Get Rich Education
Real Estate Investing with Keith Weinhold
Podcast
Episodes
Listen, download, subscribe
Multifamily Values Down 25%. Will it Hit Residential? Featuring Neal Bawa
• 46 minFailed deals. Capital calls. Lost investor money. A dreadful and sobering conversation ensues for many in some commercial real estate sectors. Residential (1-4 unit) and commercial (5+ unit) real estate fortunes are decoupling. Multifamily commercial loans are at the mercy of interest rate resets. Residential is stable due to low supply and sustained demand. Neal Bawa from MultifamilyU and I outline the multifamily problem. Values have plummeted 25%. The magnitude of the multifamily problem is about 1/80th of the 2008 Global Financial Crisis. There are two reasons for the office apocalypse—both declining income and increasing expenses. Only 3% of office buildings in downtown cores have a floor plan that can be converted to residential. Dreadful. There will be possible discounts in the hotel industry due to a lack of funding and loans. Retail has surprising bright spots. We discuss the future of rents through 2026. Will multifamily problems create contagion into 1-4 unit residential? We discuss. Timestamps: Multifamily industry changes and challenges [00:00:46] Discussion on the new difficulties faced in multifamily, such as failed deals, capital calls, and banking industry challenges. Opportunity arising in the multifamily market [00:01:12] Exploration of the current opportunity in the multifamily market due to a 25% reduction in prices from the peak, caused by distressed transactions and high interest costs. Anatomy of the problem with floating rate debt [00:05:57] Explanation of the issues faced by apartment building owners or syndicators when they have floating rate debt without rate caps, leading to potential deal blow-ups. The rate cap issue [00:08:29] Discussion on operators neglecting to buy a rate cap or buying a rate cap set too high, leading to negative cash flow. Magnitude of the multifamily reset problem [00:09:47] Comparison of the current multifamily reset problem to the global financial crisis, highlighting the challenges faced by operators. Challenges in refinancing properties [00:12:10] Explanation of the challenges faced by properties in refinancing due to decreased net operating income and increased mortgage costs, leading to potential loss of investor money. The availability of multifamily loans [00:16:50] Neil discusses the availability of commercial real estate loans, particularly in the multifamily space, and how it differs from other asset classes. Lending challenges in the commercial real estate space [00:18:03] Neil talks about the severe lending challenges faced by asset classes like office, retail, and self-storage, while expressing confidence in the stability of multifamily lending. Contagion and the impact on the 1 to 4 unit space [00:20:56] Neil discusses the limited level of contagion that could affect the 1 to 4 unit space due to problems in the multifamily market, highlighting the healthiness of the single-family market and institutional interest in it. The Troubled Office Sector [00:25:35] The speaker discusses how the office sector is facing a long-term demand crisis due to the decrease in office occupancy and the challenges of converting office buildings into residential units. The Ten-Year Problem in the Office Sector [00:27:06] The speaker explains that the office sector is about to face a ten-year problem, with defaults and declining values affecting the downtown core and other assets. Bright Spots in Retail and Hotels [00:29:21] The speaker highlights that retail occupancy is higher than multifamily occupancy, and despite the Amazon effect, retail is doing well. They also mention that hotels have seen strong recovery post-pandemic. Hotels and Multifamily Discounts [00:32:55] Discussion on the current cash flow opportunities in hotels and multifamily properties, potential discounts in the next 12 months. Retail Reinvention and Rents in a Recession [00:33:57] Exploration of how retail can sustain itself through experiential offerings, the resilience of rents in past recessions. Artificial Recession and Rent Growth [00:35:33] Analysis of the possibility of a recession and its impact on rents, the strength of the US economy, and the expected short duration of the recession. The recession and its frequency [00:40:56] Discussion on the frequency of recessions and how they are a normal part of the business cycle. Learning opportunities at MultifamilyU.com [00:41:31] Information on the webinars offered by multifamily ewcom, covering various topics including single-family and multifamily projects. Appreciation for Neil Bawa's insights [00:42:22] The host expresses gratitude for Neil Bawa's informative contributions and welcomes him back on the show. Resources mentioned: Show Notes: GetRichEducation.com/473 Neal Bawa: MultiFamilyU.com and Grocapitus.com For access to properties or free help with a GRE’s Investment