OT: Why the real estate market is not in a bubble: Q1 2023 update video added to OP

[anon_0k9zlfz6lz9oy]

Ummmm…….I told you so 😀

Told me what?

 

[anon_0k9zlfz6lz9oy]

So my question is does the CRE market take down the stock market with it?

Im the wrong guy to ask. I know nothing about stocks

 

[anon_0k9zlfz6lz9oy]

Super slow. Been happening for years, will continue for years (due to long lease terms).

All due respect, youre off here. This isnt your space.

 

[T2Kplus20]

All due respect, youre off here. This isnt your space.

Super duper slow.

 

[anon_0k9zlfz6lz9oy]

Super duper slow.

Youll see in 2024. Already beginning

 

[T2Kplus20]

Youll see in 2024. Already beginning

It's been beginning since pre-COVID, but the shutdown and WFH definitely sped it up.

 

[superfan01]

Not sure how many here follow commercial real estate. But that space is going to get uglier than most think.

Here’s a little piece I wrote on it

This is why in 2024 there will be blood in the streets in the commercial real estate market which includes large scale apartment complexes. Armageddon is coming to some and the buyers who can get in will make the type of money that makes people uncomfortable to even talk about. This is slightly complicated but I’m going to make it simple.

First lets define a couple things to help you understand this.

1) DSCR. This stands for Debt Service Coverage Ratio. This is simply taking your Net Operating Income divided by your debt service. For example, if my annual debt service was $1 and my annual NOI was $1.50 I would have a 1.5 DSCR $1.50/$1 = 1.5

2) Lenders wont lend you money right now (for the most part) unless your DSCR is at least 1.25. Meaning that if your annual debt service is $1 they’d need to see $1.25 in NOI annually.

Now, here’s why things are going to get crazy.

These are distressed debt, performing assets. Very rare to see but very common right now due to the most aggressive rate hiking cycle we’ve ever seen. There are quality properties, operating well that are coming up on loan maturities in q4 2023 and into 2024 that will have one of two options. Refinance or sell.

Here’s the issue though. This hypothetical asset could currently be at a healthy 1.5 DSCR but if their rate on that loan lets say is 4.5%, they’re looking at a refinance at rates around 6.5%.

To put those numbers into perspective, let’s say it’s a $10,000,000 loan with interest only payments. Monthly debt service on a $10,000,000 loan at 4.5% is $37,225. Which at a 1.5 DSCR would mean their monthly NOI is $55,837.

If they refinance that $10,000,000 loan at 6.5% that would mean monthly debt service is now $53,892. At their monthly NOI of $55,837, they wont qualify for that refinance for the whole loan amount of $10,000,000 as that would only equate to a DSCR of 1.04, well below the 1.25 the bank will require.

So what loan will they qualify for? Well at their current NOI of $55,837, the most a lender will lend to them is at a $44,670 monthly debt service. $44,670 monthly debt service even at interest only payments would mean max loan proceeds on the refi of about $8,300,000. Meaning that in order to refinance they will have to bring $1.7 million to the table!

So now they have two options, refinance at a higher rate AND ask your investors for $1.7 million OR sell.

This is why there will be an INSANE amount of forced sellers of loans up against maturities until rates come down. Remember, this example was of a loan previously performing GREAT, a 1.5 DSCR!

Get your money ready. 2024 is the biggest opportunity we’ve had since post GFC.

So how would one specifically play this if they had cash on sidelines?

 

[pmvon]

The ten year at 3.5 was holding things in since exit caps are generally priced off of long rates. The supply backdrop and positive economic growth also aided the fundamental backdrop. However, a 10 year at 4.5 will make pricing and refinancings more difficult leading to declining values. How much depends upon sector, and debt structure

 

[anon_0k9zlfz6lz9oy]

So how would one specifically play this if they had cash on sidelines?

Invest in syndicate funds with LEGITIMATE GP’s who are good operationally and not just acquisition animals. Youd be shocked at how many acquisition animals there are out there. I know guys who were buying 20 deals a year, BILLIONS in AUM and almost every loan is below a 1 DSCR even at their low interest rate. Theyre fvcked.

 

[jtung230]

Told me what?

Everything you wrote. You were saying it’s just office but I told you MF was not immune to this downturn.

 

[superfan01]

Invest in syndicate funds with LEGITIMATE GP’s who are good operationally and not just acquisition animals. Youd be shocked at how many acquisition animals there are out there. I know guys who were buying 20 deals a year, BILLIONS in AUM and almost every loan is below a 1 DSCR even at their low interest rate. Theyre fvcked.

Where is best place to find and research syndicated funds to invest in.

