Bid Pricing down 5-10%. Bid count down 75%.

Where Are We Today And What’s The Contrarian To Do

May 30, 2022

*These reflect my personal views and not Berkadia’s*

I believe the multifamily market hit peak pricing in January and February with the deals that closed in March and April of 2022.

Macro Headlines in May:

So where does that leave us in pricing multifamily deals today?

Bid Pricing is down 5-10%. Maybe more in weaker markets, but not less. This discount varies between micro location and value add to core properties.

Bidders are down 75%. A deal that would’ve had 15+ bids two months ago has a quarter of the bidders today. This is the most important stat in my opinion… more on this later.

Core/Core-Plus Multifamily: 25-75bps cap rate expansion on Year 1 Cap Rates. The market is trying to understand where to price deals today. The bidders I’m talking to today are generally underwriting cap rate expansion between 25—75bps. Pricing a deal going in with positive leverage gains you no traction with sellers today. In contrast, pricing a deal with negative leverage gains you no traction with your investment committee. Someone’s got to give.

Value Add Multifamily: 25-75bps cap rate expansion on Post Renovation Cap Rates (or Yield on Cost). What constitutes as “value add” varies by deal, not necessarily vintage. Are you actually acquiring a property that is +50% unrenovated with white kitchen appliances, dark cherry cabinetry, and carpet throughout? Or are you buying an 80s deal that’s been flipped 7 times this cycle only to add a backsplash and a nest thermostat? Value add buyers that were buying deals at a 4.75–5.25% post renovation cap rate (with extremely bullish rent growth projections and premiums to get there) are bidding today at 5.50–5.75% post renovation cap rates (with less rosy projections, only giving credit to value add premiums you can already point to in the rent roll or very noticeably in the micro market).

What are exit caps today? This is the biggest question mark when discussing underwriting today. Bidders largely either increased their exit caps by 50–75bps, or are sticking to the old rule of thumb of adding 5-10bps per year throughout their hold period.

Interestingly, if bids are down 5-10% today—but sellers aren’t willing to sell—does that necessarily imply pricing is down 5-10%?

Who do you think caves most over the coming months?

Sellers still willing to monetize their promote 5-10% from the highs
or buyers with capital they need to deploy?

What’s a contrarian to do…

First, let’s set the stage *as I see it today*:

As a buyer, you’re anticipating there’s more pain to come.

I’m here to tell you a lot of buyers think the same.

Right now I think the multifamily market appears to believe that 1) stagflation is here (or coming), that 2) rates will continue to increase, that 3) there’s a wave of bridge loans that will start coming due over the next 12-18 months, and that 4) all the highly-levered syndicators many lost bids to over the last 24 months are going to be caught with their pants down in 2023-24.

You’re convinced there will be more blood in the streets and I bet there will be much less of it than you expect, given everyone is thinking the same.

Whether you’re right or wrong, let’s discuss the implications of today’s market psychology and some actionable advice.

Recommendations:

For the last two years, every multifamily shop and every third party provider that help make deals happen have been drinking from a fire hose. This is true whether you were busy acquiring, selling, asset managing, or simply just vetting the overwhelming amount of deal flow.

So what now?

Check in with the brokers on the deals you bid and underwrote in the last 60 days. Many of those sellers are being re-traded and/or deals are about to be dropped, potentially allowing you to step in. The seller may be too proud to accept a retrade but understands the outlook may be bleak and may be willing to work with you instead.
Walk brokers through your underwriting to help them walk their sellers through that math. “I know the seller wants $300K/door, but the deal works for us at $270K/door and here are the reasons why…” It’s easy to say you’ve always done this but the reality of it is only about 10 out of 100 buyers I talk to do this. Make sure you, and your acquisition analysts, are part of that 10.
Reassess whether you’re most bullish on primary, secondary, or tertiary markets going forward. I may be biased, but I think Miami isn’t going out of favor. Both domestic and foreigners from Gen Z to empty nesters want to be here. With the rise of hybrid work and the digital economy, people will continue voting with their feet. Where will they be moving?

You’ve been waiting for two years to buy a deal way below guidance while only competing against one or two other bidders.

Now’s that chance.

By this time next year, the market will have recalibrated, priced risk accordingly, and you’ll be a market buyer like the other 15 bidders.

But what do I know? I’m just a broker trying to sell you some more deals today (: