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Every Friday, join us as we dive into the latest in real estate multifamily with David Moghavem, Head of East Coast Acquisitions at Trion Properties. David invites top experts who know the ins, outs, and trends shaping the real estate multifamily market across the nation!
Whether you’re a seasoned investor or just curious about where the next big opportunity might be, Deal Flow Friday brings you the weekly inside scoop on what’s hot, what’s not, and what to watch for in today’s ever-evolving real estate scene.
David Moghavem (00:17)
Welcome to another episode of Deal Flow Friday. I'm your host, David Moghavem and we got Max and Mitch back on the pod. Yes, exactly. From the beginning of the year, we had a good predictions of what we think 2025 is going to be.
Mitch Paskover (00:25)
We're sorry about it.
David Moghavem (00:35)
And here we are almost halfway in. it's, guess, good to have a little bit of a recap, So first of all, how are you guys feeling? Yeah, good. Yeah, good about the year.
Max Sharkansky (00:43)
You good?
I mean, it's, you know, it's been a little chubby with everything, with the tariffs and who knows what's going on with the interest rates
David Moghavem (00:51)
Yeah.
And there's now this announcement. I think it's happening right now that Trump is meeting with the UK maybe.
Max Sharkansky (00:57)
Right. It should be interesting to see what the framework of that is because I'm sure a lot of a lot of the other countries will analog off that framework. That'll probably set like the precedent. What the template is. Yeah. Trade deals. Yesterday was the Fed meeting and Powell said we might have inflation. We might have a recession. So whatever that means.
David Moghavem (01:10)
Yeah, exactly.
Yeah, and we're gonna dive into that too. know, Max, I guess we'll jump into that first. I'm gonna add some quotes here from episode one. So it'll be fun to read the predictions. We have the receipts. We have the receipts.
Max, episode one. And I quote, you said, the tariff thing. It seems to me like the crowd is saying tariffs are inflationary, which they definitely are in the very, very short term. But at the same time, when prices on products rise, that brings down demand, which will theoretically hurt the economy because products will get more expensive and the demand for products will go down. So the sales of those products will go down.
That's more recessionary than inflationary and that can actually help interest rates. Do you still believe that? ⁓
Max Sharkansky (02:05)
too. Then
on that, think the capital markets support my thesis, right? At that time, I was definitely in the minority on that. And everybody was screaming at the top of their lungs, inflationary, inflationary. But with what's going on, and with what CEOs are saying is we're gonna have to cut jobs, we can't do this here, the tariffs aren't going to work. I think that I was in fact, That if you tax something, whatever that product is,
The demand on that product goes down. So if the demand on a product goes down, you don't need as many jobs to create that product and sell that product and support that product. So it's recessionary. And that's why Powell said what he said yesterday where yes, you'll have inflation, but yes, it can also earn the economy. Um, so it's a little bit of both, but it's not real inflation, right? It's just a temporary price increase and.
then again, it could do a lot of But then there's also, of course, the theory that maybe it can incentivize certain American manufacturing, but that's a long conversation. So yeah, it's not just entirely inflationary. I think that's an all too simplistic way of looking at it of tariff means price goes up, that's inflation. And before they can't cut rates, it's not that simple.
David Moghavem (03:24)
Yeah, and I think the biggest takeaway from since Liberation Day was uncertainty. And uncertainty is lowering consumer confidence, which as you said, is is recessionary. No one wants the economy to get into a recession. But I think you're seeing that this tariff talk is more a lowering of consumer confidence than it is an increase in prices. That's inflationary. So I think that's totally, totally right in that regard.
Mitch, how are you feeling about this tariffs in regards to multifamily? How do you think it's going to impact multifamily overall?
Mitch Paskover (03:57)
I mean, you have to look a little bit deeper into sector by sector. I think what Max is saying is interesting, but I think you got to look at it sector by sector. mean, for example, sure, can you have screwdrivers that are coming from China now they're taxed 130, 140%. Is demand for those going to go down? Sure, but end of the day, there's still a big construction business. There's a lot of people that still need screwdrivers. And I just read an article a few days ago about
how a few American companies have, quadrupled or quintupled the production of, screwdrivers or other materials because the market still needs that stuff. So that is inflationary, right? For example, in terms of multifamily, Canada, if you look at the import export, I think they're down almost five and a half, 6%. We haven't seen that since kind of the COVID days. So Canada being one of the biggest, lumber exporters to the United States.
