Connect Apartments 2023 – Speakers Series

Connect Apartments 2023 (720p).mp4

Panel 1: Welcome & Keynote: CRE in 2024 – Turning Change into Opportunity

Emily Lettieri [00:00:08] Good afternoon. Hi, everyone. I’m Emily Lettieri and I’m the vice president here at Connect. I just want to take a moment and thank all of the speakers and sponsors that you just saw in this video. Without them, this could not be possible. So let’s all take a moment and give them an applause. Welcome to Connect Apartments. For those of you who don’t know, Connect CRE is a content producer. We’re publishing about 50 stories every day on commercial real estate across the country. So we do have a national email that goes out as well as our Florida News and a bi weekly dedicated apartments email. So if you’re not signed up for that, please make sure that you check us out. In addition to this event, we’ll be having about 20 events like this across the country, which next year, starting in 2024, we’ll have another 20 events where we’ll be focusing on different asset classes and also different regions. So at your tables around the room, you’ll see the calendar for next year. I also did want to point out apartment buildings dot com. So you’ll see the table back there where we have a video playing and you can kind of preview what that website looks like for apartment buildings dot com. We have for sale apartment apartment properties and listings on the platform. We also have directories connecting brokers, lenders and property managers. So please check it out. We have our president of apartmentbuildings.com here as well Scott Furman. So if you have any questions, he’ll be back in the room all day. So before I bring up our keynote, staying true to our name, what we like to do is have everyone at your tables connect. Hand out some business cards, introduce yourselves, and I will bring up our keynote speaker to get started. Thank you. So it is my pleasure to introduce our keynote speaker, Hessam Nadji, President and CEO of Marcus Millichap. Please join me in welcoming Hasan. Thank you.

 

Hessam Nadji [00:02:04] Good afternoon, everybody. Great to see you. Thank you for coming out to be with us this afternoon. I want to thank Connect on behalf of all of our Marcus Millichap professionals across the state of Florida. We have major offices throughout the state and very proud of their ongoing relationship with many of you as our clients and Connect has been a big part of educating the industry. And we take a lot of pride in providing information directly to our clients through entities like Connect that are doing such a great job disseminating good information throughout the market at a time when there’s a lot of uncertainty and confusion. My job this afternoon is to share some perspective on what’s happening with the capital markets and the national economy. Focusing a little bit on South Florida and really give you our perspective on the apartment investment market, which has been the darling of the industry for so long, that for us to have the kinds of challenges and uncertainty that we’re seeing even in the apartment sector is kind of unusual right now. So I want to walk you through a little bit of a journey. Come along with me to kind of assess where we’re at and how we got here and more importantly, talk about where we’re we’re headed into next year. Well, it all started when our Fed chief declared war on inflation and therefore the economy in the US in August of 2022, when their messaging wasn’t really being heard previous to the Fed meeting, they had at the time Jim Powell came out and said there will be a lot of pain because they knew that they basically had to do whatever it took to bring inflation back in, back in line and back under control. Our view at the time is that, you know, it really didn’t have to be this way to take a sledgehammer to the economy. Commercial real estate, residential real estate and and the consumer. Because the Fed had the opportunity to normalize the financial condition of the country after the pandemic, really starting about a year before this declaration of war, if you will, as of middle of 2021, when the economy was reopening, the vaccines were working. We’re adding about a million jobs a month. We felt pretty strongly that they should start gradually to normalize financial conditions. Of course, the idea was that inflation was transitory and they waited until March of 2022 to start the tightening process. By that time, inflation had so much had a steam. Plus, you still had global supply chain issues that all worked together to create a pretty, pretty serious inflation problem. But let me just put things into perspective as to how we got here. You have to go back to the amount of stimulus that was pumped into the system. I mean, the problem really started with the liquidity injection. To give you a perspective of these gray areas, gray shades or recessions going back to the sixties, and you can see the money supply move up and down with recessions in 2007, 2008, 2009, when we had the great financial crisis, the government injected something around 6% of our GDP into the economy, and most of that went to recapitalize banks. It didn’t actually circulate through the economy, and it took 12 months through actually 13 months before the stimulus even came out. And if you all remember, for those of you that were in the business, that was TARP, it was a first big move by the by the feds this time around. They injected 26% of GDP into the economy through liquidity injections. And it came in seven weeks. It started out in seven weeks. So the playbook that the Fed had developed from the great financial crisis was handy, but they had to offset this terrible tragedy of the pandemic by such a magnitude that it created this flooding of capital into the system. By the way, we weren’t alone. Other central banks around the world did the same thing, and therefore the result was this surge, 40 year surge in inflation that then was basically out of control. Had they begun to gradually normalize conditions a year sooner, I don’t think we would have had the kind of sledgehammer effect on interest rates and the disruption that we’ve seen in the commercial real estate market for sure. Now, we’ve made a lot of progress. Are we out of the woods yet? I think we’re close. But if you look at the PC on some the little box there in the middle as a personal consumption expenditures, that’s the most important basket of goods pricing that the Fed looks at. They don’t look at top line CPI or even core CPI as much as they look at the PC and core and core CPI. Those are the two that they really look at, the PC being that very important one. That 3.4% down way. Down from where it’s been, but still nowhere close to the 2% that they need it to be. You could see periods of inflation going back up. So I think this notion that the Fed is done now, everyone’s talking about the Fed reduction of interest rates, maybe a little bit premature. But net net, the good news is we’re at the tail end of this huge disruption that now shows up on this graph much, much more accurately in that you can see interest rates going up from essentially 0 to 5, you know, five and a half percent on the on the federal funds rate, the blue line or the orange line and 5% on the ten year treasury. More importantly than just the rise, it’s been the volatility for all of you in the room trying to price deals, trying to price debt and having to basically shoot at a moving target constantly coupled with the interest rate shock. On the right side of this chart, you see the unwinding of the bonds that were acquired by the Fed during the pandemic to create liquidity. They’re not basically allowing any of those to be repurchased. They’re expiring those those bonds back into the market to wind down the Fed’s balance sheet, which also creates another layer of a credit crunch because of the fact that it’s the opposite of creating liquidity. When the Fed lets bonds mature into the marketplace instead of buying bonds, which is what they do to create stimulus. So this double whammy was the biggest shock we’ve seen since 1980. In 1980, Paul Walker took the federal funds rate from nine and a half percent. I think it was in the fall of 1982, 19 and a half percent by the spring of 1981. From a percentage point basis, what we just experienced was even more dramatic because we’re going to come in from 0 to 500 basis points. I think it’s almost over. You’re see the ten year treasuries pulled back into 4.2 today from 4.9 just to 30 days ago. That’s that’s the world banking on the fact that the worst of it is over and the fact that we may now be looking at the other shoe to drop, which is the economy. Are we going to have a recession? It would be very unusual for us not to have a recession after a 500 basis point movement on interest rates in a year and a half. So the economic part of this equation is yet to be filled in or yet to be a story is yet to be told. I think we’re in pretty good shape and I’ll tell you why. We lost 22.7 million jobs had been added since the bottom of the last recession. They all got wiped out in a few weeks during the pandemic. But we’ve recovered all those jobs and then some. So we’re sitting at 26 and a half million jobs created since the bottom of of the pandemic, well ahead of where we were pre-pandemic. And the pace of job growth has gone from 600,000 a month in 21 to 4000 to 240,000 this year. So that’s slowing of job creation and taking the edge off the labor market by the Fed is working. And you can see job openings start to come down a little bit. But the reason why I don’t think the economy is going to fall off a cliff is that we still have 9.6 million job openings. It’s still a near record, meaning companies need labor. Companies need skilled workers. And that demand is indicative of a pretty healthy economic foundation. And the fact that many of those jobs aren’t actually finding qualified workers. So there is a there’s a 3.1 million unit labor shortage in the US. Now, are we going to lose some jobs or are we going to have a maybe a mild recession or a period of no growth? Probably. But it won’t be coming off of a cliff or jumping off of a cliff. Let me share with you what all this means at a local level. This is the ranking of metros on the left. You see the metros around the US with the highest percentage growth in jobs in the last 12 months. On the right, you see the lowest percentage growth. Look at the blue indicating Florida metros that make up a huge portion of that top ten. Jacksonville at 4%. Miami three and a half percent. Fort Lauderdale, 2.6%. Tampa at 2.6%, well above the national average of 1.9%. And, you know, dominating the top ten. This is the Florida story. This is the growth story of Florida. And on the markets, on the on the right that you see our lagging. Typically, some of these metros have been market leaders in job creation like San Jose or San Francisco, Denver. And there they’re just not seeing the same catalyst that is creating the same growth. Lots of concerns out there. We’ll talk about the concerns and we’ll talk about what offset some of those concerns. The first one is maturing debt. We have the highest volume of maturing debt between 2023 and 2024 combined in the next five years. That’s a lot of volume of loans coming due and you see it by property type. The orange is office and the blue is multifamily. A lot of multifamily loans coming to term and many office loans coming to term. This has been all over the media as the next shoe to drop for the banking system. We had a mini banking crisis, as you recall earlier this year. It feels like it was three years ago, but it was actually spring of this year with Silicon Valley Bank and First Republic and so on. And the question is and the media is really fueling this concern about the next shoe to drop being commercial real estate for the banking system and the economy. And I’ve been out there really scratching my head and trying to go on as many news shows as possible to actually bring data to the table. And that data shows us this graph in relation to the banking system risk. You see that of all the loans that the US banks hold, total loans held by US banks, 24% is in commercial real estate. So that’s a big that’s a big piece, but it’s less than some of the other categories if you combine, for example, consumer and other. So it’s a meaningful portion, but if you diagnose what’s underneath that buy property type, 50% of it is in multifamily and only 14.8% is in office. So office being the biggest concern there is for occupancies and loan performance makes up 15% of the 24%, which translates to 3.6% of total outstanding debt held by US banks. And not every office building is in distress. The newer office buildings are performing just fine. In fact, anything that was built, anything is ten years or newer across the country has an office vacancy of around 11%. Anything that’s ten years or older has an office vacancy of around 22%. So you can tell that the pain is there and really older, obsolete office buildings that basically need to figure out a way to work out. And the banks are marking those to market and selling them in some cases. But this notion that the whole banking system may come down because of commercial real estate is way overblown and multifamily. We have some issues, of course, with maturing loans, but the fundamentals are multifamily are nothing like troubling or distressed. Even retail has made a big comeback. In fact, retail is sort of like the new apartments offices and new retail and apartments are just trying to reconfigure their position as a favorable asset class. Industrial is still doing very well. A little bit of overbuilding, but still also a favorite asset class. This is another reason why I don’t think the economy is headed for a major crash. If you look at bank liquidity prior to the financial crisis in oh seven, it was 44 billion. The banks did not have enough capital going into into the pandemic. As of February of 2020, the banks had liquidity of $1.7 trillion cash on hand, and today they have 3.2 trillion. And so is there a banking crisis around the corner? I don’t think so. Now, banks aren’t lending as much. Their underwriting criteria is really tight and they’re being extremely cautious. Regulators are putting a lot of pressure on them. And I don’t see the flow of debt coming from banks normalizing for at least another 12 months or so. But nonetheless, the banking system itself is not in trouble. Corporate profits are at a record level and corporate cash on hand is at a record level. This is why that the trifecta of these trends give the economy a pretty strong footing. The other thing to think about in terms of maturing loans, not all property types are created equal. I mean, if you look at the underlying rent growth in the last five years and let’s take a look at an interest rate movement on the left over the last five years and rent growth movement on the right over the past five years, industrial rents are up 50%, apartment rents are up 34% in the last five years, Even retail 15%, storage 9%, now percent. It’s only office that’s hardly had any rent growth. And therefore it’s isolating the distress really to the for the office sector more than anything else. Maybe some retail too to some extent. Hospital, hospitality hotels have come back very strong as well. So what are we facing as apartment investors More than anything else? It’s really this chart. It’s the spread between interest rates and cap rates, which have not been this narrow since 0506. In 0506. It was a function of cap rates coming down so fast. Remember the condo conversion wave in South Florida? I see some nods. Those were some. Interesting days that we all live through. The cap rate decline is what really created that narrowing of the gap between apartment yields and interest rates. It then widened because interest rates went down to zero in 2020 2021, which created a flood of capital coming into the system. And now with interest rates having been jacked up so fast that that gap is has narrowed, pressuring valuations. Everybody keeps asking me, how do we get out of this? Is it the Fed coming to the rescue? Lowering interest rates? Well, you’re seeing interest rates pull back a little, but I don’t think it’s from the Fed going back to 0% or one or 2% on the federal funds rate. That shifts this equation back. I think interest rates will come in to some extent, but I don’t think we’re going back to the days of two or 3% on the federal funds rate. A non restrictive rate, a neutral rate is around four on the on the federal funds rate and about three and a half to four for the ten year Treasury. That’s about neutral. I think we’re headed to neutral. I don’t think we’re headed to the days of two or 3% interest rates. Therefore, inherently pricing has to adjust and it adjusting as we. You see the cap rate line tick up just a bit. And if you look at the cap rate trend as far as price adjustments by market type preferred markets, these are the most desired metros on mostly both coasts, the primary class AA markets and the secondary markets, tertiary markets. You see the cap rate movement already showing up in what is trading right now in tertiary markets and secondary markets, the preferred markets and primary markets a little more sticky, but nonetheless valuations are adjusting as we speak. What we’re seeing on the apartment front throughout the country is that depending on the quality of the asset, the occupancies, rent growth and so on. The price adjustment is ranging anywhere from 15 to about 22% on apartments from March of 2022, which was the peak of market valuations. If anything is basically everything else being equal on the new side of the equation is discounting in that range. It’s trading with multiple offers, so there’s plenty of capital coming into the market. The lack of available debt, like it used to be, is being overcome for people who want to buy the right assets. So what else do we face as apartment investors? We’re facing a very slow rent growth situation. In fact, another month over month number came out that showing rents declining nationwide month over month on a year over year basis. We’re down to almost barely 2% rent growth on a national basis. But look at what happened before that. Look at the surge in rents from pre-pandemic to to about a year ago when rent growth really slowed down. It shouldn’t be a shock that after that kind of a rent surge, that the market is going through a period of cooling off. Does this mean that we have a serious operations or or occupancy or rent issue? No, we have some other operational operating issues like insurance. We’ll talk about that in a moment. But nonetheless, this is weighing heavily on buyers minds. What’s going to happen to my rent growth? Well, if you take a look at the insurance side of the equation, compounding the slowdown in rent growth, it’s a severe problem and it’s affecting underwriting everywhere in terms of the increase that we’ve seen. 37% on a national basis or $757 a unit, which is exceeded quite a bit in Florida for obvious reasons. And this has now become as much of an issue as anything else in terms of underwriting. Compounding the debt problem and the and the interest rate problem, there is no immediate solution around the corner. In fact, I was visiting our Miami office this morning. We were talking about that with our team there. And there’s some initiatives that we’re actually a part of to try and bring a solution to this, but there is no solution around the corner. What will offset this and what will happen to the rent growth part of the equation? Now, let me shift gears to that. First of all, when you take that national rent growth trend that I showed you with the surge and then slowing to 1.7. Let’s now talk about what that meant for different metros. Again, top ten metros with rent growth since December of 2019 pre-pandemic. On the left markets with the least rent growth on the right. So this is from December of 2019 to the third quarter of 2023 this year. Tampa, Fort Lauderdale, Miami, West Palm dominate the top ten with 40 plus percent rent growth, nearly 50%, Four for Tampa, Jacksonville, 37%. Orlando, 36%. Again, Florida owns the top ten. Look at that unbelievable rent growth. National average was 27.6%. That’s unheard of, by the way, to grow rents that much in three years. So, yes, we had this amazing surge. Yes, there is now a major offset to that, an insurance costs and so on. And the question is, where does it go from here? But the doom and gloom that seems to be kind of dominating a lot of the narrative, especially again within the media, is really debunked by these numbers when you take a look at it. Look at some of the markets that haven’t had a lot of rent growth. San Francisco, San Jose, it’s throughout my entire career, the Bay Area, Southern California, where among the leading rent growth markets, obviously, you see some some Texas markets that don’t show up here in the top ten, but they have been really strong. You know, markets like Seattle have traditionally been really strong there. They’re here on the right with decent rent growth, but nothing like the top ten. And so these markets have shifted, the dynamics have shifted. And the growth markets, particularly Florida, Texas, Georgia, the Carolinas are the beneficiary of the demographics and the economic growth that many other areas in the country just aren’t experienced. Home prices have skyrocketed. Interest rates have gone up so much. Yet home prices are continuing to increase because there is hardly any inventory. And so the idea that the House home prices would crash because of interest rates just got totally counter played by the fact that people who have low interest rates aren’t going to sell and people aren’t willing to part with their low interest rates that are in place. So their home sales are down 48% or something like that. And the gap between owning versus renting is at an all time high. I mean, look at that. It’s pretty amazing to look at that. And if if you look at that in terms of the home price equation, again, bringing it down to the local level. Look at the surge in home prices. U.S. average home prices are up 43% since December of 2019. Unheard of, 43% in a three year period dominating the top ten, you guessed it, Florida. West Palm, Miami. Tampa. Fort Lauderdale. Make up. Make up the first four. Orlando. Jacksonville. The surge in home prices in your state has been unprecedented. And again, you can see some of the markets that are lagging on the right. Lagging meaning the worst of them had in Manhattan. It is essentially flat. San Francisco is up 10%, you know, which is not a bad, you know, three or 4% a year on price appreciation is normal. And then everybody else showing pretty big numbers as well. So what does this mean? Look at the affordability gap. The chart is kind of busy. I apologize for that. It’s the only way to show it. Remember that I showed you that national average at 1200 bucks. Here. Let me go back. So here’s the national picture. Right. Keep that in mind. Now, look to the right of this chart. That’s where the US comes in. Look at the rest of Florida. So people cannot afford to buy homes in a big, big way. Yes, insurance costs are a major problem. Current slowdown. A rent growth. Major headwind. Interest rates currently a major headwind. But you look at the fundamentals, you look at the affordability. You look at the job growth. I think what’s ahead is a better picture than than a lot of the headlines would would have you think. So nationally you think about apartments where we at supply demand and so on. Record construction this year or this year? Next year, 23 and 24. 400,000 units this year. Something more next year. You look at that. Vacancies are going up from a low of three and a half percent to 6%. And it looks very, very concerning. But the story, again, when you peel back the onion, is very different. Here’s what’s happened in Florida, by the way. South Florida has vacancy rates less than the national average. Five, seven and four eight. Mainly because it’s supply constrained. We haven’t added as many units. If you look at the rest of the state, we have had a surge in vacancies, mainly because of new construction. There’s been lots of new units built in Orlando, Tampa, especially, and even Jacksonville. And those starts are now pulling back, going into 24, 25. The number of units that are in the pipe are significantly lower, probably by at least 30 to 60% lower because equity for development has dried up. The risk appetite has dried up, and all developer surveys point to a 50 to 70% decline in new starts over the next two years, which means that the market will have a time to do that, time to catch up. But here’s the most interesting story I love to tell on the supply side of multifamily. If you look at those 400,000 units, I just talked to you about the top ten metros. Look at Dallas at 26,000 units in 23 this year. 26,000 units. Atlanta at 20,000 units. Houston. New York. Austin. Phenix. If you add up the top ten metros by construction, they add up to 42% of the total new stock being delivered in this country. The rest of the entire country is sharing the 50, whatever, 59%, which is a rounding error on a per metro basis. This is not a macro systemic overbuilding of an asset class. This is maybe pockets of overbuilding in some growth markets that are getting a little ahead of themselves. By the way, the reason Dallas and Atlanta aren’t crashing is because they’re adding. Dallas added 200,000 jobs in the last 12 months. Atlanta added 80,000 jobs in the last 12 months. They’re job creating markets. Those units, for the most part, are being absorbed. There’s some softening. I won’t I won’t deny that. But anyway, the concentration is huge and that’s why we’re not too concerned about it. Looking beyond the next 12 months, where is capital going to come from? Institutions are kind of out of the market. They’re slowly coming back. The reason I’m optimistic about the institutional capital allocation for commercial real estate in general is that their total allocation stands at 11% right now, up from eight, 9% ten years ago. Very slow increase, but and a very low allocation to commercial real estate. If you look at pension funds with $33 trillion of assets under management, they have less than 5% of commercial real estate institutions are going to come back into this market, private capital. We’re tracking something like $237 billion of sideline capital waiting for the market to open back up and to come in. As those price adjustments happen that I was talking about, that is going to happen and it’s going to start happening in 2024. I go back to Florida. With that macro overview. Where does that leave here? The state of Florida, number one in in-migration last year, 44,000 people have 444,000 people. Texas number two, 350,000. And the losers of in-migration were New York and California. And by the way, that those numbers seem really huge, too. But as a percentage, what California New York lost is less than 1% of their population. Nonetheless, they are losing population while Florida and Texas are gaining. And in the Carolinas, Georgia are are gaining. So that’s really important. If you look at the job growth trend for a long time, the last ten years, and then carry it out for the next five years. Florida has outpaced the national average and is expected to continue at a slower pace. Why is it slowing so much? You ask. It’s because Florida is a matured market. We’re not the same market we were ten years ago because of all the maturation, traffic congestion. You’re having growth market patterns like Seattle did in the nineties and 2000s and many other markets. All those people coming in are taxing the system. So their grade of growth is slowing, but over the next five years, the state should add 350,000 net new jobs and the population growth is even higher. The gap or the outperformance versus the US average on the population growth side of the equation is even bigger, expecting 860,000 more people to live in the state five years from now versus versus today. That’s my overview. Thank you for being here. Thank you for all the business that you have trusted our team to. We our philosophy has always been to be with our clients or in good times during times of uncertainty. We have never left the market. We will never leave the market. And we’ll be right there with you. In a rising market, a flat market, a declining market, and whatever it is that you need to navigate all of them. So thank you very much. Thanks for having me.

