Real Estate

*UPDATED* (and still true): When you build "luxury" new apartments in big numbers, the influx of supply puts downward pressure on rents at all price points -- even in the lowest-priced Class C rentals. Here's evidence of that happening right now: There are 21 U.S. markets where Class C rents are falling at least 4% YoY. What is the common denominator? You guessed it: Supply. Of those, all but one have supply expansion rates ABOVE the U.S. average. In Florida -- which continues to make itself a supply magnet with strong demand + the boost from the new Live Local legislation -- NINE metro areas made the list, with Class C rent cuts exceeding 4% year-over-year. Other key markets nationally to highlight: Ultra-high-supplied big markets like Austin, Phoenix, Salt Lake City, Raleigh/Durham and Atlanta are all seeing sizable Class C rent cuts of at least 5%. Tampa, Dallas, Charlotte and Orlando cut at least 4%. Small markets on the list include Provo, Greenville, Colorado Springs, and Wilmington (NC). Bear in mind that apartment demand is NOT the issue in any of these markets. They're all demand magnets. Sure, they've seen some moderation / normalization for in-migration and job growth, but (among the larger metros) every single one of them ranks among the national leaders for net absorption. (Interestingly, btw, Class C rents are falling materially MORE than Class A rents in most of these markets.) Simply put: Supply is doing what it's supposed to do when you add a ton of it. It's a process academics call "filtering" -- which happens when higher-income renters in Class B+/A- apartments move up into higher-priced new Class A+ units ... and then Class B+/A- units see vacancy increase, so they cut rents to lure up Class B renters ... and they Class B cuts rents to lure Class C renters. And down the line it goes. Filtering works best when we build a lot of apartments. We didn't see this phenomenon play out as clearly in past cycles when supply was relatively limited -- and failed to keep pace with demand. We probably won't see it in future years, either, as supply inevitably plunges and (barring some shock) could revert back to falling short of demand in high-growth markets. Less anyone still doubt, the inverse is true as well: Class C rents climbed at least 4% YoY in 22 of the nation's 150 largest metros, and nearly all of them have limited supply. So you can't just blame affordability ceilings when Class C rents are climbing briskly in low-supply markets while falling in high-supply markets. Most new construction tends to be Class A "luxury" because that's what pencils out due to high cost of everything from land to labor to materials to impact fees to insurance to taxes, etc. So critics will say: "We don't need more luxury apartments!" Yes, you do. Because when you build "luxury" apartments at scale, you will put downward pressure on rents at all price points. #multifamily #affordability #housing #rents

💥 New homes are now CHEAPER than resale homes 💥   This marks a significant inflection point in the housing market, reversing the historical trend where new construction commanded a premium—often as much as 20% more than existing properties. The shift, which began during the pandemic with a narrowing of the price spread, has fully materialized over the past three months.   While new home prices can be influenced by changes in product offerings or location, our Zonda data, builder survey, and NewHomeSource.com trends all confirm that real price cuts are also occurring in the new home space.   Beyond the raw data, several additional factors make new homes even more compelling for buyers: - Lower insurance premiums. New homes typically incur lower insurance costs compared to existing properties due to modern building codes and materials. - Reduced maintenance. New construction offers a maintenance-free or lower-maintenance lifestyle, saving homeowners time and money on immediate repairs and upgrades compared to the resale market. - Enhanced energy efficiency. New homes are often more energy-efficient than existing homes, leading to lower utility bills and a reduced overall cost of living. - Attractive builder incentives. Builders continue to offer incentives (e.g. buydowns or design credits), providing extra perks to buyers that can further offset costs. Zonda Sarah Bonnarens Alexander Edelman Tim Sullivan Bryan Glasshagel Evan F. #housing #realestate #newhomes

