LLoyd Jones | Searching For Good News
Searching For Good News
If there’s any good news out there, surely the experts will find it. So, full of hope and anticipation, I recently attended two excellent national conferences.
The first was Globe St. Multifamily Conference in Los Angeles. With its encouraging subjects like “Turning Change Into Opportunity” and “Bouncing Forward,” I was ready for the good news.
This is always a great conference because they get exceptional speakers and panelists. But alas, no good news. The general sentiment is that we’re in a very challenging market. Interest rates, insurance, and taxes are all growing much faster than rents (which we all know). Along with that are the political regulatory risks. All in all, the great storm. The speakers confirmed it’s very difficult to make deals work. It seems most capital providers are looking at providing “pref equity” (the new equity) and or mezzanine debt. All provide extra protection in the capital stack and at today’s rate, equity-type returns.
There was overwhelming sentiment that there’s going to be a reset in the near future. What kind of reset? Cap rates UP and prices DOWN.
If that’s not bad enough, a huge inventory of new multifamily product is coming online. (700 new units per day since 2020 according to Avison Young.) With these new deliveries rent growth has slowed. But so has new construction. Starts are down about 60% since last year. With 10-year Treasuries at 4.7% and asking cap rates at 5.0%, investment activity is very limited.
No one is expecting devastation (maybe that’s my good news), but everyone is expecting a correction that will take a few years to work through.
Of course, this will present opportunities for those with fresh capital.
With my enthusiasm dampened a bit, I was off to my next great hope, the ever-popular NIC (National Center for Senior Housing) conference in Chicago. I knew I could find some good news here, because we are seeing it in the rising occupancies in our own senior properties. I did find some optimism here, mainly because we see the massive baby boomer market starting to reach “senior housing” age. So, the demand is here. And there’s optimism that technology will somehow address the labor challenges we face.
But optimism is different from good news. As though COVID was not enough, labor costs, insurance, and interest rates are all putting pressure on the industry. Debt markets have almost all shut down, so transaction volume is very low. It’s especially hard to get debt for non-cash-flowing assets. Here, too, cap rates are rising while prices are declining.
But occupancy is slowly improving, along with the labor market. But some sellers cannot hang on, so we anticipate seeing outstanding investment opportunities for those willing to take the risk (and able to find funds to close). As you know, I am a strong believer in this asset class. If you can close a deal in this market, I am optimistic that you will be well rewarded in the next three to five years.
One thing for sure is that the market demand is growing and unlike multifamily, there’s very little new supply.
Actually, I did discover some good news. A University of Chicago study has found that senior housing improves the lives of seniors as they adjust to a new, social, nurtured lifestyle found in a senior community. Knowing that might give families more comfort and confidence in their decision-making.
In conclusion, in my opinion we are nearing a capitalization stage, Sellers with debt coming due (whatever the asset class) are going to have to liquidate. If they can’t fund interim losses, they will have to sell, maybe even below remaining debt. There will be some extraordinary investment opportunities.
Know What Matters by Ron Shaich
I just finished Know What Matters by Ron Shaich, founder of Panera Bread. He started with a cookie shop in Boston, then merged with Au Bon Pain, and then created Panera. Unlike many books by founders, Ron has been extremely forthright and provides great information and insights.
Capital Calls and Rescue Capital by Adam Gower, Ph.D.
Adam Gower has just written a timely book called Capital Calls and Rescue Capital. Adam has weathered many cycles (as have I) and feels that this is a repeat of the “Big Short.” Great information from a pro who’s been there before. Full of smart info and no fluff.