{"id":166463,"date":"2024-02-12T13:56:21","date_gmt":"2024-02-12T20:56:21","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=166463"},"modified":"2024-04-22T05:31:08","modified_gmt":"2024-04-22T11:31:08","slug":"multifamily-crash-to-continue-through-2024","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/multifamily-crash-to-continue-through-2024","title":{"rendered":"Multifamily Is at High Risk of Continuing Its Historic Crash in 2024\u2014Here\u2019s Why"},"content":{"rendered":"\n\n      <iframe loading=\"lazy\" frameborder=\"0\" height=\"200\" scrolling=\"no\" src=\"https:\/\/playlist.megaphone.fm\/?e=BIGPOC5796989634\" width=\"100%\"><\/iframe>\r\n  \n\n\n\n\n\n      <iframe loading=\"lazy\" frameborder=\"0\" height=\"200\" scrolling=\"no\" src=\"https:\/\/playlist.megaphone.fm\/?e=BIGPOC5281586420\" width=\"100%\"><\/iframe>\r\n  \n\n\n\n\n\n      <iframe loading=\"lazy\" frameborder=\"0\" height=\"200\" scrolling=\"no\" src=\"https:\/\/playlist.megaphone.fm\/?e=BIGPOC4964995111\" width=\"100%\"><\/iframe>\r\n  \n\n\n\n\n\n      <iframe loading=\"lazy\" frameborder=\"0\" height=\"200\" scrolling=\"no\" src=\"https:\/\/playlist.megaphone.fm\/?e=BIGPOC8277690900\" width=\"100%\"><\/iframe>\r\n  \n\n\n\n\n<p><span data-preserver-spaces=\"true\">The multifamily and commercial real estate crash is in full swing. As much as $2.7 trillion in wealth has been wiped out with a historic surge in cap rates and plummeting asset values in the commercial real estate world, with multifamily and office leading the charge with estimated&nbsp;<\/span><em><span data-preserver-spaces=\"true\">30% and 35%&nbsp;<\/span><\/em><span data-preserver-spaces=\"true\">peak-to-trough declines in asset value and even larger percentage declines in&nbsp;<\/span><em><span data-preserver-spaces=\"true\">equity<\/span><\/em><span data-preserver-spaces=\"true\">&nbsp;value.<\/span><\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"468\" height=\"351\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2024\/02\/image2-1.jpeg\" alt=\"Estimated commercial real estate value loss since peak - CRE Analyst\" class=\"wp-image-166467\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2024\/02\/image2-1.jpeg 468w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2024\/02\/image2-1-300x225.jpeg 300w\" sizes=\"auto, (max-width: 468px) 100vw, 468px\" \/><figcaption class=\"wp-element-caption\"><em>Estimated commercial real estate value loss since peak &#8211; <a href=\"https:\/\/www.creanalyst.com\/\" target=\"_blank\" rel=\"noreferrer noopener\">CRE Analyst<\/a><\/em><\/figcaption><\/figure>\n\n\n\n<p><span data-preserver-spaces=\"true\">I wrote about some of these risks in my thesis,&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/multifamily-real-estate-is-on-the-brink-of-crashing\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">Multifamily Real Estate Is at Risk of Crashing\u2014Here\u2019s Why<\/span><\/a><span data-preserver-spaces=\"true\">, including a discussion about stagnating and falling rents in many metros, an onslaught of supply, interest rates steadily rising throughout the year, and expenses growing out of control.<\/span><span data-preserver-spaces=\"true\">&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">In 2023 alone, values declined by as much as 20% on&nbsp;<\/span><em><span data-preserver-spaces=\"true\">average<\/span><\/em><span data-preserver-spaces=\"true\">.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Unfortunately, I don\u2019t think 2024 is going to be much more fun for current owners of&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/finding-multifamily-properties\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">multifamily<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;and&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/commercial-real-estate-fundamentals\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">commercial real estate<\/span><\/a><span data-preserver-spaces=\"true\">. There\u2019s still a lot of room for this bear market to run and little reason to believe in income growth or valuation growth in U.S. multifamily at the national level.<\/span><span data-preserver-spaces=\"true\">&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">In this article, I\u2019ll walk through my updated thesis for 2024, outlining the continued threats to multifamily valuations. Be warned: I think the outlook is just as ugly as last year, and the pain for investors and operators will continue until supply abates, perhaps sometime in late 2024, but more likely in 2025.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">As always, this is a complicated subject. I am an amateur in this space. I could be (and indeed, I hope I am) completely wrong or off base. I invite you to tell me what I\u2019m missing in the comments, email me at&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"mailto:Scott@biggerpockets.com\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">Scott@biggerpockets.com<\/span><\/a><span data-preserver-spaces=\"true\">, write a rebuttal to this piece, or discuss a rebuttal\/bull case for multifamily on a podcast or video.&nbsp;<\/span><\/p>\n\n\n\n<p><strong><span data-preserver-spaces=\"true\">Part 1: <\/span><\/strong><span data-preserver-spaces=\"true\">It Just Doesn\u2019t Make Sense to Buy Apartment Complexes at Current Valuations<\/span><\/p>\n\n\n\n<p><strong><span data-preserver-spaces=\"true\">Part 2: <\/span><\/strong><span data-preserver-spaces=\"true\">The Outlook for Rent Growth Is Poor in 2024<\/span><\/p>\n\n\n\n<p><strong><span data-preserver-spaces=\"true\">Part 3: <\/span><\/strong><span data-preserver-spaces=\"true\">Expenses Eat Into Multifamily Profit<\/span><\/p>\n\n\n\n<p><strong><span data-preserver-spaces=\"true\">Part 4: <\/span><\/strong><span data-preserver-spaces=\"true\">Interest Rates Will Not Come to the Rescue&nbsp;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Part 1: It Just Doesn\u2019t Make Sense to Buy Apartment Complexes at Current Valuations&nbsp;<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">There are a lot of reasons people buy single-family homes: generational wealth, a place to make family memories, living out a life vision\/dream, taking advantage of great schools, etc.<\/span><span data-preserver-spaces=\"true\">&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Meanwhile, there is only one reason investors buy multifamily apartment complexes: the income stream.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">That\u2019s it. It\u2019s the only reason I\u2019m investing in multifamily. I want that&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/rental-property-cash-flow-analysis\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">cash flow<\/span><\/a><span data-preserver-spaces=\"true\">.