January 2023: Slowing Down to Speed Up
In January, we were busy with taxes and noticed fewer properties on sale. We're changing our email system from MailChimp to IMS, so watch out for our updates in your spam folder. Exciting news: We're hiring more people to help us review more properties.
We find January always tends to be a slower month. There was very little inventory on the market, and we always get bogged down in tax preparation so we can deliver investor K1s on time. However, we took some massive steps forward this past month. More on that below. However, before we move onto that, we want to state that this will be the last time we issue this email via MailChimp. Instead, we'll be using IMS, the system we use for property reports, investor portals, etc. So, if you feel that you suddenly no longer see our monthly newsletters, our new emails are probably just going to the spam folder.
LATEST NEWS
We Are Hiring (Again)!
Thanks to many of you reading this email and the relationships we've built over the last several years, for the first time in our company's history, we feel that equity is no longer the "bottleneck" limiting our acquisitions. Instead, our ability to analyze properties is what is limiting our pipeline, so to solve this issue, we've been interviewing prospects for our Acquisition Associate position.We received dozens of applications and completed nearly as many interviews over the past month. We'll have two new people joining our team shortly, so stay tuned for that announcement. WHAT WE ARE LOOKING FORNo changes here. For 2023, our acquisitions will focus on debt timing. More specifically, we'll be targeting properties where the current owners' issues are not necessarily coming from the property performance, but the capital stack such as the following:
- Distressed borrowers (bridge debt)
- Motivated sellers (loans coming due)
- New construction (construction loans)
Once we expand our analysis capacity, we'll be expanding our market focus to include not only South Carolina, North Carolina, and Georgia, but also Virginia and Tennessee.
WHAT WE ARE FINDING
As we mentioned earlier, there hasn't been much inventory on the market so far. The distressed debt stories are still out there, but we don't expect them to come to the market quite yet. And as we'll detail later, there's a new group of funds that could limit the number of distressed properties hitting the market.
MARKET INSIGHTS
These are a few big stories that we’re following right now:
Hedging is Expensive
We've mentioned the coming bridge debt balloon previously, but the increased cost of interest rate caps is a very similar phenomenon that we think is going to be the biggest story in real estate in the coming months. With approximately 1/3 of commercial real estate using floating rate debt and the cost of interest rate caps skyrocketing over the past year, we expect to see a flood of owners looking to sell in the near future unless...
Lenders to the Rescue?
"Rescue funds", which are groups that will come in and provide mezzanine debt or preferred equity to sponsors in tough situations, are the hot new thing (see here and here). This could prevent a lot of properties from coming on market, but this seems like a very risky move to us. If you have a property struggling due to capital stack issues, why not throw more onto the capital stack?Good and Bad News on InflationWith the latest inflation data coming out earlier this week, there is both good and bad news. The good news is that inflation is now down for the seventh consecutive month, and core goods inflation is down around 1%. The bad news is that it isn't down as much as expected (but let's be honest, are the expectations ever correct?).
The End is Near?
With inflation slowing going down for 7 consecutive months and the Fed (maybe) slowing down, some are thinking that we're close to the other side. Investment advisory firm Green Street says that the bottom is close, or that we've already reached it. Only time will tell.