With what is happening in the real estate market, the sh## IS going to hit the fan and will be true, especially in the multifamily area. Many Families are gearing up for this……. as long as they will not lose their shirts!
People purchasing multifamily properties at a four cap or near that number will be running into some issues, especially if they borrow at a higher interest rate than the purchased cap rate. And what about if they have a variable loan or have to reprice a loan when they convert it into a permanent loan?
This negative leverage will put significant pressure on these properties, providing opportunity. We will find out who the experienced asset managers and developers are.
Loans will also default in the near future and provide an opportunity to pick up properties at a discount while in the first position. THIS WILL HAPPEN. Any banks that overextended themselves will not be bailed out; however, banks have been much more conservative this time, which will be different than the great recession, but defaults and distress will happen.
For four consecutive years, in our annual family office real estate investing report (in our 4th year), 70% of families have wanted to invest directly with sponsors into real estate deals. However, the market has only gone up since the recession, so the question is, did they pick the right partners to implement the investment strategy when trouble hits the market?
Over the last ten years, family offices have had significant returns, but as the first patriarch I worked for on his real estate portfolio said, “all boats rise in a rising tide,” and that has been the case. So, as I said at the beginning of this, we are about to find out which sponsors/operators are equipped to handle any downturns. Many of these operators have never been through a recession or started purchasing properties from 2012. If they started at that time or anytime up until now, they have never seen or experienced a downturn, and if things keep moving the way they are, then there will be blood in the streets.
Many families, similar to institutions, are not putting out capital or are building up dry powder; however, families need to understand that there is still opportunity even now. Fundamentals are solid in many markets, as well as certain property types. People are still moving for jobs, quality of life, and cost of living, which might increase with current events. Digging in to learn more about what deals are being presented to you as a family office will ultimately determine if the opportunity is truly there.
Is there going to be opportunities coming up? Yes, for sure, but family offices must be sure to keep their eyes open to what is in front of them as well as looking down the road.