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Fundamentally, investors expect real estate to generate rents, which grow in excess of expenses, and for the property to put an ever larger future income stream, a safer income stream, or just a different income stream into their pockets than viable alternatives. They&nbsp;<\/span><em><span data-preserver-spaces=\"true\">have&nbsp;<\/span><\/em><span data-preserver-spaces=\"true\">to believe and expect this, and they have to believe and expect that, at some point in the future, another investor will believe in that growth story as well and buy the property from them.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Right now, average prime multifamily real estate is trading at about a&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.globest.com\/2024\/01\/22\/fed-stays-steady-but-multifamily-cap-rates-keep-climbing\/?slreturn=20240026095345\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">5.06% cap rate<\/span><\/a><span data-preserver-spaces=\"true\">.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">A rough translation of the previous sentence is that right now, if I want to buy a quality multifamily property, for every $1 million I invest, I will receive $50,000 in annual cash flow (assuming no debt).&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Now, I understand that debt service, tax benefits, CapEx, and other items challenge this statement and that it\u2019s a huge oversimplification. Gurus who teach multifamily investing and analysis are already lining up to beat me up, but I\u2019m sticking with it. At the core of it all, this is what a Cap Rate is attempting to get at.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Remember:&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/cap-rate-real-estate\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">Cap rates<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;and interest rates are highly correlated. Capitalization rates are a method of valuing commercial real estate and comparing assets. Dividing the property\u2019s net operating income by market capitalization rates gives investors a way to value real estate assets or, more precisely, to value their income streams.<\/span><span data-preserver-spaces=\"true\">&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Cap rates are&nbsp;<\/span><em><span data-preserver-spaces=\"true\">not&nbsp;<\/span><\/em><span data-preserver-spaces=\"true\">a method of calculating returns. And investors can make money in environments with low cap rates, as well as those with high cap rates.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">However, when cap rates are lower than interest rates, investors have to be all-in on appreciation, lower interest rates, rising rents, or falling costs. It\u2019s just hard to make money in a \u201cnegative leverage\u201d scenario where you buy an asset with a&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/net-operating-income\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">net operating income<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;(NOI) of 5% of the purchase price but have debt at 6.5% interest.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">The core issue with present-day cap rates is that there are a lot of ways to generate a greater than 5% cash-on-cash ROI in 2024, including:<\/span><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><a class=\"editor-rtfLink\" href=\"https:\/\/ycharts.com\/indicators\/1_month_treasury_rate#:~:text=1%20Month%20Treasury%20Rate%20is,a%20maturity%20of%201%20month.\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">1-month U.S. Treasuries<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;(trading at 5.5% yield)<\/span><\/li>\n\n\n\n<li><a class=\"editor-rtfLink\" href=\"https:\/\/www.cnbc.com\/select\/5-percent-interest-savings-accounts\/\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">Savings accounts<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;(up to 5.35% APY).<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Residential mortgages:<\/span>\n<ul class=\"wp-block-list\">\n<li><span data-preserver-spaces=\"true\">Literally, one can lend to people with credit scores of 800, earning $200,000-plus per year, a 30-year mortgage, at 6.5% interest or more, backed by the borrower\u2019s full net worth&nbsp;<\/span><em><span data-preserver-spaces=\"true\">and&nbsp;<\/span><\/em><span data-preserver-spaces=\"true\">a single-family real estate asset. That\u2019s a safe investment with a compelling yield.<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Investors can also get exposure to mortgages by buying mortgage REITs that offer a ladder of potential yields.<\/span><\/li>\n<\/ul>\n<\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Commercial debt: One can&nbsp;<\/span><em><span data-preserver-spaces=\"true\">lend&nbsp;<\/span><\/em><span data-preserver-spaces=\"true\">to the borrower buying an apartment complex in the 6.5% to 8% simple interest range at conservative LTVs.<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Hard money or bridge debt<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Single-family rentals<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Private businesses<\/span><\/li>\n<\/ul>\n\n\n\n<p><span data-preserver-spaces=\"true\">The list goes on. It\u2019s&nbsp;<\/span><em><span data-preserver-spaces=\"true\">so<\/span><\/em><span data-preserver-spaces=\"true\">&nbsp;<\/span><em><span data-preserver-spaces=\"true\">easy&nbsp;<\/span><\/em><span data-preserver-spaces=\"true\">in 2024 to earn a 5% yield. And that is the fundamental problem for the current owners of commercial real estate, including those who own apartment complexes.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">A common argument for why apartment valuations won\u2019t crater this year is that private equity firms like Blackstone have a ton of cash piled up and are waiting for a crash. This could be significant\u2014<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.globest.com\/2023\/10\/20\/whats-keeping-300b-in-cre-cash-on-the-sidelines\/\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">Globest claims<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;that some estimate that $200-$300B is sitting on the sidelines waiting for prices to fall, but does not provide a link to the source of this massive estimate.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">However, a rational investor simply won\u2019t deploy their cash, no matter how much they have hoarded, into an apartment complex that yields less than the&nbsp;<\/span><em><span data-preserver-spaces=\"true\">easy, low-risk&nbsp;<\/span><\/em><span data-preserver-spaces=\"true\">laundry list of alternatives I presented\u2014unlevered, unless they&nbsp;<\/span><em><span data-preserver-spaces=\"true\">believe strongly in growth<\/span><\/em><span data-preserver-spaces=\"true\">.