 

Panel 2: Development & Ownership Outlook

 

Emily Lettieri [00:30:47] So we are going to jump right into our next panel, which is our development and Owner Outlook panel. So if everyone can stay seated, we’ll ask our next panel to come to the stage. Our next panel will be moderated by Gus Cabrera. Gus currently serves as the director of business development for Resia. So please join me in welcoming Gus and the rest of our panel. Thank you.

 

Gus Cabrera [00:31:13] There we go. Thank you. Thank you all for joining us. Thank you so much. To connect to Yuri for for this great event I get to follow we get to follow a psychology, which is which is always a lot of fun. It’s a great speaker, but we want to get right into it. I’d like to introduce our panel by name and then give them an opportunity to say a few words about themselves, about what they’re working on. And I’ll tee up a question for each of you. How optimistic are you about 2024? I know 2023 has been a volatile, tumultuous year. But I think as we look into 2024, it’s interesting to get your perspective as we talk about development and ownership for the coming year. So by alphabetical order, I want to introduce I’ll just say the names and then give you an opportunity to say a few words first. Sabrina R. Beraja, the chief investment officer for MAGASI. Carlos Burneo, the Housing and Development and Transaction lead for Nuveen Real Estate. From the Falcon Group, the great and powerful Alfonso Costa. Doug Faron from the founding partner at ShorehamCapital. And to my immediate right, Andrew Velo-Arias, director of acquisitions and development at Related Urban Development Group. So, Andrew, why don’t you kick off your tell us what you’re working on and your outlook for 2024.

 

Andrew Velo-Arias [00:32:50] Great. Good afternoon, everyone. It’s a pleasure to be here with you all. And next to the great and powerful Alfonso Costa. So with, with, with in my role at Related, I focus primarily on affordable and workforce housing developments, in particular mixed income, mixed use, public private partnerships. And as far as my outlook for 2024, I would say it’s perhaps not as rosy as the picture that Marcus Millichap was painting. But I do have an optimistic view of 2024 as it relates to Treasury rates. You know, it’s been coming steadily down over the last couple of weeks. I do think it’ll it’ll reach a point where it will kind of stabilize in construction costs of also, we’re not seeing the unabated increase in costs that that we were seeing a year ago when we were bidding our projects. So so that gives you a more optimistic view of next year.

 

Gus Cabrera [00:33:51] Thank you Andrew. Alfonso if you want to take it from there.

 

Alfonso Costa [00:33:52] Yeah, Thank you for the introduction, guys. It’s a pleasure to be here and thank you to the Connect CRE team for for having us. Alfonso Acosta Jr. Falcon Group work with Art Falcon. We do everything from street multifamily to mixed use master plan developments, build to rent commercial retail, land banking, land acquisition for homebuilders off balance sheet kind of focused on a little bit of anything and everything as it relates to 2023. I think it’s been a good reflection period for everyone to see what their core business is and to prepare for a transitionary period, I think in 2024 to see what’s important to execute on from a current pipeline perspective and gear up for what we think will be a strong 2025. Not that 2024 won’t be a strong time. I think, you know, in any given cycle, you know, you have these years that you really start to hone in on what is going to make your money and also stay focused on, again, what your core business strategies are. So I don’t think that’s necessarily a bad thing. But thank you again for having us.

 

Doug Faron [00:35:07] Perfect. Hi, everybody. Doug Faron I am the co-founder and managing partner of Shoreham Capital. Shoreham Capital is a residentially focused, focused investor, developer and operator across the East Coast and southeast of the United States. To your question on optimism, I think it sort of depends what you’re focused on. I think I’m very optimistic for 2024 for the buying opportunities that I think are going to shake out. I think you, you know, overlay the pipeline of debt maturities happening. The number of deals that were done just about three years ago on a three plus to ones and a floating rate debt in the multifamily segment. And you’re already starting to see a lot of just forced sellers and that into an environment where, you know, you saw the tight spread between cost capital and cap rates. So I think we’re going to see an opportunity to buy, you know, significant by replacement cost by good assets. And I think there will continue to be some disruption as a result of that. 324 But the other piece of optimism is what was referred to in pipeline wise on 25 and 26 is that you have in certain markets a decent amount of pipeline delivering over the next 12, maybe 18 months. And then you have nothing because I don’t know, you know, who’s gotten much financed from a ground up development perspective over the last 6 to 12 months. But that pipeline is a fraction of what it was historically. So we’re firmly convicted in what we’re doing. We think owning residential, developing residential and to meet that lack of supply thereafter in an already undersupplied market is going to be very interesting.

