{"id":160288,"date":"2023-10-09T21:29:16","date_gmt":"2023-10-10T03:29:16","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=160288"},"modified":"2023-10-09T21:29:20","modified_gmt":"2023-10-10T03:29:20","slug":"what-is-really-behind-the-slew-of-recent-commercial-real-estate-failures","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/what-is-really-behind-the-slew-of-recent-commercial-real-estate-failures","title":{"rendered":"What&#8217;s Really Behind the Slew of Recent Commercial Failures?"},"content":{"rendered":"\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Let\u2019s stop talking about commercial real estate, which actually consists of over a dozen asset types, many of which are quite different.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Headlines like \u201c<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/the-biggest-crash-imaginable-is-coming-for-commercial-assets\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">The Biggest Crash Imaginable is Coming for Commercial Real Estate Assets<\/span><\/a><span data-preserver-spaces=\"true\">\u201d might apply to the office sector but not so much to self-storage or mobile home parks. In fact, it might apply to the office market in San Francisco but not office assets in Topeka, Kansas.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Furthermore, a crash could happen to office assets in Topeka, but only those acquired with high leverage\u2014not those owned for cash or those acquired cheaply from mom-and-pop investors.&nbsp;&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Do you see my point? Let\u2019s not overgeneralize what\u2019s happening as we consider our current or next investments.&nbsp;&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><em><strong>Quick Note:<\/strong> <span data-preserver-spaces=\"true\">I\u2019ll be hosting the Commercial Real Estate Panel at the upcoming BiggerPockets Annual Conference in Orlando in mid-October. I\u2019ll be joined by a distinguished panel of experts, including&nbsp;<\/span><strong><span data-preserver-spaces=\"true\">J Scott<\/span><\/strong><span data-preserver-spaces=\"true\">,&nbsp;<\/span><strong><span data-preserver-spaces=\"true\">Britt Arnason<\/span><\/strong><span data-preserver-spaces=\"true\">,&nbsp;<\/span><strong><span data-preserver-spaces=\"true\">AJ Osborne<\/span><\/strong><span data-preserver-spaces=\"true\">, and&nbsp;<\/span><strong><span data-preserver-spaces=\"true\">Tyler Cauble<\/span><\/strong><span data-preserver-spaces=\"true\">. (I won\u2019t need to say a word!)<\/span> <span data-preserver-spaces=\"true\">I hope to see you there. Please come and say hello!&nbsp;&nbsp;<\/span><\/em><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">A perfect example is&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.wsj.com\/articles\/self-storage-addiction-investors-80e0a14b\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">recent news on self-storage<\/span><\/a><span data-preserver-spaces=\"true\">. Self-storage has been overbuilt in places like Charlotte, North Carolina; Nashville, Tennessee; and Denver. (Or has it? I\u2019m generalizing again.).<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">But that doesn\u2019t mean it is overbuilt in Ishpeming, Michigan, or Beeville, Texas, where we made significant investments in assets that have thrived in up-and-down economies.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">And just because prices are dropping in Las Vegas doesn\u2019t mean we didn\u2019t do a storage deal. We are excited about it there (it helps that previous rents were only 41% of market price).&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Just because the city of St. Louis has experienced population declines doesn\u2019t mean the metro St. Louis self-storage asset we invested in at $33.45\/square foot won\u2019t be a wonderful asset (though nothing is guaranteed).\u00a0<\/span><\/p>\n\n\n\n\n\n\n  <div class=\"lg:block\" x-data=\"{ ad_block_block_6524c4f90306e: popAds(1) }\">\n      <template x-for=\"ad in ad_block_block_6524c4f90306e\">\n        <a\n          :href=\"ad.linkURL\"\n          class=\"no-underline text-black\"\n          x-on:click=\"adClicked('https:\/\/www.biggerpockets.com\/blog\/what-is-really-behind-the-slew-of-recent-commercial-real-estate-failures', ad.sponsor, ad.title, ad.id, 'blockAdClicked', 'blockAd', '')\"\n          target=\"_blank\">\n          <div\n            class=\"py-4 border-b flex flex-col flex-nowrap text-sm border-t px-0 rounded-none\"\n            x-init=\"\n              analytics.track('blockAdLoaded', {\n                referrer: 'https:\/\/www.biggerpockets.com\/blog\/what-is-really-behind-the-slew-of-recent-commercial-real-estate-failures',\n                sponsor: ad.sponsor,\n                ad_title: ad.title,\n                ad_page_location: ''\n              })\n            \"\n            