That's going to have an impact on construction costs, which is for us, right? Cause we're not really doing any development right now, but it's good for our existing product. So I think it depends sector by sector and is impacting the market. But overall, I feel pretty good being a multifamily owner right now, because that is having a effect on construction costs, which are still pretty high. can't really build multifamily for less than, you know, 325, 340 a foot.
That's what it's going for. So you're not having as much development happening right now, which is good for us because you're not having so much supply.
David Moghavem (05:29)
Yeah, and I think the supply already kind of tapered off before the tariffs. think borrowing costs really was even more dramatic to cost of capital than tariffs are right now. think tariffs is almost like the nail in the coffin with supply. think supply you already saw to see come down, which we were all looking forward to when you had this glut of supply hit the market and you started seeing our own operations start to take a hit.
with concessions, with bad debt. So I think tariffs does help that in the regard, but it's not really the impact that maybe some would say because I think the interest rates really had even more of an impact. I think even just if there was a, if there were tariffs still in place, but interest rates were to come down, I think you will still see a little bit more supply happen even with tariffs.
Mitch Paskover (06:24)
Yeah, I agree. mean, look, interest rates are the big one. Yeah. It's the wild card in here. and look what's happened with long-term rates. You know, they, they came down substantially when Trump became president, and then we went back up. So it's tough to kind of predict, you know, short-term rates or long-term rates, but they're bouncing back and forth and they're kind of where they were before Trump, you know, came into office.
David Moghavem (06:47)
Yeah, and going to interest rates, the audience, especially Omar loves that Max that you always predict how many rate cuts there are in a year. So I want to give the audience what they want. January 1st, you said that there would be more than two cuts this year. I think you predicted three or four. Do you think there's still going to be more than two cuts this year?
Max Sharkansky (07:11)
As we sit here today, May 8, 2025, yes, I do think that there are going to be more cuts. I feel more confident there are going be more cuts because of everything that's going on with tariffs and inflation coming down. I think that we saw the GDP contract first quarter. There are some indicators showing that the economy is weakening and there is less inflation.
So you also had Powell, I think four or five weeks ago say that we are moderately restrictive right now, which in layman's terms means rates are higher than they need to be. And based on all of that, yes, I firmly stand by three or four cuts this year. When they start, I don't know. We were all hoping for June cuts and on the CME, the Chicago Mercantile Exchange, which is the futures markets where people bet on
When that's going to happen as of two days ago, it was a 65 % probability for a June rate cut, which is now unfortunately about 20%. So it looks like we're likely not going to get a June rate cut based on what the fed set yesterday. Couldn't happen in July possible. August, we have a break and I would say by September for sure. I actually heard one analyst this morning calling it a football season rate cut cycle. Like last year.
David Moghavem (08:26)
Yeah.
Max Sharkansky (08:27)
So will we have a football season rate cut cycle? I don't know. We'll see. But I think we will have three to four cuts. Let me add one more thing. Yeah, sure. Let add one more thing to that. Is Bank of Canada, two and three quarters, they're cutting. Bank of England cut this morning. They're around four. People's Bank of China, they're cutting. I don't know the rate. European Central Bank. Yep, they're two and a quarter. So.
David Moghavem (08:33)
Yeah, I think.
Mitch Paskover (08:50)
that small.
Max Sharkansky (08:53)
We're behind the eight ball and all of the other central banks, or at least the ones that I mentioned, that they're being much more proactive and trying to get ahead of it. Our central bank is being a little more reactive. They want to what's in the data.
David Moghavem (09:05)
I think from the, from also to be fair, like from the tariff policy, right? I think, the uncertainty kind of shook things up where it's like, are tariffs being inflationary going to seep in or is the consumer confidence, which is more recessionary going to seep in more. And I think that's where you said the Fed is a little bit more reactionary because they're kind of waiting and seeing what the data comes out after this kind of post liberation.
Max Sharkansky (09:31)
Well, the Bank of England said this morning, they 25 basis points this morning based on the fact that they're concerned with what will happen with the global trade war. Right? So they're being proactive. They're saying we're concerned what may happen in the future. Right. Or our Fed is saying we want to see the data. We're going do anything. So they're more reactive. Whatever.