Sears sold houses from catalogs in 1900. Oregon just brought back the strategy that could end the housing crisis. Here’s why it could change everything: HB 2258 went through. A near-unanimous approval. Modern apartment buildings get criticized for looking the same. But still, each project gets designed from scratch. The result? Risk and cost without higher quality. The problem with housing development today: • If the project isn't approved, that money is lost • Small developers front well over $100,000 before raising a dollar • Capital invested before approval typically comes out of the developer's pocket Keeping small developers out of missing middle housing. Oregon cracked the code with pre-approved housing catalogs. Here’s how: 1/ Pattern books: • Pick from the catalog, start building • Cities must publish pre-approved designs • Up to 11 units or 20,000 square feet get ministerial approval Cookie-cutter by design. 2/ Historical precedent: • Sears sold kit homes from catalogs • Complete packages delivered in two to six weeks • Criticized for "mechanical, dehumanizing monotony" This isn't new at all. 3/ De-risking development: • Errors in plans had long since been removed • Layouts had been iterated upon and optimized • Designs called for readily-available, inexpensive materials • No convoluted review process No convoluted review process is the real innovation. Why this works: • Architects and contractors already have the skills and connections • They just lack the risk capital and appetite for discretionary approval • An architect bringing down $175,000 per year won't risk low six figures Pattern books eliminate the biggest uncertainty. The timeline: • Oregon's Department of Consumer and Business Services develops the plans • Cities have until January 1, 2027 to adopt • New housing won't see the market until mid-to-late 2028 at earliest Other states should look to this as a model The bigger picture: If HB 2258 works as planned? It could serve as a national model for streamlining multi‑family housing approvals. Reducing costs, and accelerating supply.

There's something potentially remarkable brewing in the U.S. apartment market right now, and it's all about demand. Data for 2nd quarter 2024 shows that renter appetite is not only strong, but arguably downright impressive. In the year-ending 2nd quarter 2024, nearly 400,000 market-rate apartment units were absorbed on net. How does that compare historically? Nearly off the charts strong. There are 98 quarterly readings on this chart dating back to 2000, and the year-ending 2Q24 figure is the 8th largest absorption figure on record. This is actually the third-largest figure on record (behind 3Q18 and 4Q00) if you remove the pandemic era peak (mid-2021 to mid-2022). But even including the once-in-a-lifetime pandemic era demand boom, the past 12 months' worth of demand ranks in the top 10th percentile dating back to 2000. This recent demand surge defies the prevailing thought that job growth is the be-all and end-all driver of housing demand. It's so much more than that, and one of the reasons why I'd argue it's vitally important to look at a holistic set of driving factors. Demographics, wage growth, pent-up demand, immigration, and consumer health among a myriad of unmentioned factors. This is one of the reasons why RealPage's market forecasts rely on a dozen-plus additional exogenous variables beyond job growth. Perhaps the BIGGEST thing that appears to be flying in the face of conventional wisdom though? Household formation. I'll tease this for a forthcoming post later this month, but get this: the mean # of residents per new lease agreement through May 2024 is the LOWEST figure since 2016. In other words, households aren't doubling up. If anything, the data might suggest that they're dissolving which means new household formation is happening outside of job growth-driven demand. (More on this idea later in July!) Assuming that 3Q24 is otherwise "normal" (meaning about 100k units will be absorbed) then that will push the trailing 12 month figure above 400,000 which was only recorded on one other occasion outside of the pandemic era.

A client just lost $2M today because their trusted CPA misunderstood ONE 1031 exchange rule and and since they didn't understand. Heres is what you need to know: This happens every day because 93% of tax professionals rarely handle these transactions To fully defer taxes in a 1031 exchange, you need to reinvest both the net equity from the sale and any debt that was retired in the sale into the replacement property. This means: 1. Reinvest the Net Equity: The net equity is the cash you receive after paying off any existing mortgages and selling expenses. This entire amount must be reinvested into the new property. 2. Replace the Debt: If there was a mortgage on the relinquished property, you must either take on an equal or greater amount of debt on the replacement property or bring in additional cash to cover the difference. This is to avoid what is known as "mortgage boot," which is taxable. The common misconception is that only the net equity needs to be reinvested, but if there is debt involved, it must also be replaced to avoid triggering taxes.