x-intersect:enter.once=\"adViewed('https:\/\/www.biggerpockets.com\/blog\/what-is-really-behind-the-slew-of-recent-commercial-real-estate-failures', ad.sponsor, ad.title, ad.id, 'blockAdViewed', 'blockAd', '')\">\n            <div><span class=\"text-xs text-slate-light block bg-slate-50 p-1 inline-block rounded-md\">Sponsored<\/span><\/div>\n            <div class=\"flex items-center text-sm space-x-4\">\n                <img :src=\"ad.imageURL\" :alt=\"ad.imageAlt\" class=\"h-10 w-10 object-cover rounded-full\">\n\n                <div clas=\"text-sm\">\n                    <span class=\"font-bold block\" x-text=\"ad.sponsor\"><\/span>\n                    <span class=\"text-slate\/80\" x-text=\"ad.description\"><\/span>\n                <\/div>\n            <\/div>\n\n            <div>\n                <span class=\"font-bold\" x-text=\"ad.title\"><\/span>\n                <p class=\"mt-2 text-slate\/80\" x-text=\"ad.body\"><\/p>\n                <span class=\"mt-2 text-themeBlue block mt-2 underline\" x-text=\"ad.linkTitle\"><\/span>\n            <\/div>\n          <\/div>\n        <\/a>\n      <\/template>\n  <\/div>\n\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Deals Gone Sour<\/span><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">We\u2019ve all heard the bad news about&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/multifamily-market-could-see-catastrophic-declines-by-end-of-2024\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">multifamily<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;deals going wrong. I\u2019m not talking about recent crowdfunding debacles, which is a separate issue, exposing a lack of corporate due diligence.<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Often, the assets we say failed are not failures at all. The properties are still producing healthy cash flow. People still live in them, or there is stuff in them.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Yet some are foreclosed on and making headlines.<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">So what failed? The asset? Rarely. The deal? Close.&nbsp;<\/span><em><span data-preserver-spaces=\"true\">It\u2019s typically how the deal was purchased and financed<\/span><\/em><span data-preserver-spaces=\"true\">.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Here are some types of deals that could have been rock stars with the right operator but will likely go bad:&nbsp;<\/span><\/p>\n\n\n\n<ol class=\"wp-block-list\">\n<li><span data-preserver-spaces=\"true\">A&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/ultimate-guide-to-real-estate-syndication\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">syndicator<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;who overpaid by 30% for a deal expecting rents to catch up (after all, rents in that city went up 18% a year for three years, and since people are coming from California, it\u2019s logical that trend will continue\u2014NOT!).&nbsp;<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">A deal acquired with 80% floating-rate debt with a two-year term.<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Floating-rate debt with no rate cap (could sink most deals).&nbsp;<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Floating-rate debt with a rate cap that expires.<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Bad underwriting, such as assuming operating expenses would flatten while rents continued to rise. Unfortunately, the opposite has happened to some.&nbsp;<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Underutilized equity. Someone over-raised millions and planned to pay investors their returns from that raised money (with no disclosure). This is highly dilutive to the deal, and often, much of that capital must be used to fund interest rate caps and higher debt service.&nbsp;<\/span><\/li>\n<\/ol>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Some of these have seen reserves go up 50x (that\u2019s not a typo) or more. That\u2019s devastating, especially since the projected rent increases did not materialize and operating expenses continued rising with inflation. And it hasn\u2019t helped that insurance premiums and taxes have sometimes experienced record increases.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">So, it\u2019s not the asset&nbsp;<\/span><em><span data-preserver-spaces=\"true\">classes<\/span><\/em><span data-preserver-spaces=\"true\">&nbsp;that failed. Multifamily is still in high demand. And it\u2019s not always the asset&nbsp;<\/span><em><span data-preserver-spaces=\"true\">itself<\/span><\/em><span data-preserver-spaces=\"true\">. Many are still performing well. It\u2019s often the deal structure. And that is what you should watch out for.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">This is why I\u2019m still urging investors to perform robust&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/rookie-190\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">due diligence<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;before writing a check.