 

[anon_0k9zlfz6lz9oy]

The ten year at 3.5 was holding things in since exit caps are generally priced off of long rates. The supply backdrop and positive economic growth also aided the fundamental backdrop. However, a 10 year at 4.5 will make pricing and refinancings more difficult leading to declining values. How much depends upon sector, and debt structure

Its hilarious to me that every month MBA (mortgage bankers association) keeps raising their end of year target for mortgage rates. Now at 6.2% which seems unrealistic to me

 

[anon_0k9zlfz6lz9oy]

Everything you wrote. You were saying it’s just office but I told you MF was not immune to this downturn.

Everything? The basis of the thread was on 1-4 family homes haha. Multi-family will experience a flash crash due to debt maturities paired with poor operators who have seen a rise in vacancy or lack of reserves.

Office is fvcked fundamentally. Two different things.

Multi-family performance is tremendous operationally.

 

[anon_0k9zlfz6lz9oy]

Where is best place to find and research syndicated funds to invest in.

Tough because theres no like marketplace for them. Their all for the most part private offerings.

Heres how I did it at least.

I went to events geared towards syndicators. Would ask people whos the best gp they invested with. When the same name popped up 3+ times id meet that person and ask to be added to their investor list.

We put them together as well but it’s been over a year since we bought one and probably wont land another until 2024 as we’re being patient right now. You can check out our website here KovatsMultiFamily.com

 

[pmvon]

Everything? The basis of the thread was on 1-4 family homes haha. Multi-family will experience a flash crash due to debt maturities paired with poor operators who have seen a rise in vacancy or lack of reserves.

Office is fvcked fundamentally. Two different things.

Multi-family performance is tremendous operationally.

All depends on debt. I know of a direct transaction that just closed at a 3.5 cap in Austin. Irreplaceable asset with 9 years of 2.5 IO debt remaining. MF rents continue to grow, still a favored asset class but headwinds growing for sure and as you point out refinancing will be very hard for many.

 

[anon_0k9zlfz6lz9oy]

All depends on debt. I know of a direct transaction that just closed at a 3.5 cap in Austin. Irreplaceable asset with 9 years of 2.5 IO debt remaining. MF rents continue to grow, still a favored asset class but headwinds growing for sure and as you point out refinancing will be very hard for many.

Agreed. Pretty much all well placed MF assets trading at caps in 4’s in Dallas. Core luxury low 3’s.

The reason i say flash crash is because itll just be forced sellers, and alot of them having to come at once in a short period of time

 

[FastMJ]

Invest in syndicate funds with LEGITIMATE GP’s who are good operationally and not just acquisition animals. Youd be shocked at how many acquisition animals there are out there. I know guys who were buying 20 deals a year, BILLIONS in AUM and almost every loan is below a 1 DSCR even at their low interest rate. Theyre fvcked.

How many of these guys will be upside down underwater on their deals when time to refinance? Will mortgage REITs be left holding the bag?

 

[anon_0k9zlfz6lz9oy]

How many of these guys will be upside down underwater on their deals when time to refinance? Will mortgage REITs be left holding the bag?

Depends when they bought and what their debt is. That's the unknown. But I can tell you this.

There are ALOT of people who bought the past 2 years on 2 year bridge loans who have failed debt yield/DSCR tests and have gone into cash sweeps and need to either A) buy additional VERY TIGHT rate caps to get the 1 year extension or
B) Refinance

The thing is they can't afford to do either so they're going to be a forced seller.

 

[FastMJ]

Depends when they bought and what their debt is. That's the unknown. But I can tell you this.

There are ALOT of people who bought the past 2 years on 2 year bridge loans who have failed debt yield/DSCR tests and have gone into cash sweeps and need to either A) buy additional VERY TIGHT rate caps to get the 1 year extension or
B) Refinance

The thing is they can't afford to do either so they're going to be a forced seller.

Right, but if they are forced to sell below their loan balances then what? Are short sales a thing in commerical RE?

 

[superfan01]

Right, but if they are forced to sell below their loan balances then what? Are short sales a thing in commerical RE?

Why would there be a short sale? If they can't refi or extend the loan, the property gets foreclosed and sold off.

 

[FastMJ]

Why would there be a short sale? If they can't refi or extend the loan, the property gets foreclosed and sold off.

Of course. I'm thinking of why single family properties had short sales during the GFC. People were trying to avoid the stain of foreclosure and lenders avoided the costs involved.

 

[anon_0k9zlfz6lz9oy]

Right, but if they are forced to sell below their loan balances then what? Are short sales a thing in commerical RE?

Yeah it happens. Happening alot in office and malls right now

 

[anon_0k9zlfz6lz9oy]

Why would there be a short sale? If they can't refi or extend the loan, the property gets foreclosed and sold off.

Well, they usually just hand the keys back to the lender rather than make them foreclose.

When foreclosures do a occur theyre auctioned off and usually the lender winds up setting an “upset bid” at a number that likely allows them to buy it themselves

 

[FastMJ]

Yeah it happens. Happening alot in office and malls right now

Alot of REITs are going to suffer. Maybe I will short some of them.

 

[anon_0k9zlfz6lz9oy]

Alot of REITs are going to suffer. Maybe I will short some of them.

