The Charlotte commercial multifamily market seems to keeping pace or exceeding that of residential. I was curious if investors were adjusting their strategies (e.g. switching from buy-and-hold to flipping or developing, condos etc.), moving to other sectors (e.g. self-storage), considering other markets, or what they are doing to find deals? I am open to partnering with other syndicators and was curious if anyone would be willing to share their experience. Thanks

Nicholas,

We’re having success finding deals, we currently have nine apartment communities under contract. Only two are here in NC, although none specifically in Charlotte. That market seems to have become too competitive for our numbers to make sense. Our advantage is we operate as a group and have active members in many MSA’s across the US. We focus on MSA’s with population growth, job growth, landlord friendly, etc. The deals making sense for us these days are deals with a story to them. One was owned for 20+ years by two elderly aunts who had their cousin running the property. One was being sold by the developer who built the property over forty years ago, never did any interior renovations and barely raised rents. Two are forced sellers because of partnership disputes. Those are deals where our returns work. The deals that are on value add 3.0 or 4.0 and have only been owned a couple years and rents are very close to market just don’t fit our criteria. We won’t pivot to another asset class because it takes years to build the relationships in the business, establish a track record, gain confidence in industry standards, find great property managers, great vendors, etc. It’s definitely more challenging finding deals that make sense today but I don’t think it will stay that way forever and I think a key today is being open to a few different markets and having a great team so you have more eyes looking. Hope that helps!

Jason, thanks for your response. I hear you on value add 3.0 and 4.0.

Having been through the great recession, I know this isn't a normal cycle, I'm curious if there are any lessons learned that can be applied here. Obviously being overleveraged is a big risk factor in a down cycle. I suppose conventional wisdom would say in times of uncertainty it is prudent to maintain liquidity and discipline in terms of chasing deals.

Definitely great things to consider Nicholas! And I agree staying disciplined this late in the cycle is very important. We’ve already seen some seasoned investors begin to get more lax in their criteria. I think one important consideration on the commercial side is the debt structure being used today. We’re using 3,1,1 on our bridge debt. So we will begin implementing our business plan on day one, hopefully in two years we’re ready to refinance and put long term agency debt on. With the bridge debt we’re using there’s typically no prepayment penalty like agency debt. So if we are all done with our business plan in two years, the economy is still good, debt terms are favorable then we refi. If the economy is deep in recession we can wait because not only would we still have another year left on the debt but we would have two one year extensions. So that structure gives us about a four year window to refinance out of bridge into long term agency debt. That’s a big window, most recessions last about eighteen months so there’s plenty of a window of time to secure proper long term debt.

I think another concern I’m seeing today is the lack of risk adjustment being placed on C class and D class assets. Five years ago the spread between A class and C class was about two hundred basis points. Today it’s probably about twenty basis points. I think as we get into our next recession I think you’ll see why that risk adjustment was placed on there years ago and I think you’ll see those spreads widen up again but that’s just my opinion. The census data puts out weekly household pulse surveys and the last one I saw gave me the impression that households making under $25k was at higher risk of evection than those of higher incomes. I’ve heard people give opinions of which class will be hit harder but so far the data looks like class C. Sorry for the long winded answer but I hope that helps. Just FYI I began in 2005 so I was invested in several flips that I got stuck with through the GFC, so I’m being more cautious now too.

Good point about building flexibility into your financing. On the rate compression, I wonder if population growth to the region will counterbalance any risk adjustment. I'm not sure of the exact numbers, but based on what I hearing and seeing, the growth trend has actually increased over the past 6 months as folks are leaving crowded and more expensive coastal urban centers.