&nbsp;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Speaking of Asset Types<\/span><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">I mentioned that we should stop talking about commercial real estate and start referring to specific asset types and assets. We could discuss over a dozen individual asset types. Here are a few:&nbsp;<\/span><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><span data-preserver-spaces=\"true\">Multifamily<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Office<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Mobile home parks\/RV parks<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Retail&nbsp;<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Light industrial&nbsp;<\/span><\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Many of these have many subtypes. Take retail. Malls are dying while open-air shopping is flying (but not&nbsp;<\/span><em><span data-preserver-spaces=\"true\">all<\/span><\/em><span data-preserver-spaces=\"true\">&nbsp;malls or&nbsp;<\/span><em><span data-preserver-spaces=\"true\">all<\/span><\/em><span data-preserver-spaces=\"true\">&nbsp;shopping are dying and flying).&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">So, what types of assets are most vulnerable? Office is an obvious one. Enough has been written about this; most BiggerPockets readers don\u2019t invest in it anyway.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Hospitality also showed a lot of vulnerability during the COVID-19 pandemic, and it appears most BiggerPockets readers avoided that asset type as well. (I do have a friend crushing it in hotels, by the way.).&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Let\u2019s spend more time on several assets many BiggerPockets readers invest in.<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Multifamily<\/span><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Multifamily has seen increasing supply and demand. So why have I been so critical about this asset type I wrote a book on (<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.amazon.com\/Perfect-Investment-Enduring-Historic-Multifamily\/dp\/153700395X\/ref=tmm_pap_swatch_0?_encoding=UTF8&amp;qid=1692803838&amp;sr=8-1\" target=\"_blank\" rel=\"noopener\"><em><span data-preserver-spaces=\"true\">The Perfect Investment<\/span><\/em><\/a><span data-preserver-spaces=\"true\">)?&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Multifamily is in massive demand. In fact, there is a 5.5 million-unit multifamily and single-family shortfall, according to the&nbsp;<\/span><em><span data-preserver-spaces=\"true\">Wall Street Journal<\/span><\/em><span data-preserver-spaces=\"true\">. Unlike in the office sector, people always need a place to live.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">I am not arguing that means that every deal should flourish. My friend and BiggerPockets author, Brian Burke, explained this well&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/podcasts.apple.com\/lu\/podcast\/157-how-to-lose-money-by-buying-at-the-top-of\/id1170805348?i=1000436048964\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">on my podcast<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;years ago. He believed that myth\u2014until he bought a half-priced deal in 2008 that tanked. I love Brian\u2019s transparency when he discusses this painful deal and how he emptied his own pockets to rescue it.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">But I am saying that overall, the multifamily asset class (particularly affordable multifamily) has different fundamentals than office.&nbsp;<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Office<\/span><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">In 2019, before the pandemic, who would have dreamed millions of square feet of office space would be abandoned within a year, with some shuttered permanently?&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Even so, office may rebound. We don\u2019t know when or how. And it\u2019s being repurposed into multifamily in some cases.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">But that would make an office investment a speculative endeavor and not for the faint of heart.<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Mobile home parks<\/span><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Let\u2019s touch on the fundamentals of&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/should-you-add-manufactured-homes-to-your-portfolio\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">manufactured housing<\/span><\/a><span data-preserver-spaces=\"true\">. Mobile home parks are the only asset type I know of, with increasing demand and decreasing supply every year.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Even if supply began to increase, which I think it could (especially with White House initiatives to expand affordable housing), we believe the demand will likely outpace supply for a very long time\u2014perhaps for the rest of our lifetimes.