 

Sabrina Beraja [00:36:43] Good afternoon, everyone. My name is Sabrina Beraja. I’m the chief investment officer at MAGASI. We are a family owned property management company with 30 years of experience in the Miami market. We manage all kinds of properties from affordable housing to short term rentals, traditional multifamily and federally funded projects. So I’m super happy to be here in terms of outlook. I’m born and raised in Miami and it’s been a pleasure to see the Miami market grow. So we’re we’re optimistic and we’ve definitely had more interest now than ever from developers and clients on building affordable housing and managing that to to meet compliance. So I’m looking forward to seeing Miami grow.

 

Carlos Burneo [00:37:26] Thank you guys for having us. Carlos Burneo With Nuveen Real Estate. I work on the housing team where segregated they sectors. A big investment manager. It’s nobody in the investment management arm of TIAA 156 billion assets under management. I work as a lead on the housing development side. We’re building eight properties across the US and they also cover Florida transactions. I also participate with a group of our colleagues in the asset management side leading our flex living strategies. I agree with with Doug, definitely. We are excited about 2024. We think there’s going to be a unique opportunity to acquire properties here. A lot of groups are not going to be able to because it’s negative leverage during the first two or three years, depending on when you buy them. So I think it’s going to be a pretty good opportunity to acquire assets at a discount in the specific markets. We are a little concerned about development just doesn’t pencil out. But we love the 2027 story and on the deliveries as well. So we’re looking actively with multiple groups that that future opportunities in some specific markets. We do not we don’t have exposure such as Denver, California. So that’s that’s kind of where we are.

 

Gus Cabrera [00:38:43] Thank you. And I think the earlier presentation highlighted the markets in Florida that are doing well and kind of wanted to ask and I’ll Doug, I’ll start with you guys. I know that you recently broke ground on a project in Cape Coral. What areas in the state and we can maybe expand that beyond Florida and talk a little bit about the Southeast U.S.? What areas are you seeing as hotspots right now? What areas are you focused on? I have a follow up for the builders and the group as well after that, but kind of want to lead it off with you.

 

Doug Faron [00:39:15] Sure. I think, you know, fortunately, that this presentation right before that clearly outlined all the places we should be focused, I think it was I mean, it’s very clear you have seen a seismic shift in population that was sort of an acceleration of the high quality of life, low cost of living, low tax dynamic you’d seen over the last ten years. That was something we were talking about forever. And then COVID sort of proved it out all at once very quickly. So what that’s done to all of these markets is cement, a new population, different types of jobs, more jobs. And to me, that is the foundation that all of these markets continue to grow off of for the next ten years. So you see some people sort of quickly nay saying, oh, you know, you’re seeing Florida in the Carolinas and Georgia taper their rent growth. Well, they grew, you know, 67%. They’ve got to taper for a period of time. But when you think about I mean, I’ll use West Palm, an example where we’re based, there’s a million new feet of office being built. It’s 65% pre-leased. That’s 650,000 feet of jobs that are all paying over 16, that somewhere between 60 and 110, that those are expensive jobs. None of them live in West Palm yet they’re all coming. So what does that mean for housing over the next three, five, seven years? And against this backdrop of no supply. So we see that in Florida, in Tampa, in south Florida, in we sit in the Carolinas, we see it in Tennessee and Georgia. So we’re focused on these markets that are seeing population growth, that are seeing job growth. And we think there’s huge tailwinds if you focus on those, whether it’s development, which is, as I was talking about, pretty tough to pencil at the moment, but buying existing assets, those markets, we think we do very well at the moment.

 

Gus Cabrera [00:40:50] And I agree with you on Palm Beach, I think that’s a good opportunity there. I want to go to Carlos on the same question and then Alfonso and Andrew.

 

Carlos Burneo [00:40:58] Yeah. So a big part of our strategy are middle income rents. So we’re extremely focused on on these new initiatives, like the PFC is structures in Texas, right? We’re looking at deals like that local like here. We’re also have a big part of our strategy in the value add funds are to own finance properties. We spend a lot of time looking at those asset types. In addition to that, we we follow jobs very similar to the organic growth markets. And we we are looking at at pretty much income supply deals with a story, but more importantly to sellers that need to meet the market, right, because of redemptions, because of fund issues, because of leverage where they are. So we’re spending a lot of time trying to look for those opportunities.

 

Alfonso Costa [00:41:45] Yeah. No, we’re super keen obviously on South Florida always we’ve been bullish on, on the submarket for decades and I think the conviction with multifamily is investment thesis and South Florida has proved out time and time again. I do think you have certain pockets that are a little oversupplied. I’m doing a deal in Oakland Park with the city as a public private partnership. I think, you know, being just north of Fort Lauderdale and seeing a lot of movement, you know, out of Fort Lauderdale and finding those more affordable submarkets, I think is a smart strategy for us as a firm. And, you know, again, like Doug referenced the previous presentation, alluding to the the stronger states in terms of in-migration and wage growth. I mean, you can’t really mess with Florida, South Carolina, North Carolina. And so very active in those markets, both on the multifamily side and what we like to call horizontal multifamily with the BTR, whether it be ground up or taking down communities in tranches from from national homebuilders. So I think the most interesting slide on that previous presentation, I know I wasn’t asked that question, but was the difference between wage growth and rent growth? And it goes again back to something that that Doug referenced with the incredible 2018 to 2023 growth. It has to taper off eventually, but that consistent growth in wages, I think will prove out in the long run, despite the fact that you might have a weakening economy as manifested by the or evidenced by the increase in jobless claims that we’re seeing more recently. But nevertheless, yeah, we are we stick to our core markets being, you know, those that that I just mentioned.

 

Gus Cabrera [00:43:28] And I always find it interesting. I think South Florida tends to be a little bit insulated right from the rest of the rest of the country economically, because the chaos that sometimes exists in South America comes for our benefit, right? Those dollars flow up and those folks participate in our economy. So, Andrew, same question for you. And as a so you can lead on the follow up, are there areas that aren’t working today on paper that you think would potentially work? I mean, to me, Jacksonville is always one of those funky markets, right? It looks great on paper and some slides and then on others it doesn’t. So are there any areas? First question, it’s what’s working other markets and areas that perhaps aren’t working that you’re looking at, you could potentially make work in the future.

 

Andrew Velo-Arias [00:44:16] I mean, I’d echo what my panel mates said in terms of the key markets that we’re looking at. Related group is active throughout the Southeast in particular focus in Florida. I think there are some markets in Florida, like you mentioned, Jacksonville, sometimes in the Orange County area that are difficult to pencil. And some of that just has to do with construction cost being especially elevated in those regions as it relates to rent or or development impact fees and other charges like that. I think the you know, Carlos touched on on the live local act, there are various components to live local that I think could help stimulate development in some of these areas that otherwise were were difficult to make pencil you know maybe I could touch local a little bit.

 

Gus Cabrera [00:45:02] It’s a little bit. We’re going to do a deep dive. Okay. And then I’ll pull back. I’ll pull back and let’s save some for maybe later.

 

Andrew Velo-Arias [00:45:08] But but a preview then for for that next segment. I think that’ll help unlock some of these areas.

 

Doug Faron [00:45:16] Yeah. I mean, I would I’d echo the same thing where what you’ve seen is construction costs come up. You got commensurate almost with this rent growth. And so suddenly you had construction costs go all the way up, which still worked when the cost of capital was near zero. But then when cost of capital came up, I mean, you can’t have free land in most places throughout Florida and build right now because the the construction costs, you know, simply don’t justify the return on cost yields you need. So I think live local is a great way that’ll sort of unlocks an ability. And I think we’re already seeing we’re seeing on site subs come back looking for work. And to me that’s the first sign of you’re going to start to see bids improving and start loosing if things come down and as they do it will make sense because you are still seeing and we saw the fundamentals, additional rent growth that will occur. And so as that rent growth occurs and is that construction cost comes down, there will be places to build that we’re still focused on sort of highest possible rent areas or better rent areas because construction costs, you know, taking Florida, for example, don’t vary as much as you might think across the state. So you’re better off working in a higher rent market. But I think the dynamic today will improve once we see some relief in construction costs accompanied by rent growth and perhaps a touch of stabilization in the cost of capital.

 

Gus Cabrera [00:46:32] And I want to ask Sabrina, because I know that you work with you’re with your clients and folks that you service in regard to those economic trends as well. I think Doug mentioned construction costs and Andrew did as well. We’re seeing construction costs stabilize, offset some of the increase on the insurance side. But what are you hearing from your clients? What are you seeing to help you navigate that that investment path?

 

Sabrina Beraja [00:46:58] That that’s a great question. I think with numbers being as tight as they are and having to make deals work, aligning with the right property manager to really hone in on your future OpEx expenses and how you can minimize that to make your deals. Pencil is really important. I know we’re going to talk about this a little bit later, but the use of technology on the optics side to again compensate for the higher cost of insurance is something that we’re talking to our clients with with Knapp about.

 

Gus Cabrera [00:47:30] Thank you for reading my email about the potential questions. Know for a second there. That was great. So I want to go to to to Alfonso and you mentioned BTR and those types of horizontal class. I know Doug does a little bit of that and that and I want to get some input from from Carlos as well. Can you kind of walk us through what’s happening in Florida on the BTR? So.

 

Alfonso Costa [00:47:55] Yes, we’re not extremely active in Florida. On the BTR side, we are in the middle of purchasing a community from Meritage and the Riverview, which is one of the the pockets of Tampa, but primarily in South Carolina and North Carolina. But what’s been great is having established relationships with homebuilders that aren’t necessarily struggling, these these folks have a lot of capital. They’ve been a lot smarter since 28, 29 in that respect. And they’re able to buy down mortgages with their financing companies. So they’re not necessarily struggling to offload product, but it does make for a pretty easy, you know, a pretty easy business execution for them to be able to sell anywhere from eight to 12 to 15 units a month over the course of a 10 to 12 month period. The interesting thing about this sector, I think having been active in it for about a year and a half, two years now, is that fine tuning the underwriting, whether it be the op side, as Sabrina mentioned, and more importantly, the absorption? I think a lot of folks have been underwriting anywhere from 8 to 10 units a month and we’re seeing more 5 to 7. So from an operating shortfall interest reserve perspective, just trying to be disciplined going into two next year as it relates to additional opportunities, both from a from an asset class perspective, I think that, you know, this is the first time in decades where a home payment, mortgage insurance, your taxes, maintenance, you know, it’s in your principal and interest. Obviously, it’s the first time where it’s really been higher than than renting and a lot of these sub markets. And so for the younger generation and I’m are we Gen Z or Gen Y? Yeah, we’re millennials definitely.

 

Gus Cabrera [00:49:46] Younger than I am.

 

Alfonso Costa [00:49:47] I’m a millennial. I’m 35. So I’ll admit that, you know, we want to have flexible lives and be able to to move about, I think, and have that flexibility and not have to worry about the the monthly pool cleaning or landscaping and all that rigamarole. And I think that’s an increasing trend. And so we’re we’re bullish on it. I do think that over the next two years, you’ll see a lot of players pull back from it. But the. The big institutions continue to be very invested in it, and I think it’s going to bode well and be a nice complement to the multifamily space, the traditional multifamily spaces as we all know it, because it provides that optionality, especially for the larger communities and the suburban markets where you do the three and four story garden style traditional wood frame product with these either single family detached homes or the the townhome product.

 

Gus Cabrera [00:50:40] And Doug, I know you got some stuff to say on this, but Carlos, I don’t know if you wanted to chime in on this a bit.

 

Carlos Burneo [00:50:45] Yeah. So we we we’re looking in on the BTR space pretty actively. We think that’s going to be a really good opportunity to to acquire properties. It’s that that segment that that area is very interesting for us because we’re vertical integrated. We created a vertical operations company four years ago. It’s called Sparrow on the Single-family residential side. So we that has been kind of like an invitation home strategy buying from the MLS on eight different markets where up to 4000 homes. And we think that the next phase of aggregation on that platform will be through BTR. And as Sabrina was mentioning, we’re really excited about that platform and everything that it’s doing because of the approach to technology, centralized operations and a lot of the things that we’re going to be touching on.

 

Gus Cabrera [00:51:33] Doug? BTR in Florida?

 

Doug Faron [00:51:36]  BTR in Florida and BTR everywhere. And I’d say one of the, you know, sort of motivating factors in the formation of short capital was pursuit of the thesis of build to rent. I mean, I spent a lot of my career across asset classes and lot in residential, but what I saw was the confluence of $80 billion of capital chasing a thesis that there were very few credible sponsors. And certainly at that time, this is, you know, 20, 19, 2020 that were out there able to execute on this plan. My part of the business is a homebuilder. So we have a fully integrated ability to develop and are doing so across the state today, but also are having opportunities to buy from homebuilders who aren’t struggling. So it’s sort of few and far between to find a deal that works. But again, sort of longer term growth dynamics, looking at economics, demographics, job growth and the combination of both baby boomers and millennials who either don’t want to or can’t afford because of record high student loans, housing, but still have children. And, you know, having children in garages and backyards are very helpful for those things. So we see a huge demand in the space over the next ten years. We see just minor changes in the homeownership rate from 66 to 60 4 to 62. Mean huge bumps in this segment. So and it’s traded historically at a premium to multifamily, but specifically in build to rent, which we do, a lot of you have higher margins, you have higher retention. So it really shouldn’t. And as the asset class institutionalizes, you’ll see reasons for that to collapse. So we we think there’s huge upside and it’s much cheaper and much quicker to build. So even in a challenging developing market, this still sort of it’s still pencils a number of places. So where, you know, long story short were highly bullish on the segment we think there’s a lot to do and we plan to do so over the next few years.