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">I wouldn\u2019t. You wouldn\u2019t. And Blackstone won\u2019t. Belief in growth is a&nbsp;<\/span><em><span data-preserver-spaces=\"true\">must<\/span><\/em><span data-preserver-spaces=\"true\">&nbsp;in order to buy a riskier, more volatile income stream than the alternatives presently available.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">For me to take a 5% cash flow return on my money in an apartment complex right now, especially if I\u2019m using a 6.5% interest Freddie Mac loan to finance the purchase, I have to believe some combination of the following:<\/span><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><span data-preserver-spaces=\"true\">Rents will grow.<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Expenses will fall.<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Interest rates will fall.<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Cap rates will fall.<\/span><\/li>\n<\/ul>\n\n\n\n<p><span data-preserver-spaces=\"true\">I just don\u2019t believe any one of those things, much less any combination of them, in 2024. And, while my personal opinion matters very little, for the reasons I will discuss at length in this article, I think that rational investors will be forced to agree with my lack of faith.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">There\u2019s just little reason to be confident about&nbsp;<\/span><em><span data-preserver-spaces=\"true\">anything&nbsp;<\/span><\/em><span data-preserver-spaces=\"true\">working in favor of multifamily valuations in 2024, based on what we know today.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">And these reasons don\u2019t care that 2022 and 2023 were&nbsp;<\/span><em><span data-preserver-spaces=\"true\">already&nbsp;<\/span><\/em><span data-preserver-spaces=\"true\">painful for multifamily investors, or that hundreds of billions of dollars have&nbsp;<\/span><em><span data-preserver-spaces=\"true\">already&nbsp;<\/span><\/em><span data-preserver-spaces=\"true\">been wiped out, or that cap rates for prime multifamily have&nbsp;<\/span><em><span data-preserver-spaces=\"true\">already&nbsp;<\/span><\/em><span data-preserver-spaces=\"true\">increased from the mid-3% range to over 5%.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">No&nbsp;<\/span><em><span data-preserver-spaces=\"true\">buyers&nbsp;<\/span><\/em><span data-preserver-spaces=\"true\">of multifamily care about that pain over the last few years. They only care about the current and future income stream of a multifamily property. And the story of future cash flows in multifamily is not a compelling one.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">I believe that the brutal lesson many investors will learn in 2024 is that just because multifamily property values have declined by as much as 30% from peak (on average)&nbsp;<\/span><em><span data-preserver-spaces=\"true\">does not mean that they now all of a sudden are on sale<\/span><\/em><span data-preserver-spaces=\"true\">, and they absolutely can fall much further. The run-up in valuations through 2021 was incredible for this asset class, and the give-back in 2023 and 2024 could be even more historic.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Part 2: The Outlook for Rent Growth Is Poor in 2024<\/span><\/h2>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">New supply puts downward pressure on rent growth<\/span><\/h3>\n\n\n\n<p><span data-preserver-spaces=\"true\">I\u2019m scratching my head. It\u2019s the beginning of 2024, and we have nearly&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.yardimatrix.com\/publications\/download\/file\/4915-MatrixMultifamilyNationalReport-Winter2024?signup=false&amp;__hstc=78826315.0b65c3bd15d52ee227bbf41df7aa69ed.1707273964673.1707273964673.1707273964673.1&amp;__hssc=78826315.1.1707273964673&amp;__hsfp=2451196102\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">1.2 million multifamily units currently under construction<\/span><\/a><span data-preserver-spaces=\"true\">, with 500,000 deliveries expected in year 2024\u2014the most ever. I said the same thing last year, and I am as surprised as you to be repeating myself with&nbsp;<\/span><em><span data-preserver-spaces=\"true\">even more&nbsp;<\/span><\/em><span data-preserver-spaces=\"true\">in-progress inventory in Q1 2024 than in Q1 2023.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">The only word I have for this mass of supply is an&nbsp;<\/span><em><span data-preserver-spaces=\"true\">onslaught<\/span><\/em><span data-preserver-spaces=\"true\">. And it keeps coming. We are in a housing construction boom in this country that is accelerating despite the macro environment conditions that threaten real estate valuations.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">This supply will continue compounding problems for the owners of existing multifamily in the form of limiting rent growth, forcing concessions, and creating inventory on the buy side for investors to sort through and pick from at their leisure.<\/span><span data-preserver-spaces=\"true\">&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">This inventory&nbsp;<\/span><em><span data-preserver-spaces=\"true\">has&nbsp;<\/span><\/em><span data-preserver-spaces=\"true\">to rent, and it will. It will set the top of the market and push everyone else down, as developers will do whatever they can to fill the inventory as quickly as possible, hitting Class A property owners hardest, but also with downstream impacts to Class B and C properties. Developers use expensive bridge debt financing, similar in cost to hard money debt. The high interest rates and short-term nature of bridge debt are a powerful incentive to finish construction quickly, get the place rented, and sell or refinance to less expensive debt.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">In 2024, we have a very real risk of seeing rents&nbsp;<\/span><em><span data-preserver-spaces=\"true\">decline<\/span><\/em><span data-preserver-spaces=\"true\">&nbsp;in many markets and for the nation as a whole. I wonder if we will see certain markets see&nbsp;<\/span><em><span data-preserver-spaces=\"true\">double-digit rent declines.&nbsp;<\/span><\/em><span data-preserver-spaces=\"true\">The impacts will be highly regional, as always. I think there is a big target on prominent markets in Texas, Florida, North Carolina, Denver, and Phoenix, in particular, where a disproportionate amount of supply is being built on the backs of big (perhaps too big?) jobs, income, and inbound migration expectations.