David Moghavem (09:48)
Mm-hmm.
Right.
Yeah, it's good to talk about. Obviously, we don't have a crystal ball, but it's good to talk about and think about as we structure our own investment strategies. Has anything changed from an investment strategy standpoint from January till now on what type of vintage, what type of assets, if nothing's changed, maybe reiterating what we're doubling down on as we're kind of almost halfway into the year?
Mitch Paskover (10:15)
Sure. I'll talk about a few things. mean, look, I think overall, it's pretty tough to raise institutional equity right now. You know, talking to a number of our partners and other groups that we've worked in the past, it's pretty tough to get the deal passed investment committee. Like most of the groups tell me it's got to be, you know, the no brainer of no brainers. So a lot of times what you're seeing in today's market,
We're just not seeing the rent premiums for renovations that we saw in the last four or five years, right? You're not really seeing value add deals where you can get 250 to 350 on a value add per unit. If you spend 12 to 15,000 a door, you just don't see those deals today, but you are seeing some deals that have some upside and you started looking at a cost basis in place, calculate basis. And it makes sense. It's still tough to get people to put some chips on the table.
I think there's certain markets and we'll talk about it as well, where, you you're starting to see some more activity being in Northern California. Maybe even in the Pacific Northwest, where people are starting to come in and looking at a basis play in feeling better about investing in those markets. And at the same time, you're starting to see there's a lot of political risk, you know, Washington just passed, you know, statewide rent control, similar to Oregon.
so you gotta be mindful of all these different things, but I think overall you're starting to see more opportunities and I feel like. People are ready to jump back in. It's just finding that right deal that is newer vintage, maybe, you know, 2000 plus or nineties. think people are really shying away from seventies and even the, you know, that extra in place cap rate that those deals are able to get you. People are really.
not moving forward with those, that product type, unless it's a no brainer, right? Yeah. It's tough to find and you can, you know, add your color, but it's tough to find nineties plus 2000 plus with a healthy cap rate, pretty close to where you're financing from the agencies. And you're going to increase the stabilized rock by 125 to 150 basis points.
David Moghavem (12:24)
Yeah, that rock is just that that spread between in place and rock is just like not as existent from a typical value add strategy. There's ways to get creative potentially with abatement and but it's just not there anymore from like a simple renovating. It could maybe be there down the line, but with all the supply and all this. Yeah, supply hitting the market, it's just been a lot tougher to find that spread. I think even more of our yield on cost.
are lower than the in-place cap because we're gain to leases and we're seeing bad debt starting to creep up and operations starting to deteriorate. So I think you're right, it's harder to get those investors off the sideline. But I think when you see through the numbers, you can see and you take a step back, you're like, this could be a good buying opportunity.
Mitch Paskover (13:10)
I think most groups are feeling this is the bottom right now. Brookfield just announced yesterday. It was all over the press. You know, they raised in the first quarter, almost 4 billion plus of equity to buy commercial multifamily and other product types. So I think they're going in aggressively in buying. So once you start hearing household names like, you know, Brookfield and Blackstone and they're putting chips on the table, you're going to see more groups invest in multifamily in these markets.
David Moghavem (13:41)
Yeah, Max, anything to add on kind of investment strategy?
Max Sharkansky (13:45)
Yeah, you know, if we're just talking about the country as a whole, I think a lot of people right now are talking about the Midwest. I would say, you know, from a contrarian perspective, I probably wouldn't go into the Midwest at this point, because it's pretty heated. I hear from a friend of mine who's pretty heavily invested in Columbus, Ohio, that Columbus is now trading in the
David Moghavem (14:03)
Yeah, the party's over. think party is
Max Sharkansky (14:06)
Yeah, in Columbus. Yeah, it feels like Boise fell right in for COVID in 2021. Everybody was calling me, like my dentist, my friends who are in other businesses, hey, what's wrong with Boise? That's when you know, right? That's Columbus right now. Yeah. And then other parts.
David Moghavem (14:13)
Exactly.
Yeah. Yeah.
What
was that? A clip from the Big Short where the stripper had like 10 houses and like, it's like put a short everything short everything. Yeah.
Max Sharkansky (14:33)
You
can draw a direct line between 11 and 11 is awesome. This is not a family friendly fun task. Anyways, and then you have all this wonderful rent growth, right? Everyone's abolished. Everyone loves the Midwest because of all this rent growth. It's stable. It's a good insurance market, right? The Sun Belt's getting killed. The West Coast has the politics. I would go the other direction. I think, you know, there's an old saying.
David Moghavem (14:40)
Yeah.
Max Sharkansky (14:59)
fish needs to swim, developers need to build. Developers are going to find that opportunity and what the Sunbelt went through in I think, know, 2020 through now basically with supply because Sunbelt has just an unbelievable amount of growth, right? It continues that population growth and has those fundamentals. The Midwest doesn't. So when they start to develop there, it's probably going to be pretty slow to absorb and can affect fundamentals for longer than some other places in the country.
like California, New York, Sunbelt, right? So I'd be really careful with the mid-wets.
David Moghavem (15:34)
this point, right? I think when you enter a market that has high rank growth, high demand, but low barriers to entry to build, that's where you got to be careful because once demand starts, the supply follows. And so I think you're kind of later in the cycle at this point with the Midwest to enter now because you're just going to be running into some supply.
Max Sharkansky (15:56)
Yeah. And if you think about it, what is the Midwest with all due respect, what does the Midwest really have going for it comparable to, let's say the Sunbelt or the coasts? California, New York, they have the best jobs, the highest incomes, they're super supply constrained. The Sunbelt has unbelievable immigration. They have fantastic weather and talent.
and they do have great jobs, not as good as California and New York, great jobs, income is growing, very business friendly, right? So you've got all these amazing reasons to buy, whereas the Midwest just didn't, they don't have the immigration, they don't have the jobs that pay like Google and Facebook on the West or, it's taxed.
David Moghavem (16:41)
It had the yield. had the yield. Exactly.
Max Sharkansky (16:43)
deal, and it had the
both of those are so the yields gone, and the rent growth is going away. So I would not invest there for those reasons. And on the flip side, we're bullish, again, going more contrarian. Not contrarian, I think the sunbelt will absorb recover fast, right? Like we own, unfortunately, only one property in Miami, we don't have any concessions to the only markets in the country where we have no concessions. rents are stable. Being
David Moghavem (17:09)
Insurance is coming down
Max Sharkansky (17:10)
Insurance is coming down, big top of the funnel. always getting a lot of calls and tours and you have immigration, you have absorption. So really, really strong. Right. And I think the other markets that were built like Orlando, mean, we're totally fine in Orlando. Some of these markets are overbuilt, they're absorbing. You have a lot of migration. And then West Coast, you know, I think I said it in our Q1 pod.
Is that long West Coast this year? I continue to remain bullish West Coast and we're trying to buy back in our own markets in the West Coast. So long West Coast.
David Moghavem (17:42)
Yeah, let's, let's stay on West coast for a bit. you called it that you were, you know, trial and we're focused on West coast and you're bullish on West coast. Since then there's been the wildfires in LA. There was an eviction moratorium in LA. I know West coast is more than just LA. a lot of people are nervous about the political risk. As Mitch mentioned, Washington just passed rent control. I don't think that rent control is so prohibitive, but
just having rent control being passed makes people nervous because it opens the door for worse. It always starts with the 12 % and then it gets a little more prohibitive. So what do you have to say about the West Coast of what's keeping you bullish overall?
Max Sharkansky (18:25)
So to your point, the West Coast is all right. So you've got great markets surrounding LA, although those cap rates are very compressed.
David Moghavem (18:35)
Like in the high E you're saying?
Max Sharkansky (18:37)
Hey, Orange County, San Diego. those are very compressed capris and I don't know if there's much room to go down further. you know, North Cali I think looks really interesting. You've got some, again, going back to jobs, you've got some of the best jobs in the world. Very supply constrained. Migration patterns tend to seem to have settled a little bit. I think we're probably looking at rent growth back half of this year and into next year. pack Northwest.
We're not really in Seattle not gonna comment on Seattle. I know they've had immigration I think they're a top 10 city again for immigration probably the only one the West Coast, which is interesting They have a lot of supply. They have the political issues. You have the exit transfer tax It's impossible to evict in the winter do without what you were We've been in Portland for probably 10ish years now, maybe a little more and I think Portland seems super interesting, right? There's no supply
you're starting to see the politics change that downtown Portland's getting cleaner. We're in the burbs and our properties are performing very, very well. So we'd love to hold onto our properties as long as we can there and continue to build a portfolio there because it just seems like it's about.
