April 2023: Eventful and Uneventful Times
In eventful times, Summers Run advances with full equity commitments. Buying opportunities exist with 20% price drops and safer financing. Loan assumptions are promising. Market demand varies. Federal Funds Rate may pause at 5-5.25%. First Republic Bank's collapse raises rate hike concerns, squeezing banks.
Isn't it interesting to be both in very eventful and uneventful times? On the eventful side of the ledger, we're anxiously awaiting every inflation update and Fed meeting. On the uneventful side, transaction volume has plummeted. Our latest news and thoughts from April are summarized below.
LATEST NEWS
Current Offering - Summers Run - Asheboro, NC
Summers Run is still progressing forward. As it sits today, we have soft commitments in place for the full equity amount, but we are in the process of finalizing investment documents and checking a few other boxes. We anticipate closing in early June.
If you are interested but haven't signed up yet, please let us know, and we'll register a soft commitment.
Our Outlook
Speaking broadly, we think it's a great time to buy. The time to be nervous was 2021, when everybody was using floating rate bridge debt at 80%+ LTC, cap rates were at all-time lows, and people were assuming multiple years of double digit rent growth. Today, prices are down 20%, most buyers aren't even looking, and financing is all very low leverage (aka safe).
Many people we talk to say that they have a lot of "dry powder" and think that the best time to buy will be in Q4 or during a recession for a combination of two reasons: bridge debt coming due (sellers are more motivated) and interest rates going down (making for more favorable loan terms). But given that this is an industry where people are constantly trying to solve for 15-20% IRRs for their limited partners, we're skeptical that things will be that great.
If even half of the buyers jump back in the market and financing terms improve, even in a recessionary environment, we would expect to see prices bid up.
WHAT WE ARE LOOKING FOR
Loan assumptions remain the most compelling opportunities, though we've recently looked at everything ranging from student housing, value-add, new construction, former LIHTC properties, and even student-to-market conversions.
WHAT WE ARE FINDING
It's hard to say what the true level of demand is these days. There are obviously sellers that are holding out and waiting for better days, but when properties do hit the market, we've seen several not only meet, but exceed their asking prices. Other deals sit out on the market for weeks, if not months.
MARKET INSIGHTS
As Bad as It Gets?
After ten rate hikes increased the Federal Funds Rate to 5-5.25%, the Fed is signaling a pause. This is the highest rate since August of 2007. SOFR futures show that markets believe that rates will be cut in half within the next 24 months, which would presumably push real estate markets back to normal levels (as in pre-2020, not 2020-2022).
Inflation Update
By our low standards, we've seen another great month of inflation developments. April officially dropped below 5% for the first time in two years. We take our wins where we can get them.
Another One Bites the Dust
With the collapse of First Republic Bank and its subsequent sale to JP Morgan, bank failures are starting to look more like a trend than one off occurrences. It's fair to wonder how much pressure this will put on the Fed to stop raising rates and start cutting them instead. Contagion in banking is what everybody seems to fear, and while each story is different, the rapid rise in interest rates is definitely squeezing banks.