Banks & Exposure to CRE: After a big freeze in the past 18 months, CRE lending opportunities are beginning to open as financial conditions have begun to ease, despite the stubbornly high SOFR base rate. Sponsors and Property Owners have anxiously waited for a more friendly backdrop to extend loans or take out new loans. Private credit managers are happy to make new CRE loans at wider spreads, competitive LTVs, acknowledging higher cap rates, a condition that leads to a more favorable IRRs & debt yields for the lender. Banks, on the other hand, are far less sanguine, given their existing exposure to CRE at a time when their CRE loan book appears to be on a trajectory towards 8-10% default rates. CRE loans represent ~25% of Bank assets with an aggregate balance that exceeds ~$2.7 trillion. Most CRE loans are held by small/regional banks. A new report from the National Bureau of Economic Research, Working Paper Series studies Monetary Tightening, CRE and Bank Fragility highlights the looming problem: excessive exposure to CRE by small & regional banks. The four largest banks hold ~11% CRE loan exposure (not a problem at all), while regional and small banks have ~38% exposure to CRE. In the U.S., there are ~4,200 small/regional banks. With DQ rates trending above 6% (less than 2%, just 18 months ago), several banks are on a collision course with reality. As seen in this bar chart (below), nearly 300 banks will become insolvent if DQ rates rise to 10%. Stricter regulations by the Fed/OCC/FDIC and higher capital charges mandated under Basel 3 Endgame (note: this applies to top 30 banks with >$100B assets) presents a huge opportunity for Private Credit Managers with expertise in Real Estate as banks reduce CRE exposure in the coming years. This void comes at a time when more than $2 Trillion in CRE loans mature in the next four years. RE Sponsors/Operators will need capital, and while construction and acquisition allow managers to deploy capital, playing defense is now job #1; the need to finance existing properties is at its most critical juncture. This likely requires a fresh capital injection by the equity holder to properly size the loan given the lower V when computing today’s LTV. Portfolio sales, senior loans, A/B structures, mezz debt, NPLs, and credit risk transfers represent solutions my team is focused on. While CRE property sales remain dormant, private credit lenders are willing and able to transact. Good luck out there to our friends in the real estate community, the banks and we are rooting for you. Number of Insolvent U.S. Banks vs. CRE Default Rates:

Achieved 50% less risk in my portfolio in just one year. Here’s how I did it: Most investors think they're diversified. They're not. I see the same mistake everywhere I look. The real estate agent with 3 rental properties. All in the same neighborhood. All bought the same year. The tech worker with their entire 401k in company stock. The entrepreneur who only invests locally. Here's what real diversification actually looks like. **The Single-Basket Problem** Picture this scenario: You own 3 rental properties worth $600,000. Same street. Same market. Same risk. The local factory closes. Unemployment spikes. All three properties lose 30% of their value overnight. Your entire real estate portfolio just got crushed. This isn't diversification. It's concentration disguised as diversification. **Why Most People Get This Wrong** We invest in what we know. We buy where we live. We stick with what's comfortable. But comfort is the enemy of true wealth building. Real diversification means spreading risk across: Different geographic markets Multiple asset classes Various time periods Different management teams Multiple economic drivers **The Syndication Advantage** When you invest in a multifamily syndication, you get instant diversification. One $50,000 investment gives you exposure to: 200+ different tenants Multiple income streams Professional management Diversified local economy Compare that to buying one rental property. Same investment amount. Exponentially less risk. **Real Numbers, Real Difference** Investor A: $200,000 in one rental property 1 property 1 tenant at a time 1 local market 100% concentration risk Investor B: $200,000 across 4 syndications 776 total units 4 different markets Multiple management teams Diversified risk profile Which investor sleeps better at night? **Your Portfolio Reality Check** Ask yourself these questions: What percentage of your wealth is tied to your local market? If your industry had a downturn, would both your job AND investments suffer? Are you comfortable betting your financial future on one geographic area? **The Texas Diversification Strategy** Smart investors spread across multiple Texas markets: Austin: Tech-driven growth Dallas: Corporate headquarters hub San Antonio: Military and healthcare stable Houston: Energy and port commerce Different economic drivers. Different risk profiles. Better sleep at night. **Your Next Move** Look at your current portfolio concentration. Identify your biggest risks. Start building true diversification. Success isn't about finding the perfect investment. It's about building a portfolio that survives any storm. **What's your biggest concentration risk right now?** **PS:** What's holding you back from diversifying beyond your local market? I'd love to hear your biggest challenge in the comments.