David Moghavem (19:44)
Yeah, it's actually interesting when pre-rate hike when people were picking markets they were solely looking at inbound migration and kind of chasing the Boise's and Sun belts and You even saw like a chart from 2020 to 2024 most of that inbound migration was like in the Sun belt, Texas, Florida What you saw that followed was all the supply and now
you're seeing where places that are maybe rent control or supply constraint are performing much better today because they didn't get prohibited by some of like the supply that hit the market. so Portland Bay Area supply constraint areas, they're the ones that the vacancies still, you know, in the 5 % range. There's little to no bad debt. People are paying rent and you're just seeing better.
operations than some of these other markets around.
Max Sharkansky (20:37)
That's right. That's right. Much, better operations.
David Moghavem (20:40)
Yeah.
Max Sharkansky (20:41)
There's something to be said for being supply constrained during the downturn.
David Moghavem (20:44)
Yeah, it's true.
we were talking about it in the beginning of the year and now we're seeing in 2025. I mean, at least what I'm seeing is that lenders are not willing to work out as much this year as they were the past two years. Everyone was kind of kicking the can to 2025 and here we are. Are you guys starting to see a little bit more distress?
coming online than what you typically saw in the past couple years? Do you think the wave of distress is starting to come? Maybe it's geography by geography. What are your guys' take on what you're seeing halfway into the year?
Mitch Paskover (21:18)
I think I look, could tell you talking to peers in the industry, lenders definitely have a different, you know, perception of the market. And I think, you know, extend to, to 25. Here we are. think they're getting a lot of pushback from their line lenders. So lenders are being a lot tougher on barbers and even lenders before that you have relationships with, you know, I think if they've given you extensions.
I think they've kicked that can as far as they can and they're going to make you transact, whether it's a recap or refi or sell. They want that loan off the books. I agree with you that there is distress in the market, but we haven't been able to find that many opportunities, right? I think by the time that we get our hands on a deal, we underwrite based on our underwriting. The price you were coming up with.
is not something where lenders want to transact. So there haven't, hasn't been that many transactions yet, but you are starting to hear about certain lenders selling portfolios at discounts and other deals, which could be interesting. You know, we just haven't seen that many deals come through our door yet that have been a fit, but I think you're going to start seeing that for sure.
David Moghavem (22:33)
Yeah, I think we have seen some that maybe are a little bit older vintage, 70s, 80s. I think once it starts getting 90s and newer, there's a lot more rescue capital out there that's saving those deals before it starts hitting the market and being sold. And I also think it's geographically, right? The ones that got hit harder operationally, like in Atlanta, I think you're seeing a lot more than that than
In Miami, we haven't even seen any distress, really. So I think geographically, it's starting to play out where some markets have a little bit more of a wave of distress, while there are some other markets might have one-offs here and there.
Mitch Paskover (23:13)
Yeah.
Max Sharkansky (23:14)
I think the distress that we're seeing right now, and I'm sure you'd agree with this is when the broker calls and say, listen, we just need to sell this at the loan basis. We've got a lot of those columns and I've probably worked on five or six of those in the last month and a half. So that seems to be where the distress is, is it's like a owner slash lender managed sale. That's the distress. I am hearing of some NPL portfolios starting to move around. So we'll see what happens with that.
David Moghavem (23:22)
Yeah. Yeah.
Max Sharkansky (23:41)
But for right now, as we sit here today, that's where I'm seeing this from.
Mitch Paskover (23:45)
But even on those deals that we've looked at and we've underwrote, we end up coming up a little short of the loan basis and the lender's not willing to transact. They're like, not yet. We don't want to take a haircut on the loan. So you might bid par on a loan because that's what the property's worth based on our numbers. And then when you really dig deep into it, you get your third party vendors out there and you realize, okay, we actually have to spend some more money on capital improvements.
Now you're at 90 cents on the dollar, 85 and the lender's not willing to transact.