 

Gus Cabrera [00:53:18] Awesome. So, Andrew, let’s go let’s talk Live Local like a little bit. Let’s dive into it. I know that something that you and I and I guess some some of the other folks we follow closely, this is in a wheelhouse. But how are you seeing, you know, what impact do you really see from the Live Local Act? I think at the legislative level, they’ve indicated that they’re not going to do a lot of changes to the legislation, kind of let the market absorb it a bit. There’s been a little bit of a wink and a smile to that as well. I think there are some tweaks coming at some point with an effective lobbyist, you can get there. But kind of give us your take on the live local act, how it’s helping your projects, what are you looking at? And then we’ll do a couple of follow ups on that. And then also I want to touch on not just a live local act, but legislation that’s happening in Texas. Right. Palm Beach passed a bond referendum recently that we’re paying attention to. Atlanta has a title two bond program that this interesting and turn county. So but let’s start it off with the Live Local Act.

 

Andrew Velo-Arias [00:54:22] Sure. Now I’d like to do something, Gus, if I may. Just curious people in the audience, if you hear Live Local, what comes to mind when you hear Live Local? Throw out some words.

 

Speaker 7 [00:54:33] But. This. Okay.

 

Andrew Velo-Arias [00:54:38] Any. Any other words?

 

Andrew Velo-Arias [00:54:40] Okay.

 

Andrew Velo-Arias [00:54:42] Crazy. Yeah. Okay. I like confusing. I just heard tax exemption here. I feel like a lot of the but the first things I heard was more about the zoning piece. Right. I think that’s what’s gotten like the most press and for for good reason. But the I think the tax abatement piece within Live Local is is is key. And that was, I think, one of the key parts of it and being developed that and for us underwriting deals and markets understanding how that tax abatement will to me play out to the common earlier about unlocking certain markets where it might have been more challenging to get deals off the ground is is important. You know affordable housing is obviously the the focus of live local. But, you know, the way affordable housing is defined in there in the state statutes goes up to 120% of area median income. So that’s really workforce housing as we know it. So you have a workforce housing tax abatement that is starting to get close to what you see in Texas or New York or other jurisdictions where you have, you know, ad valorem tax abatement for the provision of affordable and workforce housing. And I think that’ll be a big catalyst for additional growth in in Florida. More so even then, the zoning pieces, which I think is what has gotten a lot of the press, what a lot of people are trying to lobby for. And then there’s another piece of live local that I’m heavily focus on that I didn’t hear mentioned, which is there’s additional funding resources being put now into the Florida’s sale program to fund missing middle units. They authorize $150 million a year for ten years. The first $100 million tranche is being just just got issued with applications due on December 20th. And that is specifically focused on missing metal units trying to incentivize 80 to 1 20% of my production. And so I think that that’s going to be those will end up being the more lasting effects of live local, I think, tax abatement and the funding commitment. Then then the zoning pieces, which I think in a lot of jurisdictions you’re seeing some of the public battles play out. And some of those things might just be, you know, negotiation ploys and, you know, we’ll see how that plays out. But so those are, you know, confusing, I think is the word of the day. There’s a lot there. But you know, that those are my thoughts on it.

 

Gus Cabrera [00:57:06] And I think you’re right on the zoning component. Right. Because I think if you look at Miami-Dade County, the rapid transit zone legislation, essentially A does or did what the live local act tried to do. So one thing just to touch on, I think on the on the sale funding, which was a tax abatement, I think that’s an incongruence in the legislation. I think that’s something that I certainly have spoken with some legislators potentially to to tweak because I think if you’re trying to incentivize workforce housing and you put those two components opposite each other, you know, if I have a large multifamily project that can benefit from tax abatement, I am not going to compromise for taking, you know, a smaller tranche itself on the front end that, you know, I think both should work together, not be either or. So call us one out. I know that you also look and are working within the live local act touch a little bit on that and also expand a little bit on on your stuff there you’re looking at of Texas the legislation that recently passed.

 

Carlos Burneo [00:58:15] Yes. We as I mentioned earlier, the big part of the strategy is the middle income rents and bond finance properties. We looked into and are currently working on a couple of deals that have the PFC, a structure which is kind of like tax abatement as when you restrict when you end up allocating a number of units within the rent rule to the specific grants. So we are pursuing that. In Texas, we have been able to work with multiple housing authorities across the country, creating bonds that are able to provide also limited limited rents in a 20%, 50% of the brand realm. We have a program with Bank of America where we were able to swap those bonds, and that has become a big part of our value add strategy here in Florida. We we also maxxis land because that’s where we’re trying to apply to live local. And again, at the same time, we have 36 properties in Florida. We believe that eight or so might qualify under the the ACT and we’re actively looking. We think that’s the only way to do it, because that’s the choice that we’re shown early today. Right? You see this massive brand growth, but the part that was missing was the massive expense growth that we have experienced. Right. Both uncontrollable as also insurance and. Property taxes. So these are our main main objectives and strategies within the platform.

 

Gus Cabrera [00:59:46] I want to cut out switch a little bit over to property management. Give Sabrina an opportunity to chime in a little bit. I think speaking from the workforce housing side, I think the today’s workforce housing today, affordable housing projects are not what they were 20 years ago. Amenities play a part. Right. What do you see when you work with your clients? What amenities are becoming more important in the lease up? How is technology playing a part? You mentioned a little earlier. How is technology playing a part in your space?

 

Sabrina Beraja [01:00:25] That’s a great question. I would say we’re seeing developers get more and more creative when thinking about how to monetize their projects to attract potential renters and keep them there for longer and minimize the turnover. You know, what comes to mind would be pets seeing pet amenities at projects, for example, dedicated dog washing stations or onsite dog parks, or even doing programing for residents centered around their pets so that they can engage with one another. Packages is also very important to renters. The average American receives 3 to 4 packages a week. It must be higher in Miami considering that Jeff Bezos is coming back. So definitely making sure your packages are received by by your residence is an amenity. And lastly, in Miami, we’re seeing a spike in pickleball. And developers are definitely trying to meet that low supply of courts and including some pickleball in there, their projects on rooftops. I think that’s a great amenity to attract residents and keep them there.

 

Gus Cabrera [01:01:39] I think with pickleball, I’m investing all my money in orthopedics. I think I’ve had more injuries for pickleball than I did with football. Carlos, kind of want to actually.. Doug I’m sorry. I guess I skipped you. Doug I’m sorry. We talked about your outlook for 2024 a little bit by existing run up development. Speak a little bit about that as well. What you’re looking for in the coming year.

 

Doug Faron [01:02:04] In terms of what I’m looking for for ground up development projects in 24. Yes, I think, you know, in 24, I think the first half of the year is going to be focused a lot on existing. I think we’re starting to see, you know, assets well below replacement costs, high existing yield and high existing yield with the opportunity to value add. So we’re still awaiting development, but we see a lot more near-term opportunity in existing assets in the near term, in the longer term. And all along the way, we’ve been looking at, you know, trying to find land sites that we believe in, even some that may not be yet entitled, working with landowners to, you know, bring those through to entitlement. Because it’s our view that when you do start to see the decline and hopefully some relief on the cost of capital side, you’re going to hit up against that that shelf of deliveries. And so at that point, our goal is to have a large pipeline of development opportunities that are shovel ready that we can break ground on, you know, in advance of sort of seeing that need for for housing. So I’d say, you know, second half of next year to the first half of 2025, I see us shifting more into development mode and in the meantime, trying to pick up attractive existing assets.

 

Gus Cabrera [01:03:15] I think you I was told that I should leave a little bit for Q&A, So I kind of want to put one last question. And I know the the afternoon panel is going to speak about capital markets. But Alfonso, I wanted to get your sense on on financing lending opportunities, what you’re seeing and other banks are being finicky, right? And you’re being a negative. Get a little creative, but what’s your take on that?

 

Alfonso Costa [01:03:42] That’s a good question for David Isenberg over there in the corner. But I, I would also say that, yeah, banks right now it’s a lot of you know, because next year we’re we’re done for the year. So you’ve got a lot of non depositories and you know debt firms and different private players that that are looking for pretty nice pretty nice spreads. And so from a from a ground up perspective, again it’s focusing on getting things entitled. I think from a construction standpoint the three and four story wood frame garden style deals are going to come back to life first and then especially with lumber coming down tremendously over the past 12 to, you know, around 8 to 12 months and framing labor as well. But the concrete’s just just not viable the now the 5 to 7 story mid-rise product so that I think but from a financing perspective you know we’re hoping. By the end of the first quarter of next year that things start to change a bit. I am not Bill Ackman thinking that the feds are going to start cutting in the first half of next year. But I do think that, you know, along the lines of what was mentioned in the previous presentation that you know that Fed funds rate anywhere from the four seven 5 to 2 now range to five range. It’s going to be here to stay for for quite some time. And what we saw in 2021 is not going to happen for another decade at least. And so it’s just a matter of being able to pivot as needed, you know, execute on your current pipeline. For us, we play in the equities space as well. So making and loans and ADC loans, especially on the horizontal front. But on the multifamily side, it’s being very discretionary in terms of the deals that you take on. We don’t do any acquisition and value add plays. I think that was a tough, tough place to be over the past two years, especially for those who got caught with things that they thought were financeable and also from construction costs and and delays are going to be caught holding the bag or getting wiped out next year and being subject to guys like this to my right. But, you know, that’s a part of these cycles is it kind of weeds out those who are a little bit disciplined, more disciplined than those who aren’t.

 

Gus Cabrera [01:06:11] So and Andrew, I wanted to get your take on that as well. And and to bring back the the the Live Local. The comment I wanted a question I wanted to ask you are banks are the banks you’re talking to and the lenders you’re talking to the they don’t understand they’re still don’t have their arms around the live local act and the tax abatement credit. How have those conversations gone? Because I think, you know, potentially those could could make deals work. Right. But overall, your your viewpoint on lending opportunities and how that mixes in a little bit with the with the potential of the use of the Live Local tax abatement side.

 

Andrew Velo-Arias [01:06:49] Yeah. So we’re very active in conversation with agency lenders Fannie and Freddie. And I know Chad over here is going to be able to touch on that a little later, So I’ll be brief and we won’t have Q&A. But I think I think as it relates to underwriting the tax abatement for the live local actor, you’re seeing some players like Adam over here who will understand it and our our who are going to to underwrite to it. And I think one thing that we want to see is have Fannie and Freddie develop a workforce housing program that more closely aligns with the the incentives out at the state level so that it more mirrors what we’re seeing in terms of debt terms for affordable housing. I think if we can get that and workforce housing, you know, coupled with the state incentives, we’ll have a much better shot of producing, you know, a lot of missing metal units.

 

Gus Cabrera [01:07:41] And Chad knows all about the level of collecting. I know that I’m for you. He knows his stuff. Any comments? Carlos on that before we close out the panel and Doug and Sabrina.

 

Carlos Burneo [01:07:52] Yes, the only thing that I would add. As Doug was mentioning, development really doesn’t pencil right. So even if you get the land for free, I’m talking like mid-rise or high rise, even garden deals that we were looking at. So pretty much we’re excited about the opportunities on on the acquisition side. As is also mentioned, there’s going to be pain next year because of rates and insurance and other items. And at the same time, it’s it’s we’ll see where when things really start improving to get back on the development cycle.

 

Gus Cabrera [01:08:24] Sabrina And then Doug gave me money to be the last the last thing.

 

Sabrina Beraja [01:08:28] So I’m sorry. The question again?

 

Gus Cabrera [01:08:31] Well, no, not just any closing comments from your end.

 

Sabrina Beraja [01:08:34] Closing comments? Yeah. I think as everyone echoing what everyone said in this panel, we really have to look to find the right markets, the right product, that the opportunities there and really understand the fundamentals and see that long term growth present as well. And we’re here as a management company to help our clients through that.

 

Doug Faron [01:08:56] Sure. I guess I would just say, you know, everyone you know will remember and hopefully everyone here is remembering that this is all cyclical. So where we sit now, I can’t argue is necessarily the bottom. There may be worse, but it’s not a good time. So like, you know, I’m spending all my day trying to work with institutional LPs and as we talked about the position, bring them back to the market and they’re just waiting. And listen, if you’re going to call bottom, good luck. Like, we’ll see how that goes. I think you’d probably rather average cost down over the next 12, 18 months. You it looks like and I think you’ll end up there is undoubtedly a position in 24, 36, 48 months that is better than today. And if you’ve bought in this environment, you’d be pretty happy about it. So like, don’t sit scared for the next 12 months because you know you’re going to miss some interesting opportunity.

 

Gus Cabrera [01:09:44] Well, I want to thank our panel, if there’s any questions. Well, I think we got time for a few questions. Right. So anyone. The young lady in the back seat?

 

Unknown [01:10:01] Unintelligble

 

Carlos Burneo [01:10:16] Yes. So, I mean, common area maintenance. I mean, from a electricity standpoint, we usually see like 12% leakage, I think. I mean, nothing too, too crazy, but from, you know.

 

Gus Cabrera [01:10:30] Not from our end.

 

Alfonso Costa [01:10:31] Our own. Yeah, I don’t, I don’t. I mean typically with renters, you know, they’re, they’re subject to, to all the different fees that, you know, cable, wi fi trash, pest control, etc.. But on a common area maintenance side, I think, you know, in general, those fees end up covering a lot of what we’re subject to on that front. Obviously, when it comes to payroll and other additional operating expenses. I mean, typically we underwrite anywhere from 30 to 35% to OB X. So and I don’t know if Sabrina can comment on on that. It’s a little bit higher on the BTR side depending, But.

 

Sabrina Beraja [01:11:13] I would agree with that. We’re not we’re not seeing any of those charges being passed and we’re meeting those numbers about that 35%.

 

Gus Cabrera [01:11:21] We are finishing roses, finishing a project in Atlanta. So if you give me six months, I’ll have a better idea. Might be a good idea. So, uh, thank you.

 

Alfonso Costa [01:11:29] Yeah, but in terms of like, tenants, I mean, same even with same store sales renewals with tenants, I mean, we’re having to pull out the stops on, you know, whether it be if we’re fortunate to own some hospitality assets so free vacation weekends to Margaritaville resort Orlando or, you know, 4 to 6 week concessions obviously sometimes even greater on on new leases. But in terms of kind of sticking it to renters even more than what they’ve you know, they’re already subject to, that is definitely not something that that we’re doing. And I don’t think a lot of the peers in industry are doing either.

 

Unknown [01:12:07] (Audience question) So, I mean, that projects it a little bit more like a seniors concentration that, you know, it’s a different rate. So you can start to see some of that design fix it for it’s easier for independent living. Is that is that be considered now have more of that population of five more units.

 

Gus Cabrera [01:12:33] Yeah I think I’ll take that like for instance we have a project that we’re working on, it’s actually on the Metro Metro rail station which is 100% 120 and below, not really necessarily targeted our seniors. We have a project that and what’s interesting about the seniors that Miami Miami-Dade County has some senior voucher program. Right. That can kind of help us help with with that model, if you will. I certainly not been focused on we’ve not been focused on on a just a senior specific play, but. Right. Okay. But that Palmetto project that that we mentioned that I mentioned certainly tips the hat to live local act because we have units for you know young adults aging out of foster care military set aside. So absolutely. I think at least from our end, certainly as a condition of a focus, one when we’re pricing out a project. But Andrew, I don’t know if you want to add anything to that.

 

Andrew Velo-Arias [01:13:37] We’re doing some of that and we can talk more about that.

 

Sabrina Beraja [01:13:39] I’ll find there’s definitely a need for senior affordable housing at one of our projects that we managed for Miami-Dade County of 100 units, there was over a 5000 waiting list for residents at that property three years ago. So there’s definitely a need to incorporate that more into developments. And even if it’s mixed, the need is there.

 

Gus Cabrera [01:14:02] All right, final question, anyone? Going once. Oh, sir.

 

Unknown [01:14:09] So. So we’re having some supply chain issues, obviously. So it looks like supply chain. So they flow together. They still backlog.

 

Alfonso Costa [01:14:27] So from supply chain perspective, I think switch gears has still been a main hold up. I would say you’ll hear that from a lot of general contractors. Yes. So ordering them plenty ahead of time. And then on the side, work side, you know, getting your drainage structures in place, especially for doing, you know, more suburban product. But I know from a shipping standpoint, you know, the ports have been I think there was an article in Bloomberg earlier this week about how the ports have pretty much come back from their their standard scheduling standpoint and shipping costs have normalized from pre pandemic days. But depending on which GC you talk to and which market and their subs, they’ll say different things at different times. But Switch switched gears has been a consistent theme over the past two years. And again, on the cyber side, storm drain structures.

 

Doug Faron [01:15:17] You know, I’d say in general though, we’re seeing dramatic improvement. I think that was something we saw last year a lot more. And this year has has improved dramatically. So there’s still certain items, but we’re seeing it much, much better.

 

Andrew Velo-Arias [01:15:28] Yeah, I agree with that. The other thing I’d see that still pops rears its head, it’s FPL having Transformers that, you know, missing or they’re borrowing from over here. And how much of that is supply chain, How much is other stuff? I don’t know.

 

Gus Cabrera [01:15:41] But that applies to Georgia Power as well, by the way, so.

 

Andrew Velo-Arias [01:15:48] Yeah.

 

Gus Cabrera [01:15:49] Well, thank you. Thank you all for for listening. I want to thank Sabrina, Carlos, Doug, Alfonso, and Andrew. Thank you.

 

 

Panel 2: Dealmaking Focus: What Financing Will Look Like in 2024

 

Emily Lettieri [01:16:02] Up next is our panel Dealmaking, focus, focus, what financing will look like in 2024. Our panel is moderated by Noah Miller, who is the founder and president of Royal Palm Funding. Please join me in welcoming our next panel. Thank you.

 

Noah Miller [01:16:18] Thank you, everyone. Welcome. Thanks for being here. I do have to apologize. I know there was a last minute change. Charlie Munger was supposed to be moderating. Unfortunately, he couldn’t be here too soon. Too soon? He’ll have the good life, in all seriousness. Charlie Munger was actually. He was a big multifamily investor. I looked it up yesterday. In 2020, he bought more apartments in California than anyone else. He bought about $400 million worth of apartments. So.

 

Noah Miller [01:16:48] Wow.

 

Maggie Burke [01:16:49] Learning new stuff every day. There you go.

 

Noah Miller [01:16:51] Love it. Exactly. So I’m Noah Miller. I’m the president of Royal Palm Funding. We are a private debt shop. We’re based in Boca Raton. We play in these small balance sub institutional check size. Everything we do is under $5 million. We really focus in that half 1000000 to $3 million space, and we do it nationwide on on all asset types. So I will let everyone on the panel introduce themselves, then we’ll jump in. So, Maggie.

 

Maggie Burke [01:17:14] Awesome. Well, thanks, Noah, and thanks to the Connect CRE team for having us here today. So I’m Maggie Burke. I’m a senior vice president with Capital One based out of Tampa, Florida. I focus on multifamily originations across the country. Capital One, we’re a top agency lender, HUD lender balance sheet. We also are one of the largest warehouse in Dublin lender, so we play in a lot of different spaces in the industry.

 

Noah Miller [01:17:39] Kyle.

 

Kyle Jemtrud [01:17:40] So we just realized we were talking about this before I make my introduction, that we are the only thing standing between you and happy hour. So please start drinking if you’d like to. It’ll make us way more interesting.

 

Gary Bechtel [01:17:50] You can bring shots up to us.

 

Chad Musgrove [01:17:51] To say we need somebody to serve them.

 

Kyle Jemtrud [01:17:53] Yeah, please serve us. My name is Kyle Jemtrud. I’m managing director at Greystone. I run our Boca Raton office and also our Minneapolis office. Greystone is a leading multifamily lender, Fannie Mae, Freddie Mac and HUD. We also have a myriad of different balance sheet options and some some other private capital white label financing that we’ve rolled out in recent years. I focus on multifamily lending all over the country.

 

Gary Bechtel [01:18:20] I’m Gary Bechtel. I am CEO of Red Oak Capital Holdings, an affiliated entity called Oak Real Estate Partners. We are a multi fund manager raising and deploying capital in bridge loans of one, two, two to maybe three years fully extended loans. The amounts are 2 to $20 million core asset classes located in primary, secondary and some select tertiary markets.

 

Chad Musgrove [01:18:44] Great. So I am Chad Musgrove, senior vice president with M&T Realty Capital Corp. We are a subsidiary of the M&T bank, which is probably the roughly the 11th largest bank in the country today. So I focus on off balance sheet capital. So that’s Fannie Mae, Freddie Mac hired across our agency platform. We also have a life company platform. We also service for about 20, 25 or so life companies as well, and provides CNBC an additional capital markets execution. And I lead Florida in the Southeast.

 

Evan Katzin [01:19:21] Hi. Evan Katzin. And I’m a director at AllianceBernstein, based in New York. We manage a series of debt funds and life company strategies, mostly playing in the 50 million and up our loan size range up and down the stack bridge construction, mezz and perm loans. I originally from South Florida and I’m a gator.

 

Noah Miller [01:19:41] Terrific. Thanks, everyone. So we’ll jump right in. I want to start with, obviously agencies. They’re biggest player or have been historically one of the biggest players. So I want to jump right in. Kyle, maybe give us an update on agency underwriting. What’s changed in the last couple of months, what you think will change just so everyone has an up to date view?

 

Kyle Jemtrud [01:20:00] So the general terms that everybody is accustomed to in the agency space haven’t changed whatsoever. What’s changed is there’s been a more of a focus on property condition, age of property that has closed the credit box a little bit around how much interest only we’re able to write into our deals. I mean, for years now, you know, everybody’s been coming to us with full term. IO asks, you know, if your property is over 20 years old right now, you’re probably best bet is going to get you’re going to get five years. The near stabilization product is pretty much off the table right now. While while Fannie and Freddie both say they’ll entertain it, they probably won’t. But other than that, I mean, I think we’re we’re we’re pretty much status quo.

 

Noah Miller [01:20:43] What about just general view, their view on sponsors nowadays? I mean, there have been so many newer syndicators over the last couple of years. Are the agencies starting to get more strict on on who their sponsors are, maybe Maggie?

 

Maggie Burke [01:20:56] I would definitely say we’re starting to see more of a focus on where the equity is coming from. Right. So, you know, six or nine months ago, there was less focus on that. You know, obviously a lot of focus on the guarantors, the sponsors of the transaction. Now, we’re definitely there wanting to know, is this a syndicated deal? And I think it really speaks to the property condition, you know, challenges that they’re having on some of these older assets. What are these syndicators, the doctors and dentists that, you know, listen to to a podcast that Noah was on and, you know, wanted to get into the multifamily space, you know, raise money, pass the hat around. Well, now they need a new roof because that property, you know, is, you know, 40 years old and it’s got some deferred maintenance. And there’s a challenge getting a capital call. Right. You know, those investors, maybe they don’t have that kind of funds like a unaccredited investor. So we’re starting to see a lot more focus on, you know, where is actually the equity coming from. And, you know, are the sponsors well-heeled enough to to kind of weather through some of the, you know, deferred maintenance things that may come up or, you know, just sort of challenges owning a property day to day.

 

Noah Miller [01:21:57] And they’re still not allowing any PACE. Right?

 

Maggie Burke [01:22:00] You know, it’s funny you say that. You’re like the third person to ask me in the last like two, two weeks. You know, there is task forces on both Fannie and Freddie that are really trying to tackle the pace issue. But really it comes down to the inner creditor agreement, you know, and the challenges that that have, you know, Freddie, with the pooled securitization model, Fannie, you know, with their NBS model. So I think someday they may get there. But it’s almost like what’s the biggest challenge right now? And Pace just is kind of falling a little bit below.

 

Kyle Jemtrud [01:22:28] And HUD has said that they’ll accept it as long as it’s coterminous with the HUD debt. But who’s going to get 35 year PACE financing, right?

 

Maggie Burke [01:22:34] Yeah, and I’ve actually looked at a deal with PACE financing on it. And I mean, the PACE financing terms are, you know, pretty the debt service is pretty extreme that it really it really does limit LTV on it on an agency transaction.

 

Kyle Jemtrud [01:22:47] 20 or 25.

 

Maggie Burke [01:22:48] 25 year AM is generally what I’ve been seeing. Yeah. So all the hotel people out there love some pace but just not hitting on all cylinders on the on the multi side.

 

Noah Miller [01:22:57] Maybe just quickly I want to stick on agency for one second. Maggie, I know the caps just came out. If you could maybe just give a summary of those caps and also what that means. I’m not sure if everyone here is familiar with the mission mission driven component. Maybe just summarize that quickly.

 

Maggie Burke [01:23:10] Yeah, great question. So both the agencies since 2014 have had lending caps imposed by FHA. And, you know, this year there was a little bit of nervousness around the industry. Hey, you know, forecast for 2024 are going down. What does that mean for the agencies? You know, they’re the primary, you know, provider of liquidity in the market. And the good news is, is the caps came out $70 billion for Fannie, 70 billion for Freddie, only a slight reduction from last year, caps last year each had 75 billion. One thing that’s really interesting about that is that now in 2024 deals that fall in a preserving affordable housing category. So really the new products from Fannie, the sponsor initiated affordability sponsor dedicated workforce housing on Freddie side the preservation workforce housing product where borrowers self-imposed rent restrictions through the loan term between 80 to 100% of or 120% of AMI, depending on the market, those are not counted towards the cap. So while each you know, the caps are down slightly, I mean we have an uncapped. Category now, which we didn’t have last year. So my opinion, I mean, I think that’s pretty good for all of us agency lenders out there and all the agency borrowers. You know, there’s a lot of a lot of optimism, I think on my side of, you know, the agency still providing a lot of that liquidity. We’re working on a couple of those deals right now with the new, you know, conventional, affordable products. And to the point of a couple of the last panelists, you know, it’s those middle income levels that they’re targeting for that workforce housing so that 80% of am I and it’s really not that restrictive. Right. When you kind of look at some of the rents across the country and that they account for high cost market. So it’s a great thing for our borrowers get pricing discounts, you know, some different credit terms and then it’s great for the agencies to preserve that workforce housing.

 

Noah Miller [01:25:09] Got. I want to shift to to bridge that a little bit. Obviously, that’s gotten a lot of traction over the last year or so. Gary, maybe give me a little bit or give everyone a little bit of an update as to what you’re seeing in terms of of of interest in bridge that maybe can’t go firm anymore as well as if you’re shifting any of your underwriting standards, your due diligence process, and also what you plan to do over the next 12 months.

 

Gary Bechtel [01:25:33] Yeah, look, I’ve been in the business a while, right? As I like to say, I’m seasoned to not old. So I think this is my, if you want to call it, this is a market cycle. This is my ninth market cycle. In every cycle you see a contraction of traditional lending sources, right? Whether that’s banks, credit unions, life insurance companies, pensions, whatever. Right. Contraction of capital, contraction of appetite. And so that void is generally filled by alternative lenders, of which, you know, the space, the non-bank lending space, alternative lending space that that we play within. So our business is up dramatically for two primary reasons a contraction of traditional lending sources and B, within the bridge lending space itself. Up until recently, it was really dominated by the guys, the floating rate players, right? The LIBOR and Sofr based lenders who are either holding on a balance sheet or more typically securitizing that product via a CIC all out. Well, the CIC loan market is gone, right? Sofr has gone from point 5 to 5.31 as of yesterday. Right. So a lot of those transactions just don’t make any sense anymore. But the biggest thing is there’s no there’s no appetite for the buyers of those securities because they’re looking at other alternatives, investing in a final, you know, one of our funds, for example, that they get a higher yield. Yes, it’s not a rated vehicle, but it’s it’s a higher yielding and everybody’s looking for yield. Right. So our business, to answer your question, has gone crazy over the last year, year and a half, as rates have gone up and more and of capital availability has contracted. And so, yeah, it’s good. Has our underwriting change. Our underwriting has changed in that, you know, the stress rates that we use now versus what were you say, a year and a half ago, year and a half ago, we would use before before the run up in interest rates, we would use the rating agency guideline, which is a 5% interest rate, 25 year anonymization, 125 debt service coverage ratio. Right. And 90% of the deals were LTV constrained versus debt service coverage constrained. Today, it’s the flip, right? Today, 90% of the deals that we look at our debt service coverage constrained because our rate has gone up from from 5% to six and a half to 7%. I mean, with agencies are at 7% today, basically. Right. So we’re looking at, well, who’s taking out let’s.

 

Maggie Burke [01:27:51] Not let’s not overstate what’s going on now. We’re coming down below sub 6% with that Treasury. Come on, Gary.

 

Gary Bechtel [01:27:57] Okay. Sorry.

 

Chad Musgrove [01:27:57] Don’t forget we got buy downs.

 

Gary Bechtel [01:28:00] So but but anyway, so we’re looking to years in the future, right. Because our loans are generally short term. So who’s taken me out two years in the future and what’s the interest rate environment going to be two years in the future? And what do I have to underwrite to do that to make sure that I can get take it out of that deal with a refinance versus a sale. So that’s probably been the biggest change. And I think we’ll touch about this early later. The other big change that we’ve had to do is really take a hard look at insurance, especially in this market. You’ve got the same impact in other markets. California, which is where I live when I’m not on an airplane. And Texas, believe it or not. So insurance is becoming a bigger issue in how we underwrite these deals and ultimately size the take out. So I but availability of capital, you know, we still we’re still raising money. We’re still deploying money. And you know, it’s because of the contraction. It’s it’s a good time to be us right now. It’ll cycle back.

 

Noah Miller [01:28:52] Yeah. I want to ask a similar question to Evan, and I want to make sure the audience is aware and correct me if I’m wrong, Gary focuses mostly on 1 to 20 million. Evan really focuses on the, I think 50 million plus. Is that right? That’s right. So so I want to ask you the same question, which is in the true institutional space, are you guys changing the way you underwrite deals? Look at sponsors, the risk level you’re willing to take right now?

 

Evan Katzin [01:29:14] Yeah. I mean, I would say underwriting standards, you know, we’re taking a thematic approach and. Looking at themes and trends on each asset, each market. So it starts there. So, yes, general themes about softness on the top line insurance margin pressure. Those are certainly playing out. You know, the comment was made earlier about values being down 15 to 25% since 2021. So from our perspective, it really starts with where do we think spot value is today? And then is there necessary cash? And that’s required? Is there realignment? There’s a heavy focus on a number of these. Maturities in terms of making sure if we’re writing bridge loans, well, are we requiring a carrier guarantee? And if so, then who’s the guarantor? And so that goes back to what’s the strength of the sponsorship. So just think about 2023. A lot of it was just re underwriting the book. And making sure from a liquidity perspective we felt like we were in a good place understanding where the distress lies. Know probably a quarter of our business is multi, but we have big in office buildings and hospitality and exposure across other asset classes where there are certainly more challenges. So on the multi side, there’s still plenty of appetite. Clearly liquidity, it just starting with where is value.

 

Gary Bechtel [01:30:31] But it’s also market by market, right? I mean, Florida is on fire, right? This is a great market. Insurance aside to lend in other markets. You know are have have their challenges for sure.

 

Noah Miller [01:30:43] I want to talk a little bit about loan maturities. I know it was touched on earlier today. And obviously it’s it’s it’s a little bit of a looming if it’s a looming threat, but it’s definitely something that we all think about in the room. I think the number MBA came out and said I think 49 billion was multifamily loan maturities in 2024. I know we’ve seen some this year, but we’re going to see a lot next year. Chad, I’m hoping you can give some input as to what you’re seeing. Our clients are starting to get nervous earlier in the process and coming to you and saying, what do we do in this matures knowing maybe there’s no take out, maybe give us a general sense of what’s happening with these upcoming maturities.

 

Chad Musgrove [01:31:22] Yeah, I mean, I would say that while some clients are nervous, I think those clients do tend to be the younger investors, I would call it, like how, you know, Maggie mentioned the syndicators, but I think, you know, a lot of your very sophisticated clients are, you know, taking the approach of, hey, I’m going to be proactive and be prudent and say, look, let’s be realistic about this. Right. Where is my deal sizing today? What type of terms can I get if we’re looking at agency? Right, If I’m lower leverage. I think it was mentioned earlier by Cal, you know how much I owe can I get? And, you know, really, how is my underwriting going to look? So again, to the point of spotting value, right, we we always want to have, you know, some type of appraisal or something that we can get. But, you know, typically we’re working off of the previous information we had. You have to remember, for the agencies, we’re we’re always looking for history. We’re looking at historical numbers. Right. And I think a big piece even to kind of earlier what Carl and Maggie talked about is that, you know, we’re very focused on, you know, accounts receivables, air reports. Right. How is the property performing? What are the concessions look like? You know, what’s the bad debt at the property? Because, you know, while you may have now ramped up and, you know, you’ve gone through your lease up, but what kind of concessions where you offering. Right. If it if it was a value add bridge, is there still bad debt at the property that’s, you know, post-COVID, Right. Well, when is that going to come the place? You know, how how are you go? Are you just going to write that off? What are we going to do? So I think it’s more of a prudent approach. I mean, listen, I’m not going to sit here and say that, you know, there are some clients that I’ve literally had a candid conversation on the phone with and said, how much money do you expect to lose? You know, your equity has been wiped out somewhat for the most part. But, you know, from there, that’s where we kind of switch mode from looking at an agency execution to perhaps if it’s, you know, a larger client where we look at some type of asset manager execution or our life go execution. So, you know, I think the big thing is for multifamily. Well, we often talk about distress. We talk about the folks that are raising distressed funds. But is the multifamily really distressed? Because I’ll tell you right now, I get three or four phone calls a week saying, hey, how’s the bank’s balance sheet look and what do you have coming off of the construction line? You know, what are your guys talking about? Do you have a deal that I can buy? Maybe we’ll buy the note or, you know, maybe we’ll buy a piece of the note and move this the lender to, you know, to the piece. So it’s about how do we get creative and get in front of what you have coming so that we can proactively manage your portfolio.

 

Noah Miller [01:33:58] Yeah. I want to ask Gary and Evan a question. Do either of you guys at all buy distressed debt or maybe potentially raising a distressed that fund?

 

Evan Katzin [01:34:09] We don’t. I mean, in theory, yes. What we’ve done this year is we bought secondary notes. So I wouldn’t call it distress from the perspective of a value. Right. So we bought a piece of a big. Syndicated. Student housing deal that at the time is originated 12 months ago. It is probably 65% value. We think it is more like mid seventies and there’s a price adjustment that comes with that. So that was an opportunistic one off trade where we got back leverage from the bank. That’s a business we’re certainly trying to take advantage of like distress NPLs. Not today. Yeah.

 

Chad Musgrove [01:34:42] And I’m sorry, go ahead. So I was going to say, just add a quick piece of that. Right. Like, as you know, buffalo based bank, we have a lot of clients that are from, you know, Canada and Toronto. And and one thing that we see with these clients is a lot of them typically tend to be, you know, larger fund managers, etc., and they struggle with their operators sometimes in the U.S. and that may be an operator that either came from Canada or it could be a local group. And when things go awry or go sideways. Right. It’s like, okay, what what’s going to happen? Who’s going to step in to operate this property? And in particular, speaking to that point, we have one group, you know, Toronto based group had a property happen to be in California, you know, and they had funded the majority of their construction, you know, from their farm, but they were now taking the property back. So, you know, you had $100 million plus transaction that they now have, you know, essentially a first lien position at 65 million. I don’t know about you or the people you know, I don’t know about you guys on the stage or anyone else in this room. I’ll take a triple digit transaction at that value all day and then it again it becomes a price correction. Now it’s where can we refinance them out of their position and effectively it becomes a 100% equity deal. Right? Because even though it came from the fund, now they’re the owner and they’ve stepped in. So, you know, I think I think we will see more of that, too. But let me say, you know.

 

Gary Bechtel [01:36:07] We’ve taken a little bit of a different tack. We started a fund last year that’s that’s now closed to acquire either notes or distressed properties internally or externally, meaning we can buy from one of our funds, which we have. We could buy it from an external fund, which we have not yet, but it does have that mandate. So that’s how we’ve attacked it, right? We’ve used it to buy distressed assets out of one of our funds to provide liquidity to the fund, to the fund can re lend, and that’s actually turned out pretty well. So we’re in the process of doing another fund with an institutional partner that will focus only on buying distressed debt and to a lesser degree buying distressed assets in in 24.

 

Noah Miller [01:36:50] I want to jump in quickly. You know, Chad, you mentioned asking clients how much they’re willing to lose. And I you know, I’ve been in this industry since 2010, and a lot of people in this room have been in the industry a lot longer. This is the first time I’m seeing cash and refinances on the panel by show of hands. How many of you have seen transactions or worked on transactions with a cash and refinance?

 

Maggie Burke [01:37:13] Can I put both hands up everyone.

 

Noah Miller [01:37:15] Out of the audience? I ask the same question How many people have either been involved in a cash refinance or seen a deal that needed a cash refinance? That’s a lot. I bet if we asked that question two years ago, people would think you were crazy for even asking it.

 

Gary Bechtel [01:37:27] Or you. Now you know why so much prep is being raised to provide rescue or White Knight Capital.

 

Noah Miller [01:37:32] And I’m glad you mentioned that. I want to talk about that. I know there’s a couple of people on the panel doing press. Maggie, I know you’re doing a little bit of press, maybe mention what’s going on in the prep world today. And is pref a suitable option for cash and refinances?

 

Maggie Burke [01:37:43] Yeah, that’s a great question. And I think that, you know, when everyone sort of saw the writing on the wall and valuations were kind of coming down, people say, Hey, I’m going to sit on the sidelines, sidelines in terms of acquisition and I’m going to raise a pref fund, right? Everyone’s like, there’s going to be need to be pref out there. I’m going raise a pref fund. It’s great in theory, but you got to be able to pay the pref provider, right? So your deal’s distressed and you can’t even pay your first mortgage. It’s gonna be really hard to find a pref or mezz provider that’s willing to to do that in a second lead, right? So I would say we’re seeing press asks, but I put them in two different categories, right? Like the really distressed and then the opportunistic. You know, a lot of our clients, we’re taking higher leverage bridge loans over the last few years to execute on value plans. What I’m seeing right now from some of my clients that are buying value add deals is they would rather do long term fixed rate debt maybe at a lower leverage and then take out pressure for that to finish up that value add plan. Right. So that they have a little bit more certainty they can sleep better at night. But their plan is to then take a supplemental out and take out the prep in a couple of years and save completed that. The beauty there is that there is money to pay the provider. So I would say we’re seeing a lot of requests from that. But we’re also seeing, to Chad’s point, a lot of borrowers coming to us saying, hey, listen, I need prep for this, and then we have to have those tough conversations. But I think it goes back to getting creative, trying to figure out is there a way that we can really move the deal forward in the current state that it’s in?

 

Chad Musgrove [01:39:09] Yeah. And I mean, I think, Maggie, one thing to add to that, Ray, you know, you see in our world that there’s also a difference between hard pref and soft pref right? The MBA agencies view that. Very, very, very differently. And, you know, this horror preface involved, I can tell you nine times out of ten that this was probably not going to work. You know, they just they they don’t like it.

 

Noah Miller [01:39:30] So you mean your current favorite?

 

Gary Bechtel [01:39:32] Yes.

 

Chad Musgrove [01:39:32] Yeah. Yeah, exactly. So, you know, I think the other big thing that you look at as well, too, and Maggie brought up a good point. You know, when you start having those kinds of conversations, like the the point that I mentioned earlier, I have a client right now that has a deal, you know, in Daytona, you know, took a senior plus a Mayes. I mean, the property is probably 87 to 90% levered today. And literally the idea that I came up with, I was like, well, why don’t you tell your press instead of becoming approved? Because the numbers aren’t going to pencil. You’re going to get to like 75% last dollar. And it was actually a deal where he brought in his his family. I guess it’s a family partner deal. So there’s no more institutional capital raise. There’s no one to call. Right. So what we said was, hey, why don’t you have your pres actually step in as the senior pay the senior lender down, move them to a BPP’s analog. You just kind of weather the storm. They’re going to sit there, they’re going to play nicely as a second lead lender and we’ll see what happens down the road. Now, this lender is a blessing, but I know Gary, I know.

 

Gary Bechtel [01:40:34] Why would why would a senior lender step back and go into a subordinate position?

 

Chad Musgrove [01:40:38] I get it now.

 

Gary Bechtel [01:40:40] That I was a paid out.

 

Chad Musgrove [01:40:42] Exactly. And so that’s the point. I think they want to have a pay down. They probably need to have a pay now with whatever money and who knows. But, you know, maybe they’re getting the capital call from the lender or whatever, you know, whatever have you. But I think to Maggie’s point, it’s how do we be creative and have these difficult conversations and keep moving the ball forward.

 

Gary Bechtel [01:41:00] And there’s going to be a lot of that.

 

Noah Miller [01:41:01] Yeah. Kyle, I wanted to ask you hold on. We’ve got to call it principal curtailment. It sounds a lot nicer.

 

Chad Musgrove [01:41:08] Like I like that.

 

Noah Miller [01:41:10] So so clearly there’s going be a lot of problem problem loans. That’s that’s obvious. Kyle What are the agencies going to do with these problem loans? Do they force the borrowers hands? Do they start to extend loans? What are they going to do?

 

Kyle Jemtrud [01:41:25] They’re definitely not going to extend loans. I mean, we’re already starting to see it, you know, and some of the deals that I did in Minneapolis years back that were in great areas in Minneapolis that now post George Floyd are places that no one want to live and the gangs have taken over. We’ve got a couple of deals in special servicing and we’re trying to force sales or we’re going to end up taking these deals back. The agencies really don’t have a lever to extend this. So, you know, when that balloon payment comes, do you have to find a way to get out of it?

 

Chad Musgrove [01:41:58] Yeah, I mean, looking and one thing to add to California where I like, you know, when you think about it, the agencies have a fiduciary responsibility to our investors in our securities. So typically those deals are going to be put out to market with, you know, some of the household names that, you know, is, you know, sales providers. And so, again, to the point where we get the calls like, hey, you know, what do you have on your books? Can I you know, can I get in front of a loan? You know, it’s it’s a difficult conversation for us to have sometimes because, you know, we have to look at that ability. But at the same time, you got to talk to your borrower and say, hey, man, you know, what are you going to do for.

 

Gary Bechtel [01:42:33] Chad if that borrower equity has been vaporized, right? Is the agency assuming borrowers equity’s been vaporized, but there’s still a deficit, as the agencies are. The agency is willing to sell at a discount to face to just get it off the books.

 

Chad Musgrove [01:42:46] Well, what you have to remember is the agencies we don’t own, we don’t manage, right? So that’s why we underwrite the way that we do now. I mean, listen, I think the fact that the short answer to the question is I don’t know that we’re probably more of a servicing asset management question. I mean, look, last week this is, you know, first cycle kind of coming around for me. But I think the piece that you have to think about is, again, if we’re going to list the transaction and go to market, we’re trying to get the highest and best price for it. Right. But at the end of the day, to have is why the market is going to determine value and what that property is worth. You know, I mean, look, is as smart as everyone is on this panel, we all know that loan, you know, lending in today’s world is debt service covers constrained, you know, no debt cover amortization rate. All right. There’s there’s there’s no way to fake that math.

 

Gary Bechtel [01:43:42] It’s just math.

 

Maggie Burke [01:43:44] Yeah. And I think to that point, too, you know, everybody up here, I think is very a very proactive banker and lender, but really trying to work with your clients. One thing that we try and do at Capital One specifically is just really get out ahead of those things, right? Like we have our servicing teams, our asset management teams. We’re knowing when these things are getting more challenging. And so I’ve been advising my clients, Hey, look, you’re kind of what is the path forward? And if there is no path forward, perhaps it’s doing a defensive sale right now to preserve your reputation, because once you default with the agencies, there’s no track forward. No opportunities moving forward to finance with them. So I think, you know, being a debt broker is one thing, but we try and really take more of an advisory approach to really help our clients weather the storm.

 

Noah Miller [01:44:32] Evan, I want to ask you a similar question in terms of I asked Kyle and Chad about the agencies and what’s happening when loans are maturing and there is no path forward. Same question on the bridge side. You know, I assume there’s a lot of deals that you did as a bridge 12 months ago or 24 months ago that everyone thought they now would see permanent financing. What do you what are you doing? What’s the approach that alliance is taking once a loan is maturing? There’s no path forward. Do you work with borrowers again? Do you start to force their hand? Yeah. One of the benefits of our shop is we have both unlevered and leverage strategies. And on the leverage side, we have not tapped into the CLO market, so we don’t have a gun to our head, right? We can be creative. We can be flexible. Some of my peers at hedge funds, you know, they’re just trying to squeeze fees to get more time.

 

Evan Katzin [01:45:20] We’re in the business of trying to deliver and make sure we’re ultimately paid off. Right. So, again, each each deal has its own idiosyncrasies in terms of where the risk may lie and what that workout looks like. But generally speaking. Working with borrowers. You know, a couple just interesting deals that come to mind. There is one situation where, again, we had a vacant office building. We ultimately crossed it with this individual’s the lands where he was building his new home in L.A.. So that was one way to effectuate a payoff. Another was a vacant office building in D.C. that, for a good while was spun, was trying to figure out a solution there. Clearly over levered. And during those new negotiations, we reached out to three multifamily developers. And ultimately we structured a deal where we never took the deed. A developer stepped in at our basis, covered closing costs at close and put up a carry guarantee for two years. So they said, Listen, we’re going to guarantee operating and interest cost for the next 24 months. We’re going to go try and figure out the development. This is great there. It’s in the CBD, two blocks from the White House. And from our standpoint, we have a new sponsor, a new business plan, and we’re buying two more years of time.

 

Noah Miller [01:46:39] Got it. You got to get creative right now. That’s what it what it seems Kyle, Maggie kind of touched on it about getting in front of issues. But when clients come to you, you know, there’s an issue, you know, that there’s potential that a deal could fall apart. What can you do to make sure deals don’t fall apart at the altar? I mean, I personally have seen, you know, I see a deal every month that we’re going to close. And because if something pops up at the last minute that we were never told the deal was killed, you know, how are you guiding your your borrowers and clients to make sure that nothing pops up at the last minute?

 

Kyle Jemtrud [01:47:12] The key is to be proactive on the front end. We we spend a lot of time looking into deals, researching, you know, putting together a solid underwriting and understanding and asking all the right questions before we ever issue a term sheet or issuing an app. It’s vital that, you know, Chad mentioned it earlier, you know, age receivables. I mean, understanding what’s going on at the property. I mean, are there deed restrictions? Are there you know, what work’s been done at the property? You know, we’re we had a deal in Doral closed earlier this year that, you know, the borrower said, you know, it was a surprise. Oh, by the way, I converted my office into a unit and I didn’t get it permanent, you know, So so like, those are the questions. I mean, now you just you learn from every mistake. And we just keep asking more and more and more questions as we go to make sure that when we start something, we close it as presented.

 

Noah Miller [01:48:09] As we saw a deal earlier this year, an individual owned a property in North Carolina and we were doing the first mortgage. What he didn’t tell us was that he didn’t own the property. And of course, we didn’t find out until Title came back. His partner owned it. He was claiming he was the owner, but it was his partner. So we see some crazy stuff in this business. I do want to touch on insurance. I know that’s the elephant in the room, especially here in Florida. Just give this is kind of an open question on some stuff that you’ve seen, again, how you’re prepping your clients if the agencies or lenders are willing to work with you. I know the agency agencies have some waivers. I’d kind of like to hear what the bridge lenders are doing in terms of insurance. So again, I’m kind of opening this one up because I know everyone has their own war stories and everyone can have a little bit of a different opinion, but it’s definitely something we have to touch on.

 

Kyle Jemtrud [01:48:57] I think the worst one that I’ve seen is a deal actually we’re working on right now in Cape Coral, 282 unit brand new class-A Greystar managed under Gray Star’s umbrella policy and insurance went from $180,000 last year to $510,000 next year. It really resulted in a $6 million haircut and proceeds, luckily was a large cash out. So it will work. All right. But I mean, it’s a real conversation that you have to have. And going into looking at deals, it’s something that we talk to people about. We had a deal fall apart outside of Charleston where we warn the sponsor we were like, go out and get insurance quotes before you take this under contract. And the deal ended up blowing up as a result. And they lost a lot of money because of it. So that’s a very key thing in coastal markets right now.

 

Maggie Burke [01:49:46] Yeah. And I would just say to, you know, this is really where it’s important to work with a broker that’s in the market and knows the current lending expectations and the buttons you can push on to know his point about waivers. Yes, there are waivers that can be had with different lenders, even with the agencies. But you really need to have a banker in a representative that knows the program and knows what’s needed to help get that waiver across the finish line. Sure, Kyle’s dealt with this a lot lately, but it’s not as easy as just saying, hey, there’s a waiver and then it gets accepted. You really have to provide them comfort and really mitigate the risk. Right? So showing. Okay. Hey, what is that coverage out there? What are we able to get? And our is the lender covered in an event of a casualty. And so really understanding and knowing those programs is really key. And then also, again, focusing back on sponsorship, it’s a lot easier for us to get insurance waivers if we have a well-heeled sponsor who has experience and has a good balance sheet. So those things are really helpful. But to Kyle’s point, knowing that upfront and vetting those things out before you get too far down the line is really crucial.

 

Gary Bechtel [01:50:52] You know, in most markets we’re again, Florida and Texas and California aside, you know, we can actually get the insurer to what the durable value is, is the amount of our loan here in Florida, where there’s no way in hell you get it right. You’re lucky to get insurance, number one. And number two, it’s typically for, you know, maybe the houses value or the as appraised value as assessed value or some lower amount. Right. And even that is problematic. But, you know, we don’t we’re not waiving any insurance. We still require insurance at some level.

 

Chad Musgrove [01:51:23] Yeah, I mean, I think so. Just to put it in perspective for the room, right, Like from Kyle’s plane insurance card from an 8500, I mean, I think, you know, here to be helpful for people to understand when we look at this, you know, you think about it from a per unit basis, right? I think so. I got here in Florida in 2014. I mean, I can remember, you know, screening and underwriting deals where insurance was five 5750 a unit. Fast forward to today. Those numbers are north of 2500 a unit. I mean, you know, some deals in south Florida, you know, homes that flow plane. I mean, you’re you’re talking over $3,000 a unit. So two cars point when we start underwriting a transaction. When I look at a deal today, I tell the sponsor, hey, here, the agency guidelines for insurance start now, start working on it. Now from the start, a deal it used to be that we go through underwriting, you know, maybe two or three weeks from close. We know we’re going to come in and we’ll start the insurance process and we’ll get it done in two mags. Why we’re going for those waivers. I mean, you’re getting multiple bids. They want to understand the coverage, what they can’t get, you know, where is the windstorm at, etc., etc., etc.. Brain damage, Brain damage, brain damage. And we’re just fight with the agencies for you. But like really, you know, think about those numbers. You have sponsors that, you know, it’s a cause point. They have to come to the table with a what, a real check for insurance. You know, I have a client here, a South Florida affordable client, you know, down there, Dateline. And we met with them a couple of weeks ago and they said they are literally underwriting to a 35% premium increase year over year. That’s their expectation. So I think the big thing to understand and remember, too, is that it’s also not today when you close in that long where your insurance is, but where are you going to be a year from now or two years from now? And how is that going to affect, you know, your cash flow on the property? So I think, you know, I think that’s one to really consider is, you know, as providers pull out of the market, how much either give me assurance or.

 

Kyle Jemtrud [01:53:23] That’s actually something that I mean if I’m going to knock down the agencies on one thing is that they were completely unprepared for this and on deals that are currently in servicing, I can’t tell you how many phone calls I had from borrowers that have. 1970s vintage, vintage, classy deals in Fort Lauderdale that are like, my insurance is so high on my renewal. And one of them is actually an insurance guy in Fort Lauderdale called me and he said, My insurance renewal is going to be so high that I’m not going to debt service, I’m going to go into technical default. What do you want me to do? And we haven’t gotten a clear answer from the agencies. I think it’s a failure on the scale.

 

Noah Miller [01:53:59] What are you telling that gentleman in that situation when he’s about to enter technical default?

 

Kyle Jemtrud [01:54:03] I insure your property. You worry about that later.

 

Chad Musgrove [01:54:08] Yeah, well, I mean, I look into this point, you know, candidly, that has been the agency’s stance is to put it back on the borrower. They need to figure it out if they need to go get, you know, a standalone policy. Right. I have a very large institutional client as Florida portfolio. And you know, Texas, when we were looking at the deal and and Fort Myers BTR deal and I kid you not I think I shared this with them. We literally went under application on a deal on a Wednesday and because they have their umbrella, a standalone policy, they were able to get a quick insurance quotes in between interest rate and this was this was maybe I’d say three months ago between interest rate movement and the insurance coming back. The deal went under went under application on Wednesday and it died on Friday. And they just decided, they said, look, we’re just going to leave the property on your credit line and, you know, when rates come down, hopefully we can make the deal work, but we can’t hit our return number. So yeah, it’s a real issue.

 

Kyle Jemtrud [01:55:04] But you guys are I when I’m not on an airplane, I live in Southern California. But what what is driving the increase in rates? Is it storms? Is it insurance? It’s guys pulling out of the state. What’s driving it? I mean, the big thing is for the agencies, it’s the business income loss and windstorm. That’s the key piece that no one can get insurance on and that that’s driving all of the upward movement in rates.

 

Maggie Burke [01:55:30] And Gary, to your question, I was at a recent Mortgage Bankers Association meeting and we had a presentation from Lockton and Lockton said at this point it was in September. So September of 2023 we were at already. Over the number of, you know, like major storms or claim storms that cause claims in September that we were up all of 2022. And so it’s a combination of, you know, we’re seeing more, you know, events, weather events that are causing property damage. And then also, I mean, insurance carriers, I mean, it’s like they’re gamblers, right? Like they’re just hoping that the premiums cover their losses and now they’re seeing that the losses are not covering the premiums. So there are a lot of carriers that are getting out of the business because they’re just not making money. It’s a return game. Right. Know this.

 

Gary Bechtel [01:56:19] We have this in California for different reasons. Yeah.

 

Maggie Burke [01:56:22] Exactly. The fires. And then in California, too, there’s a challenge where, you know, the state is trying to impose, you know, certain regulations on what premiums the insurance carriers can provide. And that’s causing more people to exit the market.

 

Gary Bechtel [01:56:33] They’re actually trying to stop insurers from leaving the market their fault. They’re trying to force insurers to stay in the market and lose money.

 

Maggie Burke [01:56:41] Yeah. And so that’s in California. Yeah. So but that’s causing more ripple effect in South Florida, too, right? Because there’s less carriers here. You know, everyone’s feeling it in other areas. And so, again, it’s return game. You got to make some money. And so, you know, premiums are going to go up. So I think the you know, the challenge that we’re facing, you know, as as debt providers is how do we move forward? Right. I mean, we can all talk about the doom and gloom, but we got to figure out how to move forward. And one of the things that we’re trying to to help our clients with is there’s a lot of mitigation programs you can take advantage of to lower your premiums. So trying to educate our clients and help them take advantage of those products so that we can provide higher debt products.

 

Kyle Jemtrud [01:57:22] And we’ve actually we’re on a call the other day, National Call with Graystone, and we’re hearing that Freddie Mac is actually entertaining for some select sponsors, partial recourse for for insurance losses. So Freddie’s starting to think about it. I mean, Freddie’s always like the slow on the move, so I’m shocked they did it first. But hopefully they’ll be something coming in to help offset this in these high insurance cost insurance cost burden markets.

 

Noah Miller [01:57:48] We only have a few minutes left. Well, I’ll ask four questions in one moment. I just have one more question for the panel. I’m just curious, what are your clients thinking in terms of future? Are they locking in fixed rate interest rates now or are they floating in the hopes that they come down in the near term, future more? This is more for the agency clients at the moment. Just curious.

 

Maggie Burke [01:58:09] This is a great question. I think it really depends on your client base. Right. A lot of my clients were in super growth mode over the last five years, and so a lot of them are actually sitting on the sidelines right now, you know, and kind of looking at the floating rate that they took out and looking at the caps that they’ve purchased and kind of playing that game of like, okay, I think, you know, because of my cap, I can wait it out another six months. I’m going to see where interest rates go. So I would say it really depends on the profile of the sponsor. But the groups that I’m working with right now that are working on financing, it depends on where their equity comes from. You know, they’re trying to hit their return. So they’re going to put as long of fixed rate debt on it as possible to make the returns work for their equity. So if they have patient equity fixed rate all day long.

 

Gary Bechtel [01:58:51] Yeah, but the challenge the challenge is if you put a fixed rate deal on today, what’s what’s what would a ten year Fannie Mae Fannie Mae deal be today? So it’s high sixes.

 

Maggie Burke [01:58:59] Low sixes. Come on. Did you see the Treasury today?

 

Chad Musgrove [01:59:02] Well, what about.

 

Maggie Burke [01:59:04] The Treasury today?

 

Chad Musgrove [01:59:06] Coverage? I mean.

 

Gary Bechtel [01:59:07] You got to you got a 430 10 year Treasury.

 

Maggie Burke [01:59:10] 420 Treasury. Come on, let’s not. Okay. Yes, 430 Treasury.

 

Gary Bechtel [01:59:14] The forward yield curve on both Sofr and Treasuries. It’s doing this over the next two years. So why would you lock something in today if if it’s going to be a hundred basis points inside next year maybe?

 

Maggie Burke [01:59:24] That’s a great question. But the key to that is where do you think rates are going to go? Right. And so that is really where it comes. Because, Gary, I’d love to put a crystal ball in front of me and have your story play out.

 

Gary Bechtel [01:59:36] I have the lotto numbers and be on an island, but.

 

Maggie Burke [01:59:39] Exactly! I think all of us can agree on that. And some of that comes down to where the clients views of the future is and how comfortable they are with risk.

 

Kyle Jemtrud [01:59:47] And it’s not just rate risk. I mean, we’ve all been sitting up here talking about expenses, insurance costs. I mean, cap rates. I mean, no, nobody’s talked about, you know, the vacancy issues that we’re seeing in certain markets. So maybe you look forward two years and maybe you’re in a worse position even with lower interest rates.

 

Chad Musgrove [02:00:03] Yeah. So, I mean, look, I think you think about it like this, like Maggie said, dependent upon the client. Right. So we’re seeing some of our institutional clients who want to do, you know, they want five year paper. They want as much IO as they can get. They want to buy it on the interest rate. And they’re willing to say, hey, we’ll lock in that five year paper. They have recently added probably the first floating rate are you know, falling Freddy floater that I’ve done in I don’t know, maybe four years. Right. But they were essentially treating the deal almost like a bridge loan. They’re saying we’re going to do a you know, do the one year lock out comes with a 1% prepay behind it. And when you go to refinance, you can actually roll that prepay into, you know, the interest rate on the New Deal as long as you refi with the agency. So for them, it was, hey, that’s my hedge to have rates potentially come down on that deal. And then to Maggie’s point, some of the clients, you know, who are kind of in growth mode or maybe sitting on the sidelines, those guys for me are actually trying to buy a snowmobile deals right now. So I’m working on you know, it’s a deal in Chicago is $100 million acquisition. We’ve got a $46 million loan on it. But bear so in that deal, you know, a sub 3% rate.

 

Gary Bechtel [02:01:16] So I’m assuming the caps are going to be much lower on that because of the a similar financing. Right.

 

Chad Musgrove [02:01:20] The caps is going to be much lower on that. And throwing a little to to to No, that’s actually your your old shop is actually a seller on that deal. So you know so you you look at the different caliber of the sponsors. I mean, I think they’re treating it differently. But I think to Maggie’s point, it really does come down to the business plan of the sponsor and how they’re going to move forward and and listen, quite frankly, you know, where their glasses see, the last piece, I’ll leave, you know, is that if you look at the historical ten year in his lifetime, I think the average rate is somewhere around, you know, just over 4%. So if you look at where we are today, and I think the key note mentioned there. Right. We saw the ten year write all the way up to over 5% and now we’re down to 427 today. If we and my and this is my personal opinion, if you know, we have an additional fall of, say, you know, 15, 20, 25 basis points and we start to get around that 4% mark. And, you know, still seeing that deals are coverage constrained and you’re in the you know, call it mid-sixties on leverage. If you’re somewhere and you’ve got good mission and you’re around a call it a 180 to, you know, 170 spread and you buy that rate down. Now you’re in the one fifties. We start to talk about deals that, you know, are at a five and a half percent interest rate. And if you look at cap rates today being somewhat over 25 and a quarter 575, you’re getting out of that negative leverage with.

 

Gary Bechtel [02:02:44] That’s the break point. Five and a half percent is a break point of the LTV versus coverage constraint.

 

Noah Miller [02:02:49] Perfect. I don’t mean to interrupt, but I think maybe we have time for one or two questions from the audience, if anyone has.

 

Noah Miller [02:02:56] Yeah. I mean.

 

Noah Miller [02:03:04] Do you mind speaking up a little bit?

 

Unknown [02:03:16] For the agency when there’s been a, you know, recent circumstance that rose between a certain brokerage firm and Freddie Mac and that sort of permeated. So I’d be curious to hear if Fannie and Freddie have instituted any policy changes as far as submittal approval prescreening that might affect broker dealers versus direct deals.

 

Kyle Jemtrud [02:03:35] Fannie Mae has instituted that all broker dealers must now be pre reviewed. Fannie and Freddie reviews deals. You know, once we when we submitted to them for final underwriting. So they’re already getting their shot at it at the back end of Fannie and their shot at it on the front end, given the delegated process.

 

Noah Miller [02:03:51] And any other questions from the audience? Yes, sir.

 

Noah Miller [02:04:00] Maggie, you said something about Freddie Mac. That’s what they’re going to. You said they’re going to ask the borrower to guarantee the insurance loss.

 

Maggie Burke [02:04:10] Oh, I think I was. Is this an insurance question? Yeah.

 

Kyle Jemtrud [02:04:13] And I don’t know very much about it. It was mentioned very high level on a call that we had on yesterday, I guess, at that Freddie Mac. For some select sponsors are entertaining some level of recourse for insurance losses from the sponsor.

 

Unknown [02:04:29] That’s. Now, the next question I have for you. Sure. So when the special services start getting hit with this march will part those. How do either of you go? Why do you think that they’re actually going to react with the realization that some of those policies they only started to trouble? And it just doesn’t hit until next year. Well, then what if we have a lot of units? So we’re looking at these things. And what about that title? I think the problem might come next year.

 

Chad Musgrove [02:05:07] Well, will you say how they got to got the allocations like she had. Do you mean as far as the caps go for Fannie and Freddie?

 

Unknown [02:05:13] What I can say is everything changes with the X Files for having the special servicing. And there’s a lot of stuff that’s, I think the special service like here in Southeast with the board seats some of these places, it’s pretty good.

 

Maggie Burke [02:05:28] Yeah, I think that your question kind of is across all lending types too. And in the entire industry as a whole, whether you’re on the equity or the debt side, you know, there are losses that are happening or foreclosures that are happening, valuations are falling. That’s going to be felt across the board and valuations on acquisitions or things like that. So I think it’s going to affect everybody. You know, if things go sideways and there are some foreclosures and things like that, I think all lenders, you know, just valuations across the board are going to be challenged. In terms of your question about how they’re going to handle it, I think it’s really a one off basis, right. Really seeing what the deal is and what the situation is. Right. And what the path forward is. It’s hard to kind of paint with a broad brush in that sense.

 

Unknown [02:06:09] And I mean, I have a special message right here that we got.

 

Chad Musgrove [02:06:17] So, so, so, so, so, so so at this point. Right. Like, I think, you know, again with the agencies. Right. We we look at historical sales, let’s look at history. I mean, there’s a lot of people in this room who’s been in the business longer than me, Gary, including, you know, opine on this. Well, you’re right. That’s good. Well, if you know, if you go back and you look at let’s take 2008, for instance. Right. I’ll go ahead and date myself. I’m class 28. The world was a mess was coming out. You know, I was fortunate to get a job. I ended up, you know, as an airline in New York, so got into the agency business. So I saw 2011 when we came out on that ramp up on the bell curve. Right. I’m also from Mississippi. So when you look at 2008, if you look at oh five with Katrina, remember what the agencies did, right? They said, hey, we’re going to step in. We’re going to figure this out. The thing that you have to remember about Fannie and Freddie and FHA, it is our duty to continue to provide liquidity to the market when other players step away. So, I mean, honestly, if I’m speaking selfishly, yeah, let’s let it blow up. And the agency got to just the last one standing, Right? We’re we’re coming in. We’re coming in with the shifts. But let’s, you know, let’s not go to the end of the spectrum. You know, to Maggie’s point, I think every deal is different. You know, you got to look at that deal. But think about it. And I’d probably know the group that you’re talking about, you guys are very prudent in your underwriting, Right. So you’re going to underwrite the deal a sharp way when you’re looking to take over that asset or buy that asset. And honestly, the goal is you’re probably going to try to get to that, sell it directly first before those issues even start with us. Right. So you got to remember, as a as a part of the just the business cycle in general, a lot of the agency sponsors here, you know, Greystar or Cushman Wakefield, you know, we work with Marcus, I mean, other groups, CBRE And to Maggie’s point, we get these low servicing reports. So there’s going to be coordination through all of the pieces to say, hey, this deal is having a few issues. You know, let’s start talking to the sales team. If they’re open to a sale, you know, what are we doing is coming up for refi. So I think it’s just about being proactive and, you know, being prudent. And it starts with the people on the stage being in front of our sponsors.

 

Noah Miller [02:08:27] Perfect. Thank you, guys. I want to end on a note in all seriousness on Charlie Munger. He was one of the brightest of probably the last few generations. And I wanted to read a quote he had on real estate because I think it’s very topical. He said, “If you’re going to invest in real estate, there are going to be periods when there’s a lot of agony and periods when there’s a boom. I think you just have to learn to live through them.” Very succinct, very simple. That was Charlie Munger. Thank you, everyone, so much. We really appreciate it. Thank you so much to the panelists.