I recently had the pleasure of attending two commercial real estate conferences (The Advanced Commercial Real estate Summit in Los Angeles, CA and the Warrior Multifamily Summit in Phoenix, AZ) and cannot wait to share with you some of my key takeaways, which also nicely summarize the second half of 2023 and offer a sneak peek into my 2024 market outlook.
Feras Moussa from Disrupt Equity opened the summit speaking on a topic near and dear to my heart – risk management. He emphasized the importance of de-risking the investment in areas such as choosing the right location (stay away from Class D areas), not overpaying for an asset (know your market and your numbers), having enough cash reserves, having the appropriate capital stack (debt and equity structures), managing interest rate risk (via fixed rate or other derivatives), managing tax risk, accounting for macroeconomic risk (ensure you have sufficient cushion for the unexpected), and last but not least working with the team (one that acts with integrity, is vertically integrated, is in real estate full time, and has had successful exits).
The real estate panel (Mauricio Rauld, Feras Moussa, David Greene, and Omar Khan) carried on the theme, i.e. the importance of focusing on operations and ample reserves. With looming debt maturities, many are sipping on hopium but hope is not a strategy. This theme (having ample reserves, focusing on increasing revenues and optimizing expenses, i.e. things you can control) was later on emphasized by Ken McElroy too who further noted that the next 18-24 months will be rough but there will be lessons to be learned going through this and that people who can hold long term will be ok (thereby reminding us that focus on fundamentals is key).
Tom Wilson who brings six decades of real estate experience, then reminded us of the importance of not being greedy. We all want high cap rates, low risk, and high appreciation. However, it is hard to find all three – pick the one most important to you. Quality tenants are more important than the asset class. Underwriting is a valuable skill set (sounds familiar?). When choosing operators emphasize character over competence. It is all about doing right by your investors, tenants, and partners. Relationships are the most valuable asset (and a liability). Give back and share. Enjoy the journey. Smell the roses every day.
David Greene (host of the Bigger Pockets podcast, author of multiple books, and real estate entrepreneur) shared his personal story with a key takeaway question for the audience – How do you become the person you need to become to build wealth? How do I change to meet the requirements of what/who I want to become? He shared the importance of working through the problem and how to add value first. There is no such thing as free lunch and totally passive income.
Syndication attorneys (Mauricio Rauld and Merrill Kaliser) are consistently seeing higher level of distressed deals and capital calls.
Tyler Carney (mortgage broker) nicely summarized the state of the commercial lending space marked by bank failures, mergers, and liquidity constraints (we shared our outlook, which has since materialized, on this topic in one of our earlier newsletters this year. Banks are more selective on who they lend to. Cash flow, relationships, and sponsor strength are paramount. Low leverage agency debt represents the majority of deals and the agencies are getting creative on how to accommodate low leverage (e.g. 35 vs. 30 yr amortization terms).
The storm has started and we likely have not seen the worst of it yet. The coming maturities (~$700BN in multifamily loans (out of ~$2TN in commercial real estate) are coming due in the next 18-24 months). Such credit events will force operators to make a decision – sell, refinance if they can (assuming there is built in equity), or negotiate an extension with the lender (assuming the operator is in good standing and has sufficient sponsor financial strength). And while there will be a lot of pain, this will also create opportunities for those who have been on the sidelines and have deep pockets to step in and take over great assets in markets with strong fundamentals.
If you have been following our content, you would not be surprised that we are of the opinion that the recession has started and it will get worse before it gets better. However, the adjustment in commercial real estate (and multifamily) is much needed to cool off the irrational valuations that spiked post CV19. We look forward to the opportunities 2024 will bring and sharing those with you!
There was a lot more to cover. Apart from the educational aspects, re-connecting with fellow professionals and making new connections was invaluable. We look forward to attending both events again next year!
Should you have any questions or want to learn more about real estate investing or for an overview of our target markets, please reach out to firstname.lastname@example.org.
Disclaimer: The information presented does not constitute legal, accounting, tax, or individually tailored investment advice. Past results do not represent or guarantee future performance.