The Supply and Debt Conundrum - Where Is The Opportunity?
October Newsletter 2023
In a world where there is still a record number of units being delivered from the post covid boom and debt has become very expensive, where is the opportunity? We have been asking ourselves these questions and reading through the research, we think there is opportunity on the horizon for those who can weather the storm.
As you can see in the corresponding chart, there are more multifamily apartments under construction currently than at any time in the past 50 years.
Despite the above, the US is simply not building enough homes (multifamily and single family.) Per Realtor.com, from 2021-2022, 15.6 million households were formed. During that same period only 11.9 million housing units were completed.
According to MSN, the gap from renting to home ownership has reached its highest point since 2000. “The analysis revealed that the cost of buying a home has surged compared to renting, reaching a staggering 62% difference.” This is driven by two factors; high rates -- In October of 2021, the average 30-year mortgage was 3.04 compared to 2023 at 7.63%. And, limited new single family supply keeping prices high.
Even though borrowing rates have more than doubled in just two years, single family starts are staying steady simply due to buyer demand. However, multifamily permits have screeched to a halt mostly due to financing costs. Pair that with a slowdown in rent growth due to the ~970k units under construction and one would expect new multi developments starts to stay muted. The FED’s higher for longer sentiment will only exacerbate the slow-down in new multifamily supply, creating increased demand as prospective homebuyers will continue to be squeezed out of the leap to home ownership.
So, where will the above factors create Multifamily opportunity? The next 24 months will be tricky – there will be developers that started building in 2021 and are leasing up at a time that is filled with competition while they are feeling the stress of their floating rate construction loan. They will need to exit. In some cases, they’ll be lucky to do so at their cost basis. This will put downward pressure on all multifamily prices throughout 2024 and likely in 2025. It is not going to be easy to buy deals when borrowing in the mid 6%’s (commercial multifamily debt is cheaper than a 30 yr. mortgage) but, we are firm believers that basis cures all and that there will be opportunities to acquire properties at extremely attractive discounts to replacement costs, even if you have to buckle up for a less than predictable 12-24 months.
Interested in digging deeper into this topic? Josh and Donato of DXE Properties will be hosting a webinar on this topic on Thursday, November 9th. Register here.
Giving Back -- As many of you know, Donato and his wife are on the board of the Special Kids of New York Charity. This is the organization’s 27th year since Donato’s parents began the charity. Each year they help children that need medical care but cannot afford to do so through insurance. If you have a moment please watch this video — Special Kids of NY has provided the equipment you see in the video to SEVERAL of the children who are featured.
Their organization puts together an annual charity dinner which includes a night of dancing, dinner and auctions. CLICK HERE TO PURCHASE YOUR TICKET ONLINE OR MAKE A DONATION: https://www.specialkidsofny.org Additionally, if you have sporting tickets, memorabilia or are willing to give up your vacation home for a weekend, we are in need of good auction items for this years event. Please reach out!
Thanks and hope to see you there!