Coach, start here: GREmarketplace.com Get mortgage loans for investment property: RidgeLendingGroup.com or call 855-74-RIDGE or e-mail: info@RidgeLendingGroup.com Invest with Freedom Family Investments. You get paid first: Text ‘FAMILY’ to 66866 Will you please leave a review for the show? I’d be grateful. Search “how to leave an Apple Podcasts review” Top Properties & Providers: GREmarketplace.com GRE Free Investment Coaching: GREmarketplace.com/Coach Best Financial Education: GetRichEducation.com Get our wealth-building newsletter free— text ‘GRE’ to 66866 Our YouTube Channel: www.youtube.com/c/GetRichEducation Follow us on Instagram: @getricheducation Keith’s personal Instagram: @keithweinhold Complete episode transcript: Speaker 1: Today's guest is well known as the mad Scientist of multifamily. He's a data guru, self-described self-described process freak, and an outsourcing expert. He's a ten figure man with his billion dollar plus multifamily portfolio and his 900 plus investors. He's also the CEO at a multifamily education company because he's a really good teacher. It's been about a year and a half since you were first here. Welcome back to Neal Bawa. Speaker 1 (00:00:40) - Well, thanks for having me back on. It's it's a delight to be back. Had a fantastic conversation with you last time. So I'm looking forward to this one. We did. Speaker 2 (00:00:46) - The last one was so fun and spirited. But my gosh, since then, Neal, about a year and a half ago, so much has changed in the multifamily industry. We know that a lot of new difficulties have come into multifamily, like failed deals and capital calls and the need to raise bridge debt and banking industry challenges. Speaker 2 (00:01:06) - So where would you like to start to help give us some perspective on all that? Speaker 1 (00:01:12) - Well, think opportunity is finally here. You know, when when we talked a year and a half ago, I was I said things like, well, prices are too high. I said things like, I don't know where the margins are. I don't know how people make deals work. I don't know how they make them pencil out. Right. Um, in some ways, I'm still saying some of those things, but it's certainly not because of pricing anymore. So, you know, the single family market is a perfect sort of benchmark for the world that live in multifamily. As far as I know, in the last 12 months, single family prices have either been flat or up 1% or down 1%, depending upon which analyst you pick. But it's certainly been an extremely, extraordinarily stable market in terms of prices, where it's it's you know, the volume, of course, has cratered. It's down a ridiculous percentage. Speaker 1 (00:02:00) - Whereas multifamily was an industry that has hurt more because of the portion of multifamily that was purchased or traded in the 2020, 2021 and 2022 time frame. Almost all of those trades happened using bridge loans which were floating, whereas almost all single family transactions were 30 year fixed loans. Right. So so two completely different things have happened. Normally the single family and multifamily market tend to be in lockstep. And that's certainly been the case for ten years. But over the last 18 months, single family and multifamily have separated from each other. And the big reason for that is almost all of the distressed transactions that you're talking about, that you're alluding to all of those cash calls. They are related to bridge loans, which had floating debt. And that floating debt has gone from, you know, 6% to ten, eight, you know, 11%, even for for some of these, these operators making it extremely difficult to make numbers work, making it very difficult to pencil. But on the good side, we've now seen compared to the peak, which was probably about 20, 21 months ago, we've seen a 25% reduction in prices, which is huge because we mean multifamily usually as an asset class, doesn't go down 25% simply because it its value is based on rents, you know, and rents rarely go down. Speaker 1 (00:03:22) - They hardly went down for 6 or 7 months in 2008, so we didn't see much of a decline there in 2008, simply because, you know, the, the, the income was strong, but this time, the much, much higher cost of interest means that our overall post mortgage income is down. And that's why prices are down 25%. So both opportunity and distress in the multifamily space. Speaker 2 (00:03:46) - That's such a staggering number. So let's frame that. Multifamily prices down 25% since their peak or year over year. And then just to be clear, we're talking about five plus unit residential apartment buildings with that figure. Speaker 1 (00:04:01) - Yes, I'm glad you asked the question that way because I do need to qualify a few things. So so first thing is down from peak and depending upon different markets, the peak was either the last quarter of 2021 or the first quarter of 2022. And in a couple of markets, even the second quarter of 2022. So it's I'm not saying year over
Get Rich Education RSS Feed