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Consider the fact that more advanced designs and building techniques could allow for higher-quality manufactured housing. Some mobile homes I remember growing up have been replaced with modular homes. These are essentially factory-built homes designed to stick-built construction standards. They are increasingly making their way into manufactured housing communities.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">I built six or seven modular homes a few decades years ago, and they are better now than then. The technology and standards continue to evolve.&nbsp;&nbsp;<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Retail<\/span><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Consider the dynamics of open-air shopping centers. The online revolution that would create a retail apocalypse has not materialized. Discount retailers are growing fast, filling spaces left by Tuesday Morning, Bed Bath &amp; Beyond, and other retailers.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">While online sales went from the upper teens to about 22% of retail during the COVID pandemic, online&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.paymentsjournal.com\/online-shopping-coming-down-from-outsized-growth-during-pandemic\/\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">sales have proportionally dropped since<\/span><\/a><span data-preserver-spaces=\"true\">. And a few months back,<\/span><em><span data-preserver-spaces=\"true\">&nbsp;<\/span><\/em><a class=\"editor-rtfLink\" href=\"https:\/\/www.wsj.com\/articles\/the-hottest-real-estate-play-is-in-your-neighborhood-7e8ff991\" target=\"_blank\" rel=\"noopener\"><em><span data-preserver-spaces=\"true\">the Wall Street Journal<\/span><\/em><span data-preserver-spaces=\"true\">&nbsp;touted retail strip centers as America\u2019s hottest class<\/span><\/a><span data-preserver-spaces=\"true\">.<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Who would\u2019ve guessed?<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">We\u2019re happy to be investing in open-air shopping centers in our latest fund. I believe they are poised to continue performing well, but again, that is a generalization, and there are no guarantees.&nbsp;<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Light industrial<\/span><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Remember in 1993, when talk show hosts predicted NAFTA would destroy American industry and ravage employment in the industrial and logistics realm?&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Well, there was truth in that. Unemployment in nearby Martinsville, Virginia, was over 20% after textile and furniture manufacturers fled.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">But everything has a cycle, doesn\u2019t it? Industrial, warehousing, and logistics assets are in high demand across the U.S. Some long-abandoned industrial facilities are getting new owners and new life. Others have been repurposed as multifamily, as you\u2019ve undoubtedly witnessed.<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">I like investing in previously owned mom-and-pop industrial parks that need a professional operator to repave the parking lot, install modern landscaping, and dispose of hundreds of manila file folders (and the broken fax machine) all strewn across 1990s soiled carpet. You get the idea.&nbsp;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">The Near and More Distant Future of Commercial Real Estate Pricing<\/span><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">I know I wasn\u2019t supposed to discuss commercial real estate\u2014it\u2019s too general. But allowing for this general point of view, excluding office, I want to offer an opinion: Many market watchers, sometimes including me, have been predicting a&nbsp;<\/span><em><span data-preserver-spaces=\"true\">significant<\/span><\/em><span data-preserver-spaces=\"true\">&nbsp;drop in commercial real estate prices.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Inflation has receded but has certainly not given up the ghost. The Federal Reserve could continue to hike interest rates.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">We may experience a recession, which is already being felt in some quarters. There is a lot of data supporting this thesis, and I won\u2019t bore you (any more than I already have) by regurgitating it all here.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">I will point out, however, that, just like generalizing ugly headlines and commercial real estate can be a mistake, a recession in some realms&nbsp;<\/span><em><span data-preserver-spaces=\"true\">may<\/span><\/em><span data-preserver-spaces=\"true\">&nbsp;not equate to a slump in&nbsp;<\/span><em><span data-preserver-spaces=\"true\">every<\/span><\/em><span data-preserver-spaces=\"true\">&nbsp;realm.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">As mentioned, there is significant demand for multifamily and single-family housing. One in five Americans now use self-storage. Affordable housing (manufactured housing and affordable apartments) is in high demand. Light industrial parks are mostly full. Discount retail is expanding, filling up open-air shopping centers.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Again, it\u2019s often the deal structures that are failing, not usually the assets themselves.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">So, while hundreds of billions in sidelined cash is champing at the bit for bargain-basement prices in these asset types, I\u2019ll theorize that this might not materialize on a broad scale. And the best deals may be scooped up by big players.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Of course, there will be discounts, such as on some multifamily deals that have already bitten the dust.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">But a prominent multifamily syndicator told me a story yesterday: He sold several deals in 2021 and 2022 at inflated prices. The broker on at least two contacted him to repurchase them&nbsp;<\/span><em><span data-preserver-spaces=\"true\">just for the debt payoff<\/span><\/em><span data-preserver-spaces=\"true\">&nbsp;(they had already surrendered the equity). He said they didn\u2019t nearly pencil out at that level (due to disappointing NOI, plus cap rate decompression).&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">By the way, there will be many more of these in the next year or two as floating-rate debt continues to put the crunch on the operator, and their loans need to be refinanced. A\u00a0<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.globest.com\/2023\/08\/21\/these-are-the-sunbelt-markets-where-multifamily-owners-face-the-most-financial-risk\/?slreturn=20230902135211\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">recent AI analysis of five Sun Belt cities<\/span><\/a><span data-preserver-spaces=\"true\">\u00a0highlighted 300 multifamily owners with 126,000 units facing significant refinancing challenges in the next few years.<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Another trend we\u2019re seeing is lenders doing workouts (extending grace and relaxed terms) on distressed deals. This is quite different from 2008, which could add to the theory of a soft landing and less available distressed assets.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">I\u2019m guessing someone will snatch up many of these deals before they return to the bank. Or if they go back to the lender, I predict they won\u2019t come out at half-price or less, as we saw during the Great Financial Crisis. There will obviously be exceptions.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">So, while we may see a significant decrease in the prices of individual assets, we may not see this across the board like we did in 2008 and beyond. (Another case for&nbsp;<\/span><em><span data-preserver-spaces=\"true\">not<\/span><\/em><span data-preserver-spaces=\"true\">&nbsp;generalizing, which seems to be a theme here.)<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Why am I saying all this? Why do I sound like I\u2019m making predictions? Partly because I want to point out that the strategies top-performing syndicators have used for the last decade or two will probably still be on point in the coming years. While a newbie operator with access to capital could crush it a decade ago, it may take more skill and experience this time around.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">So what does that mean for me? It means that poorly or undermanaged, underperforming assets from mom-and-pop sellers will still be my favorite investment strategy. These types of typically value-add assets should perform well in any economy.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">And I want to add that Warren Buffett and Charlie Munger employ a similar mindset in every economy. Buffett said in a 2019 interview:<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><em><span data-preserver-spaces=\"true\">\u201cCharlie Munger\u2014my partner\u2014and I, in 54 years now, never made a decision based on an economic prediction. We make predictions about what individual businesses will do over time, and we compare that to what we pay for them. But we have never said yes to something because we thought the economy was gonna do well in the next year or two years.\u201d&nbsp;<\/span><\/em><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Looking to the Future<\/span><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Though I shouldn\u2019t make predictions, I want to point out that Warren Buffett\u2019s&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/nypost.com\/2023\/08\/14\/warren-buffett-betting-on-big-homebuilders-while-cutting-gm-stake\/?utm_campaign=iphone_nyp&amp;utm_source=pasteboard_app\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">Berkshire Hathaway recently increased its stake in three national homebuilders<\/span><\/a><span data-preserver-spaces=\"true\">. What does that mean for real estate investors?