Street Smart Success

The state of Florida is continuing to see exponential growth, especially Central Florida. The markets of Tampa, Orlando, and Sarasota are adding jobs and population at an unprecedented pace. As a result, Real Estate rents and values have held up well, especially compared to other boom and bust markets. Evan Shields, Founder, CEO & Managing Partner of Indelible Capital Partners, started his company in 2022 and is acquiring C to B- value add multifamily properties with 20-100 units. As other operators with heavily leveraged floating debt will be unable to get refinanced over the next year, Evan foresees great opportunity to acquire these properties at prices that will enable him to generate generous returns for his investors.

Even in deep recessions, Class B apartments are stable assets and generally withstand downward economic pressure. Class C apartments, on the other hand, pose significant risk because of unanticipated costs to repair and maintain these properties plus delinquencies that can exceed 20%. As a result of these Class C operational challenges plus higher interest rates, a lot of C Class operators are having major challenges right now that will end up as major losses for investors and operators. Mark Hamilton, Founder of Hamilton Zanze, one of the nation’s top 50 multifamily operators, has been in the business almost 40 years and has seen many market trends and cycles. Mark remains bullish on multifamily and specializes in B to A- properties in secondary markets. 

Unlike residential mortgages, commercial loans are vastly more complicated with thousands of different lenders with different lending guidelines and product types. As a result, the process can be overwhelming with a lot of potential pitfalls. Mitch Ginsberg, 

CEO of Commloan.com, has created an easy-to-use technology platform which gives borrowers unprecedented access to 700 lenders and thousands of loan products. Borrowers can now seemlessly shop online for the best loan products for their specific needs and get the best service and prices. Commloan.com matches the borrower with the right lender, the right loan product, and the right price.

With the cost of construction and borrowing costs rising, it’s become prohibitive to build new neighborhood strip centers with very few new centers built in the last fifteen years. As a result, occupancy levels at existing properties in growing markets is in the mid-high 90’s and sometimes even 100%. Contributing to recent high occupancy trends are professional service companies like retail insurance agencies and other business-to-consumer companies, plus medical providers like dentists, chiropractors and clinics.  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. 

40% of multifamily properties bought in Q 3 and Q 4 2020 and 2021 with variable rate debt will likely not get refinanced by their current lenders. In these scenarios, operators will be forced to attempt to raise more money via capital calls from their current investors and/or take on rescue capital from 3rd parties. The last option is to give properties back to the bank. Over the past couple years, the high price of multifamily properties did not pencil without high leverage bridge debt, but as a result of the precipitous rate increases of the last year, operators are now paying the piper for taking the risk. Neal Bawa, Founder of GroCapitus, saw the writing on the wall and only acquired one property during this time, and sold several. As a result, he did incredibly well by his investors. Neal is currently waiting for the market to correct much further before he’ll even consider making another acquisition. 

As inflation has taken a big bite out of renter’s pocketbooks, delinquencies on C Class apartments have increased, and prices on these assets have come down. In the next couple years, a lot of inexperienced operators who bought these properties and not significantly improved Net Operating Income, will have trouble getting extensions on their loans. This will result in great buying opportunities for experienced operators to acquire these assets at reduced prices. John Cohen, Founder and owner of Toro Real Estate, has done incredibly well in C Class properties in Columbus, Ohio and the Carolinas, and sold most of these properties over the last couple years. John has recently focused on ground up development.

In most tertiary markets in the Midwest, there’s been very little new building of multifamily housing in many years. Therefore, buildings in many of these markets have very high occupancy levels. These markets also tend to have smaller, ma and pa management, so there’s a lot of opportunity to reduce operational costs and raise rents, thereby improving Net Operating Income and creating great cash flow. Seth Teagle, Principal of The Stream Group, a vertically integrated multi-family operator, has built an impressive portfolio of C and B class properties in Central Ohio. Over the past few years, Seth has learned from mistakes on how to accurately budget for cap-ex on heavy value-add projects, an area where a lot of inexperienced operators go wrong. 

When making investments in Real Estate, the most important consideration is who you’re investing with. Proformas are always enticing, but the differentiator is the operator. More than the ability to judge the merits of a specific deal, a successful investors’ most important skill is being able to accurately vet operators. Matt Burk, Chairman of Fairway America, has consulted  hundreds of Real Estate entrepreneurs in helping them form their own funds, including how to identify credible sponsors. This experience, plus years of running his own funds, is one of the reasons Matt’s Fairway America funds have been so successful and generated great returns for his investors. 

Unlike most other asset classes, Mobile Home Parks and Self-Storage facilities have maintained almost all of their value despite interest rates having skyrocketed over the past year. Rents in both asset classes have stabilized, but not decreased. From an investment perspective, these asset categories are still highly fragmented with greater than 70% owned by individuals or families. Matt Ricciardella, Principal and Managing Partner of Crystal View Capital, has mastered the art of acquiring these asserts off-market in secondary and tertiary markets. Matt has a large in-house team that manages all aspects of operations and has achieved historical internal rates of return greater than 30%.

The most successful Real Estate investors determine when to invest in order to generate the highest returns. In a market where asset prices have skyrocketed, there are greater gains to be made in ground up development and land. In pursuing these opportunities, it’s critical to find the right people to execute the business plans. These projects require problem solving to the extreme, so the people involved make the whole difference. Hemal Badiani, Founder and CEO of Exponential Equity, started acquiring Multifamily assets and has expanded into ground up Multifamily and his favorite asset class, development of raw land.