Why There Is a Big Uptick in Deals in 2021
This year, we have sold two properties, acquired one property, have another two properties under contract to sell, and we are under contract to buy another property. That’s six multifamily transactions in 2021.
We had zero transactions in 2020.
We’re not the only ones seeing a big uptick in transactions in 2021. There was $53 billion worth of apartment transactions in Q2 2021, the highest transaction volume for Q2 in recent history. In fact, it was the highest between Q1–Q3 for the last 15 years.
So why have we seen a big uptick in deals in 2021? For starters, many sat on the sidelines in 2020 building up eagerness in would-be buyers. These investors recognized the signs of an unstable economy and decided to wait until things settled down. In addition, inflation has spiked, and the growing concerns are forcing investors to act now as their cash holdings lose buying power.
Investors want to park their money in cash-flowing, appreciating assets that can weather an economic downturn and fight inflation. Multifamily has fared better than most asset classes during COVID and other recessions and is a proven inflation fighter, so it’s understandable that investors expect it to perform well going forward. This increased demand has pushed cap rates even lower, making it a great time to be a seller to cash out on current valuations.
However, this creates challenges for buyers who now face increased competition and higher prices for apartment buildings. This increased competition is across the board, but it’s especially competitive for older, value-add properties. The valuations have increased to the point that these older properties trade at just a small discount to newer, better-quality apartments. It’s like a used 2015 Cadillac selling for $50,000 when a brand-new 2021 Cadillac can be bought for $55,000. For the extra $5K, why not just trade up to the newer model?
Some may suggest that you wait for demand to dip and prices to fall. However, you could be waiting a long time. There are investors who have been saying the market was overheated as far back as 2016. Those investors have already missed out on a full cycle and the wealth that could have been used to fund future endeavors. And while the market can certainly swing, investors who utilize sound fundamentals have already protected their downside. This includes sticking to cash-flowing properties in growing areas, where appreciation can be forced using conservative leverage.
So, what are we looking for in a deal in this market?
For starters, we want to protect our downside. The labor shortage and supply chain issues have decreased our interest in heavy value-add opportunities. Instead, we are focusing on properties where we can drive value through operations, not just renovations. We’re paying attention to the price of newer properties, as well as the traditional value-add apartments. As with the Cadillac example, where it makes sense, we will opt for the newer model.
As sellers, we’re exiting properties where we’ve executed the bulk of our business plan or feel the additional upside potential is minimal. Many of these properties still have a value-add opportunity for the next buyer if they continue what we started. It allows us to exit early, exceed investor expectations, and seek out the next opportunity to create value.
If you are looking to buy in this market, you will need to adjust your expectations. It is unlikely that you will uncover the elusive dream deal at a steep discount as most apartment owners are not in a distressed situation. You will want to understand the key terms for an owner beyond just the purchase price. There may be other factors that can weigh in your favor such as time to close, earnest money, non-refundable deposits, and contingencies.
Transactions happen when both parties are willing to work together to solve each other’s problems. We’re now seeing both sides willing to negotiate and deals getting done at a record pace. Creative buyers are making offers that give owners what they need in a deal while helping the buyer make the returns they seek. While we don’t know exactly what the future holds, we do know 2021 is seeing record levels of transactions as investors adjust their portfolios. Like others, we are both buyers and sellers in this market.
About the Author:
John Casmon has helped families invest passively in over $90 million worth of apartments. He is also the host of the #1 rated multifamily podcast, Target Market Insights: Multifamily + Marketing. Prior to multifamily, John was a marketing executive overseeing campaigns for Buick, Nike, Coors Light, and Mtn Dew: casmoncapital.com
Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.