David Moghavem (24:16)
Yeah, it's almost like the party's shift, right? When before when you were maybe at or above the loan amount, you were kind of talking to the owner. Once you start going through the numbers and go through the capex and you see maybe it's worth below the loan basis, it's out of the seller's control. And sometimes it takes a little bit of time and just hanging around the hoop to get the right decision makers to get off and move and make a move and capitulate to where the real pricing is.
Mitch Paskover (24:45)
you and I have seen on deals that we looked at, you know, in Charlotte and other stuff where lenders are busy or below kind of loan amounts and lenders were offering creative financing borrowers to offset that price, right? Where they said maybe instead of go out and get new bridge loans, we'll give you 90 % seller carry financing at, you know, lower spread than market, which gives you the ability to get closer.
David Moghavem (25:11)
Yeah. And the problem with those deals is you underwrite them and you realize it's going to be very hard to take out that loan at some point for some of those deals. They're especially, and you know, if you don't get the runway, like if they're only giving you that for two years or three years, you just don't want to end up in the same exact position that the seller's in. So I think those have been tough. We've seen a lot of those, but where the lender is willing to work and give you, you know, inside pricing, but they just,
make it tougher on the takeout loan because you can't really move the NOI to a yield where it's acceptable to take it out. Not with all the supply like in Charlotte, not with some of the collection issues. So when you're trying to be conservative operationally, that takeout loan is going to be much harder even with a little bit of
Mitch Paskover (26:01)
Yeah.
David Moghavem (26:02)
So do you guys think investors have been a little bit more receptive to coming to the table on new investments now that we're kind of quote unquote on the bottom? Do you think there's been a shift of investor appetite? And I'm not talking about the JVs, I'm talking about our high net worth family office space of over 1,600 active investors. Do you think those groups are starting to get
more intrigued on deals that we're working on. Yeah.
Max Sharkansky (26:34)
I think the smart ones are
listen, it's been a rough cycle. It's been a horrible downturn. A lot of people have been beyond just us with our own investors. have investors that invest with all different kinds of sponsors. They met the monk crowd, street or road, and they met them and they, everyone's been capital called to death. Right? So a lot of people are very fatigued and they've lost confidence in the industry and their sponsors and
They see that the S and P 500 has been ripping for the past few years and money's liquid daily liquidity, right? They made a 25 % return last year. They want to cash out and go buy a boat. God bless. Right. So it becomes very hard to raise capital in this kind of an environment, but the ones who are really smart and have the foresight, they're going to invest. Um, somebody reminded me a couple of days ago that
I think it was during a pod or something. said that fieldstone one, it was going to be the last six and a quarter cap of this cycle with that vintage and that asset quality. And I was probably right. Right. So somebody, so our investors, if you're listening to this, you were smart. Our investors who invested in that were really smart. three vintage, beautiful asset, six and a quarter cap. We rate locked mid September when the five year was at three and a half. We got low 5 % money with a six and a quarter cap.
And everyone's going to do great on that. So I would say the same thing for today. Anything you buy right now, especially in a more contrarian bet. Don't buy into all this. At a more contrarian bet, you're going to do great. Over the next five, seven, 10 years, real estate's a long-term play. This 18 to 24 month BS, that's not real estate. Over a long-term play, you're going to do great.
David Moghavem (28:19)
Yeah, and I would say to add to that, it's not going to scream off the page on an IRR, right? Buying at a six and a quarter cap and getting a low five rate, it looks great from a yield perspective, but you know, with our assumptions and reverting at a similar cap rate than what you're buying at, it's not going to scream off the page from IRR perspective. But you got to see past that. You got to see that this is a time where if you're getting cash flow and things don't compress, you're still cash flowing.
higher than what a CD would give you or a treasury. And so some of those unsophisticated investors, they're kind of looking at what's on paper, but they don't see the bigger picture of what you're really buying and what the yield is that you're actually buying, like a field stone glass.
Max Sharkansky (29:04)
So another way I think of thinking about that is.
Cap rates are as high as the events of the GFC. So you know they're not gonna go any higher, right? They're already starting to take down the bid, which means you can only get so hurt falling out of the first floor window, right? Like you're at the ball. So cap rates aren't gonna go much higher. In these models, investors are looking at it like, okay, the sponsors aren't writing, they're buying a six and a quarter cap. What was our exit cap in the end of there?