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">The hardest hit markets are the ones with the most supply coming online as a percentage of current multifamily stock. Here\u2019s a snapshot from Yardi of 20 metros and the relative supply increases they will experience in 2024:<\/span><\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"408\" height=\"990\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2024\/02\/image1-1.jpeg\" alt=\"Forecasted 2024 supply growth of multifamily properties across 20 large U.S. metros - Yardi\" class=\"wp-image-166466\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2024\/02\/image1-1.jpeg 408w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2024\/02\/image1-1-124x300.jpeg 124w\" sizes=\"auto, (max-width: 408px) 100vw, 408px\" \/><figcaption class=\"wp-element-caption\"><em>Forecasted 2024 supply growth of multifamily properties across 20 large U.S. metros &#8211; <a href=\"https:\/\/www.yardi.com\/\" target=\"_blank\" data-type=\"link\" data-id=\"https:\/\/www.yardi.com\/\" rel=\"noreferrer noopener\">Yardi<\/a><\/em><\/figcaption><\/figure>\n\n\n\n<p><span data-preserver-spaces=\"true\">I don\u2019t care how great Austin, Texas, is\u2014they aren\u2019t seeing a 10% increase in renter population in 2024 to offset that 9.5% increase in supply. Rents are coming down.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">If I owned property there, I\u2019d be writing off my investment. North Carolina and Florida markets will follow, and my hometown of Denver is also at pretty high risk. I invested in a Phoenix multifamily property a few years ago, and the deal is millions of dollars underwater at present valuations. It doesn\u2019t matter what your thesis for value-add is or was in many of these markets\u2014the supply side is just overpowering the demand side.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Multifamily developers appear to be doing everything in their power to solve the&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/on-the-market-145\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">housing affordability crisis<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;in this country in 2024, and I, for one, believe they will succeed in making a major dent\u2014perhaps at their own expense.&nbsp;<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Where\u2019s the demand going to come from?<\/span><\/h3>\n\n\n\n<p><span data-preserver-spaces=\"true\">Investors have to ask themselves where the&nbsp;<\/span><em><span data-preserver-spaces=\"true\">people&nbsp;<\/span><\/em><span data-preserver-spaces=\"true\">and&nbsp;<\/span><em><span data-preserver-spaces=\"true\">incomes&nbsp;<\/span><\/em><span data-preserver-spaces=\"true\">are going to come from to fill up all the new inventory being built in their target market.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">One argument for demand is the simple reality of higher rates\u2014the alternative to renting is purchasing a home. Buying a home is cheaper than renting in&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.cbsnews.com\/news\/real-estate-cheaper-to-buy-than-rent-four-cities-home-prices-mortgage-rates\/\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">only four U.S. cities<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;right now. This means that there is an argument that many people will seek to rent rather than buy.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">I buy that argument but also want to point out that higher rates also put downward pressure on demand. Millions of Americans who own homes with low interest rates are locked in place and are not moving out, whether to purchase new homes or become renters. I fear that the upward pressure on rents from higher interest rates will not be enough to outpace the supply hitting the market in 2024.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">I also worry about preferences changing.&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.naahq.org\/5-key-consumer-preferences-renters\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">About 40% of renters who responded to a recent national survey<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;live in single-family homes. But, 51% say that their ideal rental is a single-family home. As supply comes online and renters have this choice, I believe that their preference for single-family houses could drive down the demand for multifamily rentals.<\/span><span data-preserver-spaces=\"true\">&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">In 2023, too much inventory and insufficient population and income growth resulted in&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/rents-show-biggest-decline-in-three-years\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">rents falling modestly across the country<\/span><\/a><span data-preserver-spaces=\"true\">. Another year could, and I believe will, compound those problems and see&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/landlords-are-offering-more-concessions-as-the-rental-market-softens\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">concessions continue to increase<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;and market rents fall in many metros.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">One bailout for investors could come from&nbsp;<\/span><em><span data-preserver-spaces=\"true\">income growth<\/span><\/em><span data-preserver-spaces=\"true\">. However, I don\u2019t know of any economists who are expecting incomes to show positive surprises in 2024, although maybe that changes a little bit with the recent January jobs report. I think investors should count on no more than a 3% to 4% average wage increase as an offset to the supply\/demand imbalance that will grow in multifamily throughout the year.<\/span><span data-preserver-spaces=\"true\">&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Rent growth in your market is a function of supply, demand, and income. It\u2019s&nbsp;<\/span><em><span data-preserver-spaces=\"true\">not&nbsp;<\/span><\/em><span data-preserver-spaces=\"true\">just about inbound migration and jobs. It\u2019s about how supply interplays with those factors. And that story is one that could really hurt a lot of owners and operators of apartment complexes across the country.&nbsp;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Part 3: Expenses Eat Into Multifamily Profit<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">Led by property taxes and insurance, uncontrollable expenses are&nbsp;<\/span><em><span data-preserver-spaces=\"true\">skyrocketing,&nbsp;<\/span><\/em><span data-preserver-spaces=\"true\">with an average increase in 2023 of<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.bloomberg.com\/news\/articles\/2023-09-12\/insurance-rate-hikes-threaten-to-bust-the-us-apartment-building-boom\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">&nbsp;over 19%.