Fall 2023 State of the Multifamily Market – Time for Optimism


Although it’s only been a few months since my last state of the multifamily market update, I feel like it’s time to write another one. That post is not dated by any means but needs to be expanded upon.

The world is changing rapidly, pessimism has crept in, rates being higher for longer is becoming consensus, and ‘survive until 25’ is the new motto.

I spend a lot of time reading and talking with people, attempting to organize my thoughts in a cohesive narrative that drives my investment thesis. This post is another attempt to take all the messy information and weave it into a story that I believe to be true today.

If you read only the headlines (or Twitter), you’d think we’re in a deep recession and all multifamily is distressed. However, I’m much more optimistic.

Here’s a high-level outline which forms the basis of my view today:

  • We’ve tamed inflation.
  • The consumer is in great shape.
  • The U.S. is the best economy in the world and while things aren’t perfect today, they never are.
  • Long-term optimism will be rewarded.
  • There are opportunities in preferred equity which will prevent distress.
  • Rates will stay higher for longer, but I expect the 10-year UST to normalize around ~3.5% in 2025.

Having said that, I do not expect the next decade to be as fruitful and easy as the past decade has been for multifamily investing. I do believe there are opportunities to earn exceptional returns through buying at the right basis, devising sound investment strategies, and executing flawlessly.

In today’s environment, we’re taking the following approach:

  • Existing assets, we’re being defensive, hoarding cash, and preparing to hold existing assets for another 24-36 months minimum. We believe rates with normalize and the capital markets will stabilize within that timeframe, providing optionality. We’re thankful for long-term fixed-rate debt.
  • Acquisitions, we’re strategizing with capital providers and preparing for opportunities we think exist today and will likely become more attractive over the next ~12 months.

Here are some of the best things I’ve read lately and the ideas informing my approach today.

Howard Marks memo Further Thoughts on Sea Change

  • The memo calls for capital reallocation and touts the attractiveness of private credit today. From 2009 through 2021, the Fed kept rates near zero and we had the longest economic recovery in history. Asset owners had it easy.
  • However, for a number of reasons, “ultra-low or declining interest rates are unlikely to be the norm in the decade ahead” and thus ‘we’re likely to see tougher times for asset appreciation’.
  • “And merely riding positive trends by buying and levering may no longer be sufficient to produce success. In the new environment, earning exceptional returns will likely once again require skill in making bargain purchases and, in control strategies, adding value to the assets owned.”

I generally agree with Marks that the investment environment has been altered, but it doesn’t shift my view on high-quality multifamily in the Southeast being a great long-term investment.

Peter Linneman on the Walker Webcast

Whenever things begin to not make sense, I look toward Peter Linneman. On his recent quarterly webcast with Willy Walker, he compared the economy to a Seurat painting. If you get too close, you see nothing but little dots. You need to step back to see the full picture.

Sunday Afternoon
  • The consumer is in great shape. Only 20% of the economy is really impacted by rates, while sectors such as government and healthcare are largely buffered from the impact of rates.  
  • He also believes that money will continue to exit office and flow into multifamily and industrial.
  • Don’t bet against the U.S. History has proven you wrong again and again.

Peter is an optimist but also pragmatic which is why I gravitate toward his research. The Fed will cut rates, money will flow into multifamily, and the U.S. economy will grow. Hard for things to go too wrong when these fundamentals exist.  

Dean Adler on the Fort Podcast

This was a great one. Over his 40-year career, Dean’s seen several cycles, so it’s easy to put today’s environment in the context of history.

  • You make the most money and take on the least risk on deals acquired during periods of distress and turmoil.
  • Back up the truck during distressed periods. Acquire assets a great basis, which is a competitive advantage, and ride the recovery to success.
  • Real estate is cyclical. There’s distress, recovery, and the asset bubble. Every 10 years, work for the first 3 years during the distress, then take the next 7 off.

This is one of the 3 years where we all should be busy, before taking 2026 – 2033 off.

Real Estate God Thread on Optimism

I’m an eternal optimist, which is one of the reasons I gravitate toward long-term focused real estate investing. This post by The Real Estate God on optimism is a classic.

In real estate investing, you need to be delusional in the beginning (an unrelenting optimist) and switch to being a realist once you uncover that great deal. I highlighted some of my favorite quotes from the thread below, but you’re better off just reading the entire post.

  • “If you believe in Bigfoot, you’ll see him 5 times every day. If you don’t believe in him, you’ll never see him at all.” Homerun real estate deals are Bigfoot.
  • “Realistic people fundamentally don’t get it. If you talk to any highly successful person, they have a sense of mysticism about them. Beliefs that defy logic. An unrelenting dose of self-confidence and unwavering optimism in their abilities even in the face of overwhelming odds. They get it.”
  • You can’t get caught up in the facts, in the statistics, in the probabilities. You have to drown yourself in delusion.   
  • “Realistic” people get nowhere. Clocking into an office every day for eight hours, accomplishing nothing of note with each passing year and slowly withering away into nothing. Instead, you should make a conscious effort to drown yourself in delusion, to believe that opportunity exists.
  • Every day you need to make a conscious effort not to live in the “real world” but to operate in a different, parallel world – a fantasyland where everything is possible. This is the world business owners, CEOs and celebrities operate in. It’s a world where homerun deals exist and where you’re the one who does them.

Being a multifamily investor requires optimism and historically optimists have been rewarded.

We’re living in an interesting time where things are changing rapidly and opinions are diverging. Personally, I haven’t been this excited in a long time.

The 10-year UST is about to eclipse 5% for the first time since 2007. If rates stay elevated for the next ~12-18 months, we’re going to see some great buying opportunities.

 Stay on the hunt for bigfoot.


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