So we underwrite a five and three quarter cap. So they're like, okay, that seems reasonable, less doable. It's got good cash flow. It's going to make a 17, 18 gross iron. I'll make it 13, 14, 15, whatever. That sounds good. But what's the upside scenario? The upside scenario is cap rates come press further as interest rates come down, which they will, as we discussed earlier. The US and central bank is just a little bit behind the Able.
inflation is at two, neutral rate should be around two and a half. I'm not saying it's going to two and a half anytime soon. But over the next few years, that's a possibility. And there's a very good possibility that a lot of these cap rates go back to where they were in 2015, 17, 19. And you're selling it a four and three quarters, you're you're going to crush it. So your upside, your upside potential is much greater than your downside risk. Yeah, given where we are in the cycle. So if you think about it like that, you know, and you
You do a sensitivity analysis of what you all do when, know, as analysts, as investment analysts, we all like to do a sensitivity analysis to the downside. But what's the sensitivity analysis to the upside? You're going to crush it. You know, just whoever you are as an LP, if you're listening to this, one of your sponsors and say, Hey, model this for me. Like, what is it? You know, like this deal that you're showing me at a five and three quarter exit cap. What if it's a five? And look at what your upside potential is.
David Moghavem (30:50)
Yeah.
Yeah, I think a lot of LPs, get a little bit too trapped in the numbers, right? as we are, yeah, and we do as well. mean, of, you know, trying to protect downside and I think seeing past it and seeing like what you're really buying right now in this time and protecting the downside is really the way that you'll be able to win in long term. Yeah.
Mitch Paskover (31:17)
Look, we would obviously rather show a lower IRR and exceed expectations, right? You don't want to go the other way around. I think going back to your point is investors are looking to get back into the market. But the toughest part is for us and buyers is you're competing with discretionary funds. These funds understand the value they're getting today by in today's basis. And it's tough, right? Because, you know, the money's been raised.
And they understand like, look, we're going to do great on a long-term basis and we're getting great cap rate and it's tough to give these buyers. And that's why I think groups like us who have a great role, like some investors, sometimes you're just not able to get to that price because you have these discretionary funds. And that's kind of been the, the goal for all the brokers to try to on discretionary funds. You know, I was just talking to a broker friend of mine in LA and you know, like the downtown LA market is really interesting because.
You're starting to see prices per door that you've never seen for, I'm talking about class a beautiful product. You know, there was a deal recently that Fowler bought from CIM probably arguably one of the nicest apartment buildings in downtown for $320, $325 a unit. You know, that trade before was closer of $530, $550 a door. So you're getting amazing value on that deal. And obviously there's risks to it because.
Right now there's a lot of concessions going on in the market. People are giving, you know, four to six weeks free. A lot of renters are bouncing around. But if you believe in a certain market like LA long-term and downtown, think we'll come back buying a brand new high-rise for $325 a door compared to your cost base. It's It's insane. You're getting probably arguably the nicest building in downtown.
Max Sharkansky (33:07)
I never have supplied.
David Moghavem (33:09)
Yeah.
It's, it's great. It's honestly the contrarian bed on downtown LA. Listen, we're born and raised in LA, not trying to say LA is the downtown LA is the prettiest place in the world, but there is something to be said when return to office and some of the office, you know, you're seeing the same type of buys on the office side. Some of these guys are buying office and starting to really like get attract people to come back to work in downtown LA.
I think you're going to see some sort of resurgence. Obviously not going to get back to where people thought it was going to be, but it doesn't need to get all the way there to make a good return on something like that.
Max Sharkansky (33:47)
That's right.
Mitch Paskover (33:47)
Yeah.
But if you look at downtown LA, the office is a different sector. You're going to see a lot of these big office buildings that you should trade for 400, 500 bucks a foot plus. A lot of these guys are buying this stuff for 120 to 130 bucks a foot, 110. Carol Wood just announced they're buying that new office building. But on the multifamily side, it's kind of like, think about the office side of New York, right? The office market is, if you're in midtown, it's really hurting. But if you are.
Class A in New York, you're killing it in office right now because there's a flight to quality. Same thing I think in multifamily. There's a flight to quality. These renters are looking at, if I'm getting six weeks free on a brand new unit, they're probably not effective rent per square foot is close to three bucks a foot, 325. Are you kidding me for a brand new high-rise product? So for them, it's a no-brainer. I'll drive a little bit longer.