<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;These increases also vary by region, and I\u2019ve heard anecdotally about 100% and 200% or more increases in insurance premiums in parts of the South and West. More bad news for Florida multifamily specifically.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Those insurance hikes&nbsp;<\/span><em><span data-preserver-spaces=\"true\">crush<\/span><\/em><span data-preserver-spaces=\"true\">&nbsp;valuations because there is nothing the operator or owner can do to prevent them. They just get taken straight out of cash flow\u2014and the property\u2019s valuation.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">On the tax side, soaring values and profits leading up to 2021 are backfiring, as assessed values for commercial property are inflated, and insurance premiums in certain markets have increased by a factor of 3 or more. Owners and operators sometimes still try to pretend that their properties will trade at valuations from two to three years ago, and appraisers are in a tough spot, with transaction volume too low to provide accurate comps in many cases.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">What\u2019s the syndicator or fund manager going to do? Admit to their investors that their property equity is wiped out and fight for a lower valuation for tax purposes? Or accept the higher assessed value, pay the tax, and pray that things don\u2019t get worse?<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Few legislatures and local residents will have pity parties for syndicated or private equity landlords, and it\u2019s just&nbsp;<\/span><em><span data-preserver-spaces=\"true\">too easy&nbsp;<\/span><\/em><span data-preserver-spaces=\"true\">to turn to the owners of large commercial real estate buildings in many local jurisdictions to pad city and state budgets.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">In addition, rising labor costs in the last few years are a double-edged sword for multifamily operators\u2014they drive incomes up, but they mean it costs more to staff, maintain, and repair properties. In the face of competition on the supply side that limits rent growth, these expenses continue to leech into the bottom line.&nbsp;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Part 4: Interest Rates Won\u2019t Come to the Rescue\u2014Unless There\u2019s a Historic Recession&nbsp;<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">Many investors who pay attention to the Federal Reserve know that the big bank is signaling that it will cut rates two to three times in 2024 to the tune of about 75 bps.<\/span><span data-preserver-spaces=\"true\">&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">I believe the Fed. I think that will happen. But I think that anyone who pretends to know what will happen&nbsp;<\/span><em><span data-preserver-spaces=\"true\">after&nbsp;<\/span><\/em><span data-preserver-spaces=\"true\">those three rate cuts is fooling themselves. And the market is, in my opinion,&nbsp;<\/span><em><span data-preserver-spaces=\"true\">already so optimistic&nbsp;<\/span><\/em><span data-preserver-spaces=\"true\">about rate cuts beyond 2024 that it is irrational.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Let me explain: A 75 bps rate cut puts the federal funds rate at 4.5% (down from the current ~5.3% range).<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Right now, the yield curve is inverted. Short-term Treasury yields are in the 5.25% range, while the 10-year Treasury yields about 4.15%. In a normalized yield curve environment, the 10-year Treasury would be about 150 bps higher than the short-term Treasury. With today\u2019s federal funds rate, that would imply a 10-year Treasury at&nbsp;<\/span><em><span data-preserver-spaces=\"true\">6.75%.<\/span><\/em><span data-preserver-spaces=\"true\">&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">This is important because the 10-year Treasury is a key benchmark for multifamily and commercial real estate investors. A lot of debt products, including agency debt products like Freddie Mac loans, are pegged to the 10-year Treasury yield. When it goes up, borrowing costs increase. When it goes down, borrowing costs decrease.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">If the Federal Reserve decreases the federal funds rate to 4.5% in 2024 and keeps it there, in a normalized yield curve environment, the 10-year Treasury would rise to about&nbsp;<\/span><em><span data-preserver-spaces=\"true\">6%<\/span><\/em><span data-preserver-spaces=\"true\">, up from ~4.15% today. That\u2019s a nearly 50% increase and would have major implications for borrowers in the multifamily space.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Many readers will think that my discussion of the possibility of a 10-year Treasury yield at 6% is crazy and will never happen. Maybe they\u2019re right.<\/span><span data-preserver-spaces=\"true\">&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">However, I think that banking on the status quo or a lower 10-year Treasury yield is<\/span><em><span data-preserver-spaces=\"true\">&nbsp;<\/span><\/em><span data-preserver-spaces=\"true\">a dangerous and aggressive stance.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Let\u2019s think about what needs to happen for the yield curve to normalize and for the 10-year yield to&nbsp;<\/span><em><span data-preserver-spaces=\"true\">stay where it is.<\/span><\/em><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">For the 10-year yield to&nbsp;<\/span><em><span data-preserver-spaces=\"true\">remain at its present yield of 4.1%<\/span><\/em><span data-preserver-spaces=\"true\">&nbsp;long-term (assuming that a stabilized yield curve sees a 150 bps spread between the 10-year and SOFR), the Fed would have to reduce the federal funds rate from 5.3% to 2.6%. They\u2019d have to lower rates at least&nbsp;<\/span><em><span data-preserver-spaces=\"true\">10 times<\/span><\/em><span data-preserver-spaces=\"true\">&nbsp;at 25 bps per cut.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Once at a federal funds rate of 2.6%, a 150 bps spread to the 10-year gets you to the present-day 4.15% yield.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Stop and think about the extraordinary economic events that will have to transpire for the Fed to cut rates&nbsp;<\/span><em><span data-preserver-spaces=\"true\">10 times<\/span><\/em><span data-preserver-spaces=\"true\">&nbsp;from where they are today in a short period of time. That\u2019s the bet investors are making who think that the 10-year, and therefore multifamily borrowing costs, will&nbsp;<\/span><em><span data-preserver-spaces=\"true\">stay flat<\/span><\/em><span data-preserver-spaces=\"true\">, much less decrease.&nbsp;<\/span><span data-preserver-spaces=\"true\">&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">I believe it is much less crazy to plan on the 10-year continuing to rise than to plan for it to stay where it is today or fall over the short-term to medium-term. And when the 10-year rises, the cost to borrow on multifamily properties rises, and the alternatives to multifamily real estate continue to look better and better.<\/span><span data-preserver-spaces=\"true\">&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Despite pundits stamping their feet in frustration and talking about how the U.S. national debt couldn\u2019t bear rates that high, this is&nbsp;<\/span><em><span data-preserver-spaces=\"true\">absolutely possible<\/span><\/em><span data-preserver-spaces=\"true\">, and more than possible, the logical result of short-term rates stabilizing in the mid-4% range,&nbsp;<\/span><em><span data-preserver-spaces=\"true\">which is the Fed\u2019s stated plan<\/span><\/em><span data-preserver-spaces=\"true\">.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">&nbsp;<\/span><span data-preserver-spaces=\"true\">If you believe that the yield curve will normalize at some point in the next two to three years, then for you to bet on the 10-year yield to remain where it is, you have to be a bold and serious bull on rates or forecasting a recession as bad as the one from 15 years ago, in my opinion.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Let\u2019s also not lose sight of the fact that a deep recessionary environment where rates get cut 10 times and in a hurry will not help multifamily real estate values.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">I believe that in 2024, multifamily investors will be forced to play the same coin-flipping game they played last year:&nbsp;<\/span><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><span data-preserver-spaces=\"true\">Heads, no recession, \u201csoft landing,\u201d and the 10-year marches up and up, hurting multifamily valuations<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Tails, deep recession, rapid and steep rate cuts, but tanking asset values, hurting multifamily valuations<\/span><\/li>\n<\/ul>\n\n\n\n<p><span data-preserver-spaces=\"true\">Same game, still not very fun.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Final Thoughts<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">A historic&nbsp;<\/span><em><span data-preserver-spaces=\"true\">onslaught&nbsp;<\/span><\/em><span data-preserver-spaces=\"true\">of supply that is&nbsp;<\/span><em><span data-preserver-spaces=\"true\">currently&nbsp;<\/span><\/em><span data-preserver-spaces=\"true\">being built will almost certainly outpace demand\u2014a toxic brew of expenses that, one by one, will slice into net operating income. High interest rates with every probability of staying where they are at or rising. And, worse\u2014easy, low-risk ways to earn more cash flow, with more liquidity and much lower risk, are all over the place.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">I just don\u2019t see the path forward for multifamily in 2024. I was hoping when I wrote my thesis in 2023 that there would be light at the end of the tunnel in the second half of 2024, as much of that inventory came online, prices fell, cap rates rose, and markets had a hiatus from supply.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">A 20-30% crash is a buying opportunity, right?&nbsp;<\/span><span data-preserver-spaces=\"true\">&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Wrong.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">I underestimated the aggressiveness of multifamily development starts and the length of the timeline to get that inventory online. I underestimated the resilience of current owners and operators, who, largely, have been able to hold on to their assets to this point, making \u201cprice discovery\u201d a challenge, given the step change in transaction volume from two years ago.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">And while I acknowledge factors that could put a floor on price declines (capital on the sidelines, banks being willing to work with borrowers to restructure debt, debt locked into place for many syndicators through the next few years, anticipated continuation of low transaction volume in 2024), these are not driving value upward, just possible mitigants to a slew of brutal headwinds. The \u201csurvive til 2025\u201d game is not a game I want to play.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Because of this, I\u2019m forced to conclude that my base case for multifamily valuations in 2024 is another year of cap rate expansion.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">How much?<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">For me, rational pricing puts cap rates at 150 bps above agency debt, which is currently in the 5.5%-6.5% range. That puts cap rates at 7-8% for prime multifamily. Prime multifamily is currently trading at just over 5%. With no NOI growth, an increase in cap rates from 5-7% is a 29% reduction in asset values. And, while it seems crazy to me, it represents a very possible scenario unless something changes.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">My best guess is that 2024 will see a continued steady march towards these levels, but we won\u2019t get all the way to the 7s without a deep recessionary environment.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">I will be surprised if there isn\u2019t at least another 10%, and perhaps as high as 20%, further reduction in multifamily values in the face of these headwinds, on average, in the U.S. in 2024.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">So What? How to Protect Wealth and Generate Returns in 2024<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">I hope I\u2019m wrong with this analysis, but I wouldn\u2019t be publishing it if I thought I was. I think that all the signals are pointing to more pain in multifamily, and the fundamentals won\u2019t realign until one thing responds\u2014pricing, in the form of rising cap rates\u2014in a way that makes this whole asset category make sense.<\/span><span data-preserver-spaces=\"true\">&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">The real question, however, is what this means for investors who agree with my thesis and conclusions about the risks in multifamily real estate in 2024.