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Playing Defense And Preparing for Opportunity
Why the Multifamily Recovery Cycle Requires Patience, Discipline and Liquidity
By Edward Aloe, Founder and CEO California Capital Real Estate Advisors, Inc. (CALCAP)
There has been an interesting disconnect developing in the multifamily market over the last few months. After several difficult years, apartment fundamentals are finally beginning to improve. National occupancy has recovered to 95.5%, annual rent growth has turned positive again, and the enormous wave of new apartment deliveries that pressured rents and occupancy in many markets is finally beginning to subside. Those are all encouraging signs.
Unfortunately, improving fundamentals don't immediately translate into improving cash flow or investor returns. Operating expenses remain elevated, concessions are still significant in many markets, workforce renters continue to face affordability pressure, and interest rates remain high. Property values also remain well below their peak in many markets, while refinancing proceeds are often significantly below the debt they are replacing.
At the same time, financial distress is increasing, particularly among properties acquired near the peak with short term or floating rate debt. This creates an unusual environment where we may be approaching one of the more attractive multifamily acquisition periods we've seen in years while simultaneously working through one of the more challenging operating environments we've also seen in years.
At CALCAP, that means we have to be prepared to do two things at once. Our first priority remains protecting the portfolio we currently own, aka "The Golden Goose," and the capital our investors have already entrusted to us. That means protecting cash flow, improving economic occupancy, reducing bad debt, controlling expenses and creating liquidity wherever possible. At the same time, we need to prepare for opportunities that may emerge as overleveraged capital structures finally force good assets to come to market.
We aren't declaring victory on the existing portfolio, and we're not going to manufacture acquisitions simply because we believe the cycle is turning. The next phase will require patience, liquidity and the discipline to recognize when the right opportunity actually arrives.
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