Harsh truth: Most multifamily operators are burning money without realizing it. Early in my career, I saw properties wasting thousands on overpriced vendors and reactive maintenance. One community I took over had a “fix it when it breaks” mindset—by the time I stepped in, their repair costs had doubled, resident complaints were through the roof, and retention was a nightmare. We flipped the script. Proactive maintenance, smarter vendor contracts, and streamlined operations turned things around fast. Within a year, expenses dropped by 30%, and resident satisfaction skyrocketed. Multifamily success isn’t about spending more—it’s about spending smarter. If you’re tired of watching costs spiral out of control, it’s time to rethink your strategy. Let’s talk. #Multifamily #RealEstateInvesting #PropertyManagement #MaintenanceLeadership #OperationalExcellence

Billions of Multifamily development projects aren’t getting off the ground: Why? The numbers don’t work. Period. Lenders won’t issue the financing for construction because today’s interest rates don’t allow for a refinance of the exit post-construction. Here is the math for a typical project I've seen: *Multifamily stick on podium (the 5 to 6 story stuff you see everywhere) costs roughly around $400,000 per 2 bed unit to develop (c. $300psf-$450psf) in the Northeast. *Rents typically range from $3000 to $4500 per month *Expenses are 30%-35% of rents *Therefore income is ~$25,000 unit/yr Income typically must cover debt financing costs by 1.2x so ~$20,000 can be used for interest payments = at 7% rates a developer is capped at borrowing about $300,000/unit towards construction, i.e. only 70% of the construction costs! That doesn’t include land. Nor the holding costs. Nor the developer's fees/cost. Nor the interest cost during construction. And certainly not the cost of capital to investors. Furthermore, the land has a value: the development profit has to be greater than the next best alternative use (parking, retail, an existing property… etc…). So how does a municipality make development work? Subsidies? That’s why affordable housing projects can still proceed.  Or higher rents: i.e. $5000+ rents for 2 beds. However, if municipalities are requiring 20% affordable housing it brings average rents back down to the $4,000 range, so again projects don’t pencil. The bigger issue is developers don’t want to start permitting projects they know don’t pencil. So, even if rates and construction costs fall, zoning and affordability requirements will mean developers won’t start the process for future projects as there is too much uncertainty. Post is in response to planning board member Chris Gittins' request to understand the financial considerations of multifamily/mixed-use developments (thank you). And Scott Bailey’s request to make it a post. I welcome any of the multifamily development pros to opine as well. And, none of this is investment advice, just my personal observations on the topic. Demetrios Salpoglou, Chris Fitzpatrick, John Burns, Jay Doherty, Jonathan Berk, Marc Savatsky, CRE Analyst, Keith Hughes, Scott Trench. #MultifamilyDevelopment #ConstructionFinancing #RealEstateInvestment

What happened to that maturity wall that was supposed to take down the commercial real estate market? $950B in CRE loans was set to come due last year, yet we haven’t seen the widespread defaults it seemed every doomer was predicting. Why? Regulators have allowed banks to work with their clients to extend and modify loans providing they are able to make their payments. “Extend and pretend”? Maybe. The thought here is to “hope” we eventually get lower rates or operating fundamentals improve rather than forcing defaults like during the GFC. Loan modifications have surged nearly doubling year-over-year to $39B. I know “hope isn’t a strategy” but it’s buying time — although it hasn’t solved the issue. Alternative capital has stepped in big dramatically filling financing gaps where banks have pulled back. The total market is now $2 trillion. There is still a lot of liquidity out there looking for deals and if you’re private equity, why not lend in a first position and potentially step into ownership/control at a discount if the borrower defaults? The distress is real but it’s concentrated primarily in office properties and some multifamily. Retail and industrial are holding up fairly well. Geography is also significant contributing factor. You don’t want to own office in Portland or SanFran where there is still record high vacancies and some of the lowest occupancy and return-to-office rates. This isn’t a soft landing, it’s a controlled delay. But it’s also not a crash. We’re seeing re-defaults on the rise, and the maturity wall is growing. Unless rates drop or fundamentals improve, 2026–2027 could bring greater stress to CRE and credit markets. #commercialrealestate #CRE #banking #privatecredit #interestrates #commercialloans #maturitywall #finance #capitalmarkets