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Largely, my conclusions about what to do with my money remain unchanged from last year: pursuing that long list of attractive alternatives to multifamily real estate:<\/span><strong><span data-preserver-spaces=\"true\">&nbsp;<\/span><\/strong><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Single-family and small (1-4 unit) multifamily&nbsp;<\/span><\/h3>\n\n\n\n<p><span data-preserver-spaces=\"true\">Single-family properties and small multifamily properties are seeing significantly less new inventory. They can be purchased with 30-year, fixed-rate financing and held indefinitely by individual investors. While they face some pressure from higher interest rates, they are, in my opinion, much more insulated from pricing headwinds (and rent headwinds) than their larger multifamily counterparts.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">I plan to continue my long-term periodic approach to investing in these types of properties in 2024 and believe strongly in the long-term appreciation and rent growth potential here.&nbsp;<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Senior lending<\/span><\/h3>\n\n\n\n<p><span data-preserver-spaces=\"true\">With interest rates higher than cap rates and the ability to lend to the U.S. government, highly qualified homebuyers paying high interest rates, short-term or bridge financing for fix-and-flippers, and more, I moved a big chunk of my portfolio to debt in 2023 and haven\u2019t regretted it.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Real estate-backed debt is my favorite (especially debt backed by single-family housing and small multifamily properties), and I turned to some of the Hard Money Lenders we have here on BiggerPockets to purchase notes. I read up on this subject with the BiggerPockets book&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/store.biggerpockets.com\/products\/lend-to-live\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">Lend to Live&nbsp;<\/span><\/a><span data-preserver-spaces=\"true\">by Alex Breshears and Beth Johnson.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">I feel secure letting someone else on the equity side take the first 30% of the risk and comfortable knowing that should the worst happen, I can foreclose and operate a paid-off project on my own time.<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Buy deep and opportunistically<\/span><\/h3>\n\n\n\n<p><span data-preserver-spaces=\"true\">This multifamily market will be highly regional. Some regions will see prices crash and forced selling sooner than others. At some point, this reset turns from a bloodbath where investors lose a ton of money to an opportunity to buy at heavy discounts and take out poor operators for instant equity gains. The timing of that opportunity will vary by market and may already be here in select areas.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">For folks bent on taking advantage of the current environment, I\u2019d encourage you to get really thoughtful about exit cap rates and assume modest rent declines in your base case scenarios for the next two years. There\u2019s every reason to believe in long-term rent growth in this country, and it may not be necessary to perfectly hit the bottom of this multifamily, if my thesis is even close to right.<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Use light leverage, and be wary of \u201cpreferred equity\u201d and its siblings<\/span><\/h3>\n\n\n\n<p><span data-preserver-spaces=\"true\">Given the volatility in the market, I think that a lot of leverage can kill operators. Be wary of deals that are highly leveraged, and be&nbsp;<\/span><em><span data-preserver-spaces=\"true\">especially&nbsp;<\/span><\/em><span data-preserver-spaces=\"true\">careful about deals that use \u201cpreferred equity\u201d or \u201crescue\u201d capital.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">These types of \u201cequity\u201d are really \u201csecond- or third-position debt\u201d and senior to common equity. In a market with as much risk as this, they are still at high risk of experiencing serious losses and, of course, compound the risks of leverage for common equity at the top of the&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/multifamily-capital-stack\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">capital stack<\/span><\/a><span data-preserver-spaces=\"true\">.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">I personally prefer a simple capital stack and highly respect offerings that avoid preferred equity altogether in today\u2019s environment.&nbsp;<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Don\u2019t throw good money after bad<\/span><\/h3>\n\n\n\n<p><span data-preserver-spaces=\"true\">Properties have lost a lot of money. If your property is underwater, your principal is&nbsp;<\/span><em><span data-preserver-spaces=\"true\">lost<\/span><\/em><span data-preserver-spaces=\"true\">. It\u2019s a sunk cost. Don\u2019t chase it, and before committing to that capital call, consider the opportunity cost.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">You can try to rescue money that is gone, or you can buy new assets at today\u2019s valuation and reset. I\u2019d steer many investors toward the latter strategy.&nbsp;<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Demand more from syndicators and capital raisers<\/span><\/h3>\n\n\n\n<p><span data-preserver-spaces=\"true\">Don\u2019t let a syndicator take your money, put little to nothing of their own money in, earn an acquisition fee, earn a management fee, earn a refinance or disposition fee, and have the opportunity to win big regardless of whether they deliver returns.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Those days are&nbsp;<\/span><em><span data-preserver-spaces=\"true\">over.<\/span><\/em><em><span data-preserver-spaces=\"true\">&nbsp;<\/span><\/em><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">The power is shifting, and&nbsp;<\/span><em><span data-preserver-spaces=\"true\">you,&nbsp;<\/span><\/em><span data-preserver-spaces=\"true\">as the investor with capital to deploy, have the power here in 2024. Be wary of the following:<\/span><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><span data-preserver-spaces=\"true\">Those who ask you to invest with them but aren\u2019t contributing their own equity capital, not including acquisition or other fees. Fear of loss is a healthy balance to the possibility of maximizing gains. I\u2019ve yet to meet a Limited Partner (who is not a former, current, or aspiring capital raiser) who does not agree with this stance, though I\u2019ve met many capital raisers who strongly oppose my views on this.&nbsp;<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Those who can\u2019t provide current (last 90 days)&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/2013-08-26-comp\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">comps<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;for a project and assume in their base models that they will exit at the purchase or lower cap rates.