David Moghavem (34:37)
Yep.
Mitch Paskover (34:45)
that I have to but I'm getting this beautiful apartment and there's a lot of there's a great food scene and there's other stuff downtown offers.
David Moghavem (34:52)
Yeah. So going back to one of your points, you were talking about how discretionary funds competing against them, it just makes it really tough, right? I think one of the strategies that we've found ourselves in is product that for whatever reason, the discretionary funds aren't writing on, but it's still good quality product. You know, maybe it's a smaller new vintage deal that's merchant built. Maybe it's a eighties vintage, which
It's not 70s, but it's not 90s or 2000s either, and doesn't have that 70s risk. And I think what you're finding is if it doesn't check the box for a discretionary fund, the cap rate expands enormously. I mean, to levels where you're like, this is a no-brainer. I think we're really positioned well for that, given that we have a Rolodex of investors, we have LPs that trust us.
that we've performed with during cycles. So I think that's a great place where you can get some really good yield today and you're getting that good yield because a lot of the institutions, a lot of the capital is still on the sidelines and only buying far and few in between.
Max Sharkansky (36:02)
Yeah, absolutely. I think also the thing about
David Moghavem (36:05)
So
I was by the way like one of those deals early to field song line was like one of those deals early 2000s But a little bit of a workforce pocket, so maybe didn't check all the boxes Atlanta's a lot of favor at the time. So yeah, sorry you were saying
Max Sharkansky (36:18)
was going to say on downtown LA and something like that, again, contrarian bet. you're also, remember Omar once asking me what I thought about a certain trade in downtown LA. And I said, it's not a real estate play. It's a political play, right? Yeah. You're betting that the politics are going to change and you're going to have better politics and more competent politics, good leadership, and they'll do what they need to do to clean it up and make it a thriving neighborhood.
And when that happens, you'll agree.
David Moghavem (36:48)
Yeah. Okay guys, last thought. You know, we're halfway into this year. Are you guys feeling more optimistic about this year or less optimistic since starting the year?
Max Sharkansky (36:58)
I was hoping that things would start to turn a little sooner in the year and it looks like it's probably going to resemble last year where it's the football rate cuts and we'll probably have a summer bond rally with that anticipation and the market will start to heat up. Like I was talking to one of my friends last summer, was August, I remember exactly where I was and he had gotten retrained by a seller.
He was buying a deal in Seattle and the seller said, hey, rates just rallied like 75 basis points as we're negotiating this PSA of our own money. And he said, yes. And I think that momentum this year is actually going to stick. The volatility will start to go away. We're not going to see bond yields go down 100 basis points, up 100 basis points. You'll still have volatility, but not to that degree. And I think with that, the markets are going to improve.
David Moghavem (37:33)
Wow.
Max Sharkansky (37:52)
Supplies falling off cliff. We're going to see rank growth and that all happens. Two, three, two, four.
David Moghavem (37:57)
Yeah, Mitch, what are your thoughts?
Mitch Paskover (38:00)
I'm not as optimistic as Max is for Q3 Q4. I this year is too early. mean, look, I think that the end of the day is even if we start cutting some rates, those are short-term rates. That's going to help. But I think overall for values to kind of go back up, people are looking at long-term bonds, right? Five, seven, and especially 10-year bonds. So with all this volatility, I just don't see bonds going back down to a point where values go back up.
David Moghavem (38:04)
I think 2020
Mitch Paskover (38:30)
And I think it's going to stay like this for the full year. So I'm thinking about next year in terms of the market coming back.
David Moghavem (38:36)
Yeah, I also think operationally, nationally, you're going to see 2026, year where summer of 2026, know, leasing season, peak leasing season for money markets, the supply will be absorbed by then, you'll start to see some positive trade outs nationwide, you're already starting to see it in some markets. So I think 2026 is like the operational year where things get much better. And you'll start to see that lead to some better transactions.
Mitch Paskover (39:02)
Yeah. I'm more concerned about, you know, operations in terms of when the market was great, obviously values were great, but the market was great. You're running, you know, EGI in the, you know, low to mid nineties, right? Because, know, delinquency was half a percent to one. There were no concessions. Everybