LLoyd Jones | Turmoil in the Multifamily Market

Excerpted from Hot Topics in the Real Estate Investment World, a newsletter
by Lloyd Jones.

I’m sure you’ve read about all the impending turmoil: rate cap, floating-rate debt, and debt expirations. Foreclosures, bankruptcies. Doom and disaster.

Well, I’m here to disagree.

Let’s first discuss floating-rate debt. There’s no question that this has had a major impact. This is especially the case with value-add or turn-around strategies. What was expected to be increasing income and NOI gets stalled and doesn’t come close to matching the increase in debt service. Your property is losing money.

Now the strategy becomes survive. You have to survive until rates start to decline and rental rates start to increase. And they will. They always do.

We have seen the recent news articles mentioning several high-growth investment firms that accumulated substantial portfolios that are dealing with these issues. Many are predicting failure: giving back the key, or foreclosure, etc.

I don’t think that’s going to happen, and here’s why.

First, many of these deals involve “institutional” JV partners. These guys are very smart, have tremendous data and analytics (and capital). And they don’t like to lose money!

I think they will step up. Whether it be a capital call or a restructure of the capital stack, e.g., mezzanine or preferred equity, they will not allow their initial investment to evaporate. Needless to say, the GP’s potential profit will be substantially reduced, but they and their LP will live to see a better day and at the least recover their investment.

Now, for the GPs with retail investors (e.g., crowdfunding), there may be a different outcome. My guess is that these investors are smart and successful in their professions, but chances are they are not professional real estate investors. That’s why they invested with a GP/operator to begin with. They may take a completely different approach. After all, assume they have $25,000 or $50,000 in the investment and the GP makes a capital call for an additional $10,000 or $20,000. They may think “Why throw good money after bad?” and may decide to take the hit and move on.

That’s understandable – but a big mistake. If the GP/Sponsor has presented a plan to get through this downtown, then I would suggest it may very well make sense to provide the additional funds.

Remember, if the property goes to foreclosure, chances are you will lose 100% of your investment. If you can hang in, things always turn around.

In my 43 years in this business through numerous recessions, bank failures, etc., there’s one thing I’ve learned. If you can weather the storm, multifamily assets will almost always return in value and almost always at a new higher number.

The key is to survive the downside, and you’ll be rewarded on the recovery.

It’s a tough pill to swallow at the time, but you’ll be glad you did.

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Chris Finlay
Chairman and CEO of Lloyd Jones

_{Disclaimer: The thoughts offered by the author reflect solely his personal opinions and observations and not necessarily those of Lloyd Jones LLC. They are for entertainment purposes only. Nothing should be construed as investment advice. All investments involve risk.}