&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">I think Buffett\u2019s thoughts are similar to what I\u2019ve shared. I\u2019m guessing he\u2019s considering the massive shortfall in single-family and multifamily units as he makes these investments.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">The supply of newly built multifamily and single-family housing will likely slow down dramatically in this current environment of rising interest rates and economic uncertainty. As a result, the supply-and-demand imbalance in these arenas will be exacerbated in the next several years. I wouldn\u2019t be surprised if the same doesn\u2019t happen in self-storage and other asset types.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Why is this important? Because it reminds us that&nbsp;<\/span><em><span data-preserver-spaces=\"true\">now<\/span><\/em><span data-preserver-spaces=\"true\">&nbsp;could be an excellent time to invest in these asset types\u2014especially when planning to hold for a long time (I prefer a decade).&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Lest you think I sound like I\u2019m peddling used cars, I\u2019ll remind you that Warren Buffett, Howard Marks, and others believe the best deals are made during the worst of times and the worst deals are made during the best of times.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">While we don\u2019t think this will be the worst of times, I will say that multifamily and other similar asset classes did so well in the last decade because of the&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/25-percent-of-earners-can-afford-housing\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">shortfall in affordable housing<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;that bloomed during the Great Financial Crisis.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Multifamily and single-family new builds screeched to a crawl in the downturn. And the shortfall we see&nbsp;<\/span><em><span data-preserver-spaces=\"true\">now<\/span><\/em><span data-preserver-spaces=\"true\">&nbsp;is part of the result.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Suppose building slows down in the next several years (which it already has due to higher interest rates and tightened lending). In that case, we will likely see a more robust supply-and-demand imbalance in future years and, therefore, potentially stronger performance in these asset types.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">And Buffett is undoubtedly looking at the long term, as he always does. Since he just turned 93 in August, he probably won\u2019t be alive in a decade. But Berkshire Hathaway will still be going strong.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">As we consider the way forward, we should all be wary of anyone (even if it\u2019s me) who claims to have it all figured out. Or anyone who tells you it\u2019s OK to overpay for any investment. Or anybody who tells you to presume on the future and over-leverage.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">I know some of you have experienced capital calls and distribution slowdowns in recent months, and I am sincerely sorry. I\u2019m not making light of the difficulties you\u2019re facing. But I\u00a0<\/span><em><span data-preserver-spaces=\"true\">am\u00a0<\/span><\/em><span data-preserver-spaces=\"true\">using this opportunity to encourage everyone to perform significant due diligence on anyone you invest your hard-earned capital with\u2014this year, this decade, or ever.\u00a0<\/span><\/p>\n\n\n\n    \n  <div id=\"visibility-group-block_e140681d8fb414af1f777121722b817e\" class=\"visibility-group  hidden\">\n        \n\n<div id=\"hero-block_2e1fed4cad1ba3677ed00c5339434b49\" class=\"first:mt-0 hero-block py-4  alignwide   has-background has-theme-gold-light-background-color has-text-color has-theme-gold-color\">\n    <div\n        class=\" flex flex-wrap lg:flex-nowrap max-w-screen-xl mx-auto px-4 relative lg:items-center \">\n\n        <div class=\"relative z-30 w-full \">\n            <main class=\"py-4\">\n                \n\n<p class=\"has-theme-gold-color has-text-color has-large-font-size wp-block-paragraph\" style=\"font-style:normal;font-weight:800\">Get the Best Loan Today<\/p>\n\n\n\n<p class=\"my-3 md:my-5 lg:my-8 has-slate-900-color has-text-color wp-block-paragraph\" style=\"font-size:16px\">Find trusted, <em><strong>investor-friendly<\/strong><\/em> lenders who specialize in your strategy. <\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><\/p>\n\n\n\n<div id=button-custom-event-block_2f48b09c1d68d64a388d9492c146edea class='button-custom-event'>\n      <a href=\"https:\/\/www.biggerpockets.com\/business\/finder\/lenders\" x-on:click=\"window.analytics.track(&#039;Blog Block | B2C Marketplace Lender Finder&#039;, {\n      referrer: &#039;https:\/\/www.biggerpockets.com\/blog\/what-is-really-behind-the-slew-of-recent-commercial-real-estate-failures&#039;,\n    });\" class=\" btn-shape inline-block no-underline has-background has-theme-gold-background-color has-text-color has-white-color\" target=\"_blank\">Find a Lender<\/a>\n  <\/div>\n\n            <\/main>\n        <\/div>\n\n                <div class=\" first:mt-0 relative h-full lg:flex lg:items-center\">\n            <img decoding=\"async\" class=\"object-cover w-full relative z-20 my-0  rounded-md hidden lg:block\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/08\/Marketplace-Blog-Blocks-Lender-v3.png\" alt=\"investor friendly lender, investor friendly real estate loans\" title=\"\">\n        <\/div>\n            <\/div>\n<\/div>\n\n  <\/div>\n  \n\n\n<div class=\"wp-block-group\"><div class=\"wp-block-group__inner-container is-layout-constrained wp-block-group-is-layout-constrained\">\n    \n  <div id=\"visibility-group-block_64dd31c79f00f\" class=\"visibility-group  \">\n        \n\n<div style=\"height:10px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<div id=\"hero-block_64dd2875dba9d\" class=\"first:mt-0 hero-block py-4    has-background has-slate-100-background-color has-text-color has-theme-slate-color\">\n    <div\n        class=\" flex flex-wrap lg:flex-nowrap max-w-screen-xl mx-auto px-4 relative lg:items-center \">\n\n        <div class=\"relative z-30 w-full \">\n            <main class=\"py-4\">\n                \n\n<h3 class=\"wp-block-heading my-0 tracking-tight font-extrabold has-theme-slate-dark-color has-text-color has-large-font-size\">Join the community<\/h3>\n\n\n\n<p class=\"my-3 md:my-5 lg:my-8 has-theme-slate-color has-text-color wp-block-paragraph\" style=\"font-size:16px;font-style:normal;font-weight:400\">Ready to succeed in real estate investing? Create a free BiggerPockets account to learn about investment strategies; ask questions and get answers from our community of +2 million members; connect with investor-friendly agents; and so much more. <\/p>\n\n\n\n<div id=button-custom-event-block_64dd2888dba9e class='button-custom-event'>\n      <a href=\"https:\/\/www.biggerpockets.com\/signup\" x-on:click=\"window.analytics.track(&#039;Blog Block | Acquisition | Free Membership Signup&#039;, {\n      referrer: &#039;https:\/\/www.biggerpockets.com\/blog\/what-is-really-behind-the-slew-of-recent-commercial-real-estate-failures&#039;,\n    });\" class=\" btn-shape inline-block no-underline has-background has-theme-blue-background-color has-text-color has-white-color\" target=\"_blank\">Sign Up<\/a>\n  <\/div>\n\n            <\/main>\n        <\/div>\n\n            <\/div>\n<\/div>\n\n\n<div style=\"height:10px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n  <\/div>\n  <\/div><\/div>\n\n\n\n<p class=\"wp-block-paragraph\"><em>*Mr. Moore is the co-founder and partner of The Wellings Real Estate Income Fund, which is available to accredited investors. Investors should consider the investment objectives, risks, charges, and expenses before investing. For a Private Placement Memorandum (\u201cPPM\u201d) with this and other information about the Wellings Real Estate Income Fund, please call 800-844-2188 or email&nbsp;<a class=\"editor-rtfLink\" href=\"mailto:invest@wellingscapital.com\" target=\"_blank\" rel=\"noopener\">invest@wellingscapital.com<\/a>. Read the PPM carefully before investing. Past performance is no guarantee of future results. The information contained in this communication is for information purposes, does not constitute a recommendation, and should not be regarded as an offer to sell or a solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be in violation of any local laws. All investing involves the risk of loss, including a loss of principal. We do not provide tax, accounting, or legal advice, and all investors are advised to consult with their tax, accounting, or legal advisers before investing.&nbsp;<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"<p>These properties have been hammered all year long, but what&#8217;s been the real driver of it? Here&#8217;s what&#8217;s really behind the slew of failures.<\/p>\n","protected":false},"author":214608,"featured_media":159921,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[5527,4433],"tags":[],"class_list":["post-160288","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-commercial-real-estate-investing","category-opinion"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/160288","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/214608"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=160288"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/160288\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=160288"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=160288"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=160288"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}