When it comes to investing in multifamily real estate, understanding a sponsor’s underwriting assumptions and having realistic values to consider is extremely important. There are a number of assumptions and forecasts built into the data that a sponsor generates to project the returns for a specific project. Let’s explore what they are and why they are important.
Multifamily investments have continued to perform relatively well throughout COVID and we predict we’ll continue to see this trend playing out over the next decade. The combination of renter demographics, low interest rates, and an expected slowdown in supply should position the asset class well moving forward.
Despite the pandemic, the multifamily sector of commercial real estate investment is showing a resilience unmatched by other asset classes.
COVID-19 and the resulting economic impact coupled with changes implemented by the Federal Reserve (FED) have led to a decline in interest rates. We believe these lower rates - along with some other factors - will increase values in multifamily real estate across various markets.
The COVID-19 pandemic has hit our economy like no other financial crisis. Millions of people have lost their jobs and businesses due to no fault of their own. Being a great chef means nothing when the municipality requires all restaurants to close.
The pandemic’s effect on the economy is very different than the 2008 financial crisis. The impact has been greater (in the short term) than most previous economic crises, but it has the potential to resolve much faster because the root cause is different. The 2008 crash was caused by high leverage and low mortgage standards in the single-family housing industry. This filtered through local economies in different ways but led to an overall reset of asset values.
Winter 2019 marks our company’s 10-year anniversary. It’s hard to believe that 10 years ago, life threw me a curveball and I didn’t know what to do.
In June 2009, I was laid off from my job as an analyst at Capmark and couldn’t get another job in real estate, so I decided to try my luck investing in real estate, even though I didn’t have a formal education in this space.
What Are Interest Rates?
The Federal Reserve’s Policy Committee (FOMC) sets a desired range for inflation between 1.7%-2%. The FOMC monitors inflation using the Consumer Price Index (CPI), which measures the average change over time in prices that consumers pay for a certain basket of goods and services.
The apartment business doesn't seem like the kind of arena that can kill you. It's not likely to cause one of those obvious tragedies, and I'm not trying to make light of them. But the apartment business could kill you financially. In my opinion, financial death happens when you lose money and lose a property. It's one thing to not make a return on your money for a period, but it's entirely different to lose the money you've invested.
Over the past year, I've read about 50 books and listened to countless podcasts. One of the recurring themes is this idea of Mental Models. Mental Models are like shortcuts for thinking. They simplify complex situations, rate some items as more relevant than others, and underpin how we reason. We aren't aware of what goes into our decision making, but that's when our Mental Models kick in. We use them to make sense of our surroundings and organize them into an understandable framework.
Where is the next opportunity? It's the million- or (multimillion-) dollar question.
Here's our snapshot of the current multifamily real estate investment situation: