you’d want to go with someone else.

🏁 Start a Bidding War: Over the next six weeks or so, your broker is going to create the offering memorandum and market the apartment to the public to whip up a whole lot of interest. The goal is for your broker to create a bidding war to push up the offer price and get you the highest offer price possible.

👉 View the full eight-step process here.

_{🏠 DEAL BREAKDOWN}
MHP PROPERTY DELIVERS 10% COC RETURN ON DAY 1

Jordan Moorhead realized 10% CoC on day one and increased rents by 45% in less than three months on this mobile home park property. Here's how he did it. 👇

🏢 Property Details: 30-lot mobile home park purchased November 2023 in Louisville, KY. All tenant-owned homes and one single-family home. 

💸 Finances: Purchase price was $1 million with 25% partner equity raised.

💵 Debt Structure: Local bank debt for 75%, fixed for three years with a 25-year amortization.

💼 Business Plan: New property management and minor repairs to freshen up the property.

🍾 Results: 10% CoC upon purchase. Raised lot rents from $250 at time of purchase to $400. Long-term hold with possible cash-out refinance in two to three years. 

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

_{🌎 BEST EVER CONFERENCE 2024}
THE COUNTDOWN IS ON!

The countdown is on to the Best Ever CRE event of the year.

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To share insights. To network. To form partnerships and make deals. (And to party!)

Just look at this thoughtfully planned and ridiculously awesome program. And next week we’ll unlock the Best Ever deal list… for BEC attendees only.

If you're looking to propel your investing, now is the time. These are the people to meet.

And BEC is the place. 

👉 Register by March 22 with coupon code BESTEVER24 to save 25%.

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Wishing you a Best Ever day!

—Joe Fairless