As someone who doesnt follow the stock market help me understand something. The stress has been evident yet someone told me REIT’s were kinda just moving with the broader market when it was going up. Why?

 

[FastMJ]

As someone who doesnt follow the stock market help me understand something. The stress has been evident yet someone told me REIT’s were kinda just moving with the broader market when it was going up. Why?

Hard to say. I think the residential REITs have been faring a lot better than office and retail. People have seen apartment rents soaring and assume multi family residential REITs are going to provide a great yield but they’re not counting on the financing stress that’s coming. I doubt rents can increase to keep pace.

 

[anon_0k9zlfz6lz9oy]

Hard to say. I think the residential REITs have been faring a lot better than office and retail. People have seen apartment rents soaring and assume multi family residential REITs are going to provide a great yield but they’re not counting on the financing stress that’s coming. I doubt rents can increase to keep pace.

Nationwide rent growth is negative at the moment. -0.7% YOY

 

[jtung230]

Everything? The basis of the thread was on 1-4 family homes haha. Multi-family will experience a flash crash due to debt maturities paired with poor operators who have seen a rise in vacancy or lack of reserves.

Office is fvcked fundamentally. Two different things.

Multi-family performance is tremendous operationally.

Nope. Operating cost is way up and rent growth have slowed. Vacancy is ticking up. 1-4 family is different because those guys Don need a return. Did you know that office rents are setting records in NYC? office is a story of have and have nots.

 

[anon_0k9zlfz6lz9oy]

Nope. Operating cost is way up and rent growth have slowed. Vacancy is ticking up. 1-4 family is different because those guys Don need a return. Did you know that office rents are setting records in NYC? office is a story of have and have nots.

Class A that is actually occupied. Vacancy rates are at historic highs.

 

[jtung230]

Class A that is actually occupied. Vacancy rates are at historic highs.

Have and have nots.

 

[pmvon]

Agreed. Pretty much all well placed MF assets trading at caps in 4’s in Dallas. Core luxury low 3’s.

The reason i say flash crash is because itll just be forced sellers, and alot of them having to come at once in a short period of time

The only reason it traded there was because they transferred the debt. If it was unencumbered it would have traded 100 wider. No way people are buying at 3 caps without low cost debt included and people buying for 4 caps in Dallas are nuts imo.

 

[NotInRHouse]

There are *so* many NJ office complexes that will make great residential/retail combos.

 

[anon_0k9zlfz6lz9oy]

Final verdict in. My June 2022 call that case shiller yoy would be 0-3%, comes in at 0%. Just released.

Was viewed as a moronic bold call at the time but the data was obvious imo.

 

[jtung230]

Final verdict in. My June 2022 call that case shiller yoy would be 0-3%, comes in at 0%. Just released.

Was viewed as a moronic bold call at the time but the data was obvious imo.

View embedded media

We still have a bet. Think it was 2024 mty.

 

[RutgersNo1]

@kyk1827
Do you think the housing market will cool down a little bit next year since the supply is going up?

 

[superfan01]

@kyk1827
Do you think the housing market will cool down a little bit next year since the supply is going up?

Where do you see supply going up? We're still massively under supplied. Certainly in the northeast.

Maybe in the southeast and south west there is more supply but building is still slow and expensive.

 

[RutgersNo1]

Where do you see supply going up? We're still massively under supplied. Certainly in the northeast.

Maybe in the southeast and south west there is more supply but building is still slow and expensive.

Sorry for the confusion. I meant to say the supply is expected to go up next year.

 

[anon_0k9zlfz6lz9oy]

@kyk1827
Do you think the housing market will cool down a little bit next year since the supply is going up?

1) right now we have less inventory than last year
2) inventory is only modestly rising right now and that's due to rates
3) the market has been cool nationwide since last June with 0% YOY price growth. NJ has been the exception around 6%ish price growth yoy.
4) If rates stay above 7 with duration it will allow inventory to grow
5) the market is totally insane. 40% of 1st time buyers are getting gifted their downpayment according to data. I think that number is higher in NJ.
6) All the issues we are dealing with pretty much everywhere are 2nd, 3rd, 4th and 5th order consequences from irrational, non data based lock downs due to covid. The real estate market is broken, idk when it'll get fixed. I feel bad for first time home buyers.

 

[anon_0k9zlfz6lz9oy]

Sorry for the confusion. I meant to say the supply is expected to go up next year.

Hopefully it does. If it does though it'll be modest. There is no distress in the SFH market. all time low delinquency rates on loans right now. The market is broken. Average mortgage rate nationwide is 3.6%.

 

[Joey Bags]

5) the market is totally insane. 40% of 1st time buyers are getting gifted their downpayment according to data. I think that number is higher in NJ.

This isn't a surprise, it's actually to be expected. There's even a term for it; The Great Wealth Transfer. The boomer generation is starting to pass their wealth down as they pass on or gift downwards.