2023 is a Blood Bath: Advice From The World's Best Real Estate Investors

I just spent 3 days at the world's best real estate conference learning from some of the leading economists, data scientists, and real estate investors. Here are the key takeaways you NEED to understand for navigating 2023.

Economy

The bad news:

• We expect the Fed to raise rates three more times and then hold them steady for the remainder of 2023

• John T Chang from Marcus & Millichap: the increase in interest rates is not having its desired impact on the unemployment rate. There are 4.9 million more job openings than unemployed people.

• We are barely building enough apartment units to keep the supply/demand imbalance from getting worse. As debt becomes more difficult to source by developers, the gap will significantly increase. This will make housing more unaffordable.

• If you don’t own assets that increase significantly when there is high inflation, you will get crushed as your dollars become worthless.

The good news:

• Kathy Fettke from the Real Wealth Network: the economy is extremely strong right now even though many people feel that we are in a recession. People are calling it the “Patagonia” recession.

• Bob Fraser from Aspen Funds: inflation is extremely beneficial for real estate valuations. Higher income compounded by lower capitalization rates make property values increase significantly. The second order effects of inflation like interest rate hikes are short term in nature.

Advice from Neal Bawa from Grocapitus Investments :

"If there is cash burning a hole in your pocket, keep an ice cube in your pocket. It may be worth it to wait another 6-9 months for additional correction before buying back in"

Real Estate Syndication

• Investors want sponsors that meet the following criteria:

o Multi-year track record including multiple full cycle deals

o Preference toward sponsors that have survived a recessionary period

o Sponsors who are significantly wealthy and can save the day

o  Sponsor has significant skin in the game

• Neal Bawa thinks fixed rate debt is a mistake because you miss out when rates decrease. Many people disagree and think fixed rate long-term debt is a great hedge against interest rate risk.

• Many syndicators with short term bridge debt are in deep trouble right now and will be giving assets back to the bank toward the end of 2023.

• Hunter Thompson: investing in a sponsor’s syndication is riskier than buying publicly traded shares of a large REIT and you should be compensated for that increased risk. Demand at least a 15% IRR on multifamily deals.

• Publicly available pricing data (Costar) lags actual data by many months. If you are currently getting a 15% discount on an apartment building, you are paying too much.

• Bryce Robertson and Frank Rolfe: some asset classes like mobile home parks and self-storage fare better during economic instability. When people downsize, they move into mobile homes and rent storage units.

• Zach Haptonstall, MBA – you can’t rely on organic rent growth in this environment. You must force rent growth through renovations.

• Sam Silverman: to raise more capital, pick a target avatar and use LinkedIn Sales Navigator to find leads.

The Big Picture

• Transaction volume is low, there are fears of recession, and most investors expect interest rates to stabilize by the end of 2023. To protect your capital, invest in recession-resistant assets or make sure you are buying at an appropriate basis.

• Multifamily syndicators who took on high leverage, floating-rate bridge loans that are maturing in 2023 may be in trouble. If you can make it until 2025, you will likely survive.

• If you want to raise capital for deals, it will be harder than ever in 2023 and you will need a strong track record.

• Smart syndicators will take advantage of the volatility and scoop up assets at 25 - 30% discounts to the peak.

About the Writer

Elijah Brown is a real estate investor, entrepreneur, Army officer, and writer. While working as an investment analyst for Bank of America, and later as a manager for Healthpeak Properties (S&P500 REIT), Elijah developed a love for real estate and began raising private capital to acquire over $150 million of apartment units across the United States. Elijah is the managing partner of GoldHawk Capital, a real estate investment firm that partners with private investors to acquire multifamily properties.

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