November 2023 – The halfway point of the great pricing reset
The Multifamily Investment Environment
The hurricane in the capital markets is blowing hard.
The Fed appears to be struggling to figure out what 10-year yields near 5% mean for tightening financial conditions - and markets will wait to see how much that tempers the Fed's worries about inflation. As that is being grappled with, we could see further volatility as the lag effect of the fastest tightening cycle in 45-years begins to manifest itself throughout the broader economy. Can the Fed actually engineer its first soft landing in history or is the tide just receding to be followed by a tidal wave of value destruction?
From our perspective, stabilized real estate has never been a 3.5% - 4% cap investment. Caps in this range are close to the historical spreads used to calculate risk-adjusted returns – leaving NO actual real return potential from a normalized “risk-free” benchmark. Our thesis is holding strong as the inverted cap rate vs. 10-year spread has frozen the transaction market.
This begs the question, notwithstanding a systemic event, where are we now in the great pricing reset. The following graph from CBRE tells a compelling story.
Anecdotally, our systems have tracked a distinctive uptick in marketed deal flow that would indicate more sellers are attempting to exit their positions than any quarter this year. This may be the beginning of the acknowledgement that lower pricing is indeed ahead.
Last Month in Essential Realty Partners
Discipline and patience is driving our investment policy as we enter what we feel is roughly the halfway point of the great pricing reset. We still don’t have pricing discovery as loan modifications are extending some of the floating rate debt that is maturing.
This is a short-term blip in the great pricing reset as most modifications are for less than one year. This doesn’t mean we are resting on our laurels as we are actively structuring innovative investment vehicles designed to allow our family office capital partners to participate in GP economics more fully as we start deploying capital at the new pricing levels. We expect that multifamily will return to its roots with cash flow distributions accounting for 2/3rds of its investment yield on our upcoming investments.
Finally, as a board member of the Family Office Real Estate (FORE) Institute we are excited to announce that FORE will be hosting its annual Investment Forum in Breckenridge, CO in February. This is a great opportunity to network, learn, and be inspired by the best minds in real estate investment. With immersive sessions and expert-led panels, it's the must-attend event of the year for industry professionals. Join us to shape the future of family office real estate investment and ensure your legacy thrives.
Please drop us an email if you would like to learn more about attending this must-attend event as we work to shape the future of family office real estate investing.