&nbsp;<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Those who assume strong market rent growth in 2024 and 2025 in their base case models.<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Capital raisers who charge fees that allow them to earn anything more than modest salaries during the hold period. Look for sponsors who set things up to only earn big after investors have seen their capital returned, plus a healthy return.<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Those who have a complex capital stack and treat investors in the same equity classes differently.<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Those who ask for your money but don\u2019t intend to work in and on the deal or fund, for the life of the deal or fund, full time.<\/span><\/li>\n<\/ul>\n\n\n\n<p><span data-preserver-spaces=\"true\">If syndicators don\u2019t pass these simple tests, I pass and move on. L.P.s have the power.&nbsp;&nbsp;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">PassivePockets&nbsp;<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">I believe that almost everyone reading this is looking for opportunities to passively build wealth through real estate or to raise capital from those looking for passive wealth-building opportunities.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">And the world of private, passive real estate investment opportunities is the wild west. There is very little regulation, transparency, or standardization. Every advertisement for a&nbsp;<a href=\"https:\/\/www.passivepockets.com\" target=\"_blank\" rel=\"noreferrer noopener\">passive investment<\/a>&nbsp;is just that: an ad or sales pitch.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Every capital raiser is promising Berkshire Hathaway-level returns. And every deal seems to come with high fees. It\u2019s extremely difficult to know who to believe and trust, who is exaggerating, and who is simply wrong.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">The market is very inefficient and, as a result, is potentially a great place to look for outsized returns and great value. But it\u2019s also filled with land mines, bad operators, bad underwriting, overhyped investments, and exorbitant fees.&nbsp;<\/span><span data-preserver-spaces=\"true\">&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">I\u2019m passionate about this space and feel a duty to educate this community on how to evaluate deals based on the merits of the operator and the underlying asset. Investors need to learn and develop a framework of what \u201cgood\u201d looks like from a syndicator, a deal, and the business plan and to compare each deal to an ideal investment. Obviously, the \u201cideal\u201d state will never be fully realized\u2014it\u2019s about how close to \u201cGood\u201d we as investors can find.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">To that end, I\u2019m starting a new BiggerPockets community called PassivePockets. PassivePockets will be for accredited investors or those otherwise able to invest and access private real estate investments, including syndications, private lending opportunities, private debt funds, and more.<\/span><span data-preserver-spaces=\"true\">&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">At PassivePockets, we will form hypotheses about what \u201cgood\u201d looks like from a syndicator, fund manager, general partner, etc. We will bring in live deals that are currently open for investment and compare their offerings to what we believe \u201cgood\u201d should look like. There, we will debate, discuss, review, and rate investment opportunities and those offering them as a community. We will be frank and honest when we find things we like in investment opportunities and sponsors and direct and brutally honest when we find things we don\u2019t.<\/span><span data-preserver-spaces=\"true\">&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">As a membership-based community, we will work to be a fiduciary to the limited partners and investors looking to place their money and call out operators and deals, even those presented by well-known members of the BiggerPockets community, when they deviate from what we believe investors should expect and demand.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">PassivePockets does not exist yet. It will develop in Beta in the first half of this year and evolve as we learn and grow together over the course of the year.<\/span><span data-preserver-spaces=\"true\">&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">If you are interested in learning more, I encourage you to sign up for our <a href=\"https:\/\/get.biggerpockets.com\/passivepocketsbeta\/\" target=\"_blank\">beta group wait list<\/a>. I look forward to learning alongside you and feel that 2024 is the perfect time to start learning\u2014there will almost certainly be buying opportunities in the latter half of the year and into 2025 and beyond.<\/span><\/p>\n\n\n\n    \n  <div id=\"visibility-group-block_de86a053aec1b87832bffe9bd4dba003\" class=\"visibility-group  hidden\">\n        \n\n<div id=\"hero-block_165348d49ea14c74ad7f03d4e20c23e9\" 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\" 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\" style=\"font-size:16px\">Find trusted, <em><strong>investor-friendly<\/strong><\/em> lenders who specialize in your strategy. <\/p>\n\n\n\n<p><\/p>\n\n\n\n<div id=button-custom-event-block_8541ce1caf9165bd6fe3a0adf46e7957 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\/multifamily-crash-to-continue-through-2024&#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\" 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\/multifamily-crash-to-continue-through-2024&#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","protected":false},"excerpt":{"rendered":"<p>The multifamily and commercial real estate crash is in full swing. As much as $2.7 trillion in wealth has been wiped out with a historic surge in cap rates and [&hellip;]<\/p>\n","protected":false},"author":1676,"featured_media":166469,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[8,7119,7357],"tags":[],"class_list":["post-166463","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-real-estate-trends","category-biggerpockets-daily","category-multifamily-real-estate-investing"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/166463","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\/1676"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=166463"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/166463\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/166469"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=166463"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=166463"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=166463"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}