release edition [039]

read time [5 minutes]

Welcome to The Multifamily Download, a weekly newsletter where I provide institutional insights to help you build an exceptional Multifamily career.

My apologies for sending this a day late. Last week was a busy one.

Today at a Glance:

• Growth: Slow = Sustainable
• Investing: The Contrarian View
• Weekly Listen: Jim Costello

Growth

Humans desire growth. This is normal, and it's important.

But when it comes to Real Estate investing, I would argue that growing slowly is a gift more often than not.

Real Estate cycles move slowly. If rapid growth occurs during a small portion of this longer cycle, then the risk of ruin greatly increases because longer term perspective is often missing from the equation.

We are seeing this begin to play out for Multifamily investors that experienced rapid growth of their portfolios in 2021-2022 at the market peak.

Unfortunately, many of these investors had not previously seen a down cycle where markets soften, lenders tighten, the business of owning Multifamily becomes incredibly difficult, and survival becomes the only goal.

​The Bethany Group, which crumbled during the GFC era, is a cautionary tale of the powers of price, leverage, and timing when investing in Multifamily.

Yes, moving quickly on the day-to-day is important, but growing without structure, strategy, or perspective can be deadly to an emerging Real Estate company.

Instead, aim for sustainable growth over time. Build foundational relationships that can advise you across macro environments, markets, and strategies.

Learn how to invest in up cycles and down cycles, and observe how others are operating during those differing times.

Glean wisdom from the wisdom of those that have gone before you.

And above all else, don't get caught up in the euphoria of the moment. There will always be another property to buy, another dollar to be made, and another business plan to execute. 99.9% of Real Estate is not worth overpaying for the right to own it.

Real Estate business is an infinite game; it is not a game to be won, but an endeavor to be endured.

Contrarian

I've always been fascinated by emerging trends and popular "herd mentalities".

On one hand, it makes sense -- something is happening and everyone wants to benefit. (See: A.I. and data center development).

But on the other hand, it can seem crazy -- markets today are hyper-efficient, so the window of time to benefit from being early is becoming more and more compressed.

So instead of focusing on trends or a popular herd mentality, what about taking a contrarian approach?

For example, many investors get excited about investing in "Red" growth markets.

The problem is that many of these growth markets are also generally business and landlord friendly. This eventually leads overbuilding and a resulting increased pressure on Multifamily fundamentals.

Recent examples of this thesis include Austin, Phoenix, and Salt Lake City.

These have been strong employment markets with outsized growth since 2015, and as a result, Multifamily developers wanted to get their share of this growth by developing new properties.

Today, however, many of the developers that rushed in to get their portion of those potential profits in the 6th, 7th, 8th, or 9th innings are wishing they hadn't built the properties that they're currently attempting to sell.

In this case, a contrarian approach would have been to develop or acquire in a tighter supply "Blue" market.

We're seeing this thesis play out today, with markets like Boston, Chicago, and San Francisco experiencing a strong Multifamily recovery.

More than just being contrarian for the sake of it, is having a justifiable reason for taking such an approach.

Many times, investors are simply looking for strong conviction and rational defense of the logic that led to the conviction.

Ultimately, this is why alignment is so important in Real Estate investing. The higher the fees, the less incentivized a Sponsor is to make prudent investment decisions on behalf of their investors. (But this is a topic for another day).

When it comes to Multifamily investing, don't overlook Blue markets.

Because ironically, the invisible hand of the Government often does more good for investors than the citizens they represent, as restricting supply and elevating the barriers of entry tend to benefit landlords in those markets.

Hopefully, the next time you catch yourself chasing an emerging trend or herd mentality, you'll pause and evaluate before proceeding.

Weekly Listen

This week's episode is The Rent Roll with Jay Parsons and guest Jim Costello of MSCI Real Assets.

In it, these discuss the potential distress in the apartment sector, the lack of development capital, debt fund liquidity, and what institutional capital is seeking today.

You can listen to the full episode here.

Wrap Up

That's it for this week. I hope you found this edition of The Multifamily Download insightful and enjoyable.

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Thanks for reading. See you next week!

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