January 2025: NMHC Vibes, Distressed Deals, and the Start of a New Cycle

It's official. We've survived until 2025. The world of real estate investing is now sunshine and rainbows, and the magic of "growth" is going to rescue every 3% cap deal that was bought with floating rate debt in 2021.

In all seriousness, I have quite a few thoughts on this, including some contratian ones, which we'll cover below.  

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MARKET INSIGHTS

Before I kick off this segment, I want to disclaim that I am not using any data. These are my impressions after a few dozen conversations I've had over the last month. This is purely anecdotal (call it anecdata), vibes only! So consider yourself warned!

Earlier this week, we attended NMHC, the biggest conference in the industry. For starters, I was told that attendance was down from 9,000 to 5,000 (reminder, I didn't verify this), which would make you think that on a macro level, the vibes are definitely bad. But I'm going to break my conversations into four specific groups: lenders, equity, brokers, and owners.  

Lenders

For the lenders, I think we're finally seeing them call in their bets and move on. Some lenders were open about deals they wanted off the books, while others agreed to put together lists of distressed assets. I heard this second hand, but one group said a lender didn't want to offload any bad loans, but followed up by asking about which markets somebody would buy their non-performing loans.

None of this should come as too big of a surprise. We've already seen some of the larger syndications lose deals to foreclosure (sorry GVA and Tides), so it makes sense that others would follow suit.

Verdict: Lenders are negative

Equity

For the last few years, it's been a great time to be equity, as you could really dictate terms. Term sheets were hard to come by, so if you were investing, preferred returns were up and GP splits were down.

But that appears to be ending. Multiple JV groups told me about how they'd been out bid on term sheets. Either that, or sponsors opted to syndicate instead. My overall impression from equity (from their perspective) was somewhat pessimistic, which I think marks a huge turning point. But I think the bright side of this is that equity will be put out, which wasn't always the case during the last two years (and let's not make the perfect the enemy of the good).

Verdict: Equity is negative

Brokers

Who cares what brokers think? Just kidding. I care. Or do I...?

I thought broker sentiment was fairly positive. Which might have a lot to do with the reason lender sentiment was very negative. We've hit 2025, rates haven't really gone down, so owners and lenders are throwing in the towel. That's good news for brokers.

Verdict: Brokers are positive

Owners

Shockingly, it was hard to find a single owner that confessed to having trouble within their portfolio. Who would have thought? Maybe you could argue that the most troubled owners know they won't be raising money, so what's the point of showing up? In all seriousness, if you have issues in your portfolio, it's not like you want to go advertising them to people.

However, outside of NMHC, my impression of owners is that a lot of owners are giving up. They've survived until 25, but the rates haven't come down, and lenders are calling the loans. Many spent the last couple years trying to squeeze every operational efficiency possible, but if you haven't improved it yet, it's not likely to get better (yes, there are some special circumstances).

Verdict: Owners are split

Conclusion

The final score on this front comes out at 2.5 negative, 1.5 positive. Here is how I interpret the vibes.

Over the past two years, I've maintained that it was a great time to buy. Prices were down and demand was low. That bodes well for buyers. We're certainly proud of the acquisitions we made, and we've even successfully gone full cycle on one deal (Cooper Bend), delivering 30+% returns for investors in just 14 months. I still believe that these acquisitions are going to look great in the years to come.

For 2025, I think you'll see more transactions, and a lot more equity being deployed. The negative outlook from lenders really means that more deals will hit the market. The negative outlook from the big equity groups is one way of saying that more equity will be deployed (see perfect vs good again).

I don't think we're at the bottom anymore (I peg that as Q4 2023), but we're certainly early in the new cycle. I think it will be a good time to buy. It will be a hard time to buy (I don't think there is such thing as an easy time to buy in the moment, only in hindsight). As a friend of mine put it, "sellers are going to hate the price, and buyers are going to hate the debt."

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OTHER THOUGHTS

I don't think there is too much left to touch on in this newsletter.

Rates went up for a few months, and inflation didn't quite go away, so the Fed has put a pause on the rate cuts for the time being. Personally, I don't think it makes much sense to claim that the impact won't be felt for 12-18 months on the way up, but then act like the cuts you've made in the last 6 months are heating up the economy too much. (There are also the problems with downward jobs revisions, the delay in rent calculation in CPI (don't get me started on owner equivalent rents again), the Sahm rule, etc.) Also, the labor numbers continue to worry me, since they're being propped up by healthcare and government (both of which might now be in doubt).

So I'll end with my bold prediction, and I'll give bonus points to anybody who saves this and throws it in my face at the end of the year. I think there will be at least 100 basis points of cuts this year. If I'm reading this correctly, the market thinks it will be 75 basis points, so we'll see.

As always, thanks for your support.

Thank you,

Will Matheson