Summary of Current US Market Conditions

High Inflation / Recession Fears

⦁   Aggressive FED policy of increasing rates is causing fears of recession in 2023

⦁   Higher interest rates result in higher borrowing costs, lower leverage and tighter lending terms

      ⦁   This means lower return on investment and pressure on asset valuations

Cap Rates

⦁   Going-in cap rate expansion started happening and will continue

⦁   Investors are underwriting higher exit cap rates and less aggressive leasing

Real Estate Investment Volume 

⦁   Investment volume has decreased, and institutional capital is waiting for the market to stabilize. 

Loan Maturities

According to Trepp, $53 billion of CMBS loans with debt coverage ratio < 1.25x are maturing in 2023

      ⦁   Operating margins are down due to expense inflation 

      ⦁   Rent growth is plateauing and likely to go back to normal levels in 2024

      ⦁   This is likely to create distress in the market

US Multifamily Rental Market

As the largest investment category, fundamentals are strong for US multifamily

⦁   Home ownership is expensive for many Americans: Rent vs. Own analysis indicates Rent

⦁   After the pandemic, rents have grown exponentially, as high as 20%+ in major markets

⦁   Population growth, life-style changes and “work from home” trend pushed Sunbelt and Southeast markets into new records for rent growth 

⦁   In prime markets like New York inflation related rent growth may be plateauing, but fundamentals remain strong due to supply constraints 

      ⦁   Demand always outpaces supply in New York due to job creation and population growth. 

OPPORTUNITIES – SUMMARY

⦁   Price correction in all asset types, especially available to cash buyers

⦁   Distress caused by maturing debt and lower operating margins: office, multifamily, hotels

⦁   Rescue capital for deals with gaps in the capital stack due to lower leverage

⦁   Quality core assets with lower price for cash buyers

⦁   Mid-market deals that are too small for institutions who must deploy large chunks of cash

⦁   Co-GP development opportunities with good sponsors who need capital injection until LP’s join their deals

⦁   Prime gateway cities with supply constraints with higher rent growth potential

OPPORTUNITIES – DETAILED

2023 indicates a year of unprecedented opportunity due to a confluence of several factors: 

Recession, rising interest rates, tightening credit markets, declining NOI margins, inflation affecting consumer confidence and lowering disposable income levels

⦁   Price correction, especially available to cash buyers 

      ⦁   Tighter lending and high interest cost combined with higher exit interest rate underwriting will affect all assets including multifamily and industrial, but fundamentals are very strong, both financially and demographically. 

⦁   Lower operating margins will create distress for assets with maturing lower rate debt

⦁   Deals that are in the works but are suffering from gaps in the capital stack due to volatile debt markets and investor fears, will need reasonably priced, fast execution rescue capital

⦁   Quality core assets with strong cash flow and strong fundamentals that will be less affected by debt market volatility will be attractive at lower prices. 

      ⦁   All cash buyers could have strong upper hand in purchasing these assets

      ⦁   Sellers could be more inclined to offer seller financing that would be cheaper than market debt

⦁   Big institutions who have raised $billions and are holding to buy due to market dislocation, will have to make large purchases to deploy capital when the market stabilizes. This will create opportunities to purchase in the mid-market segment that is too small for institutional investors. 

⦁   Co-GP investment opportunities with quality sponsors for ground up development deals that need capital injection until markets normalize and LP’s come into the deal

⦁   High growth secondary markets that experienced explosive rent increases are seeing normalized growth assumptions going forward as supply had been strong. However, prime gateway markets like New York have high barriers to entry and are extremely supply constraint putting upward pressure on rents.