Street Smart Success

The commercial real estate market has been majorly challenged over the past couple years. Interest rate increases and rising expenses coupled with flat to declining rents have put major pressure on many assets. More recently, geopolitical uncertainty including war and tariffs has caused a further slowdown in transactions. Deals are getting done, but it’s been the most challenging time over the past couple decades. Cliff Booth, Founder of Westmount Realty Capital, has been a large investor in value-add warehouses and multifamily for over 40 years and has over $300 million assets under management. Cliff is currently developing Cold Storage and big Box warehouses.

After several years of exorbitant multifamily prices, sellers are being forced to face the music and get more realistic about the values of their assets. This is resulting in the best opportunity to acquire multifamily in over a decade. Prices are now 30%-40% below their peak plus operational upside to achieve great returns. Brent Neely, Founder of Neely Property Investments, is investing in Boise, Idaho because of its rapidly growing population growth and robust business climate. Brent is looking to acquire 40–150-unit value add properties with upside. Brent has also invested in cash flowing government leased office buildings.

One of the hottest real estate asset classes in the country is Senior Living. Occupancy levels have caught up and even exceeded pre-covid levels. 10,000 people per day are turning 80 years old and this number is increasing. The average age of senior facility residents is 83, so the number of people who will need some type of Senior Living is about to explode and continue for the next two decades. Matt Johnson, Founder of McFarlin group, acquires distressed properties, increases occupancy and profitability, then sells them. As the market has heated up, and the demographics support future growth, larger global players are investing in this space.

AirBnB can be a great business, but there’s been major oversupply in many markets. A glut of inventory has impacted occupancy levels and daily rates. One successful strategy to overcome competition is to operate larger properties with more rooms and greater amenities. There are far fewer of these properties and therefore less competition. Guests also tend to be higher end and less impacted by economic downturns. Larger properties attract wedding parties, reunions, golf outings, and other occasions where people travel in larger groups. David Gindin, Director of Development at WorkshopWDXL in New Orleans, converts existing multifamily properties into AirBnB’s and also develops projects ground up.

After several years of headwinds, including unprecedented levels of new supply, multifamily may be finally bottoming out. Supply is getting absorbed and new deliveries are declining. As new household formation continues to emerge, and home prices remain out of reach for most new home buyers, rental demand and rents will continue to increase. The long-term outlet is promising. As a result, multifamily accounts for 50% of large institution’s real estate allocation. Mark Hamilton, founder of Hamilton Zanze, manages over 25,000 residential units, making him one of the top fifty multifamily operators in the country. 

In today’s environment, multifamily valuations on stabilized properties are still too high to generate enough cash flow for many investors. By contrast, ground up development economics make more sense. California still has a major shortage of housing for middle wage earners, so the state encourages Build-to-Rent developments of affordable properties. Jared Jones, Co-founder of Middle Housing Partners, has a Private Equity fund that develops smaller multifamily, condo, or townhome projects that generate cash-flow and strong appreciation. These properties are in the California Inland Empire where demand for housing continues to outstrip supply. 

Although many sunbelt markets have been excessively challenged for multifamily, not all have been equally impacted. Houston, for example, has continued to see major job and population growth. Companies like Nvidia, Apple, and Foxconn have made large AI-related investments in Houston. Houston has one of the country’s major ports and Is the fourth largest city in the country. It is predicted to surpass Chicago as the third largest city in the U.S. by 2035. Sam Morris is a partner at LSCRE, a multifamily real estate company with a large presence in Houston. All of LSCRE’s properties are in Texas, 80% of which are in Houston, which is becoming an attractive market for institutional investors.

With the right asset classes and the right operators, Real Estate is a slow and steady investment vehicle, but can still entail risk. Over the past 3-5 years, many passive investors have lost money. The best way to mitigate this risk is to invest with experienced fund operators who vet the operators and the opportunities withing the fund for you. Great investors like Warren Buffet, Charles Munger, Howard Marks and others, invest in boring, predictable things they know will endure. Paul Moore, The “Boring Investor,” and Founder of Wellings Capital, is operating his eighth successful fund that invests across recession resistant asset classes.

The cost of land, borrowing, and construction has made it prohibitive to build new neighborhood retail centers in Florida. As a result, occupancy at existing properties in many markets is in the mid-high 90’s and sometimes even 100%. There’s a huge demand for space from restaurants, yoga and Pilates studios, gyms, massage clinics, plus other medical providers like dentists, chiropractors and joint clinics.  There are also many other tenant types that need retail foot traffic to survive. Todd Nepola, President of Current Capital Real Estate Group, has been buying retail centers in South Florida for 25 years and has generated great wealth for investors. 

With so much volatility and uncertainty in the world, it’s getting increasingly risky to invest in equity opportunities with long, illiquid hold periods. It’s too hard to predict what will happen over time, and we’re long overdue for a major market correction. That’s why investing in shorter term, no or low leverage residential loans can be a great way to generate a high, risk adjusted yield in today’s market. Jef Baker, Founding Partner of Black Butte Capital, specializes in making loans to fix and flip contractors in the Portland, Oregon metro where he lives. Jef gets to know the borrowers and properties in-person to mitigate risk and protect his investor’s capital. Black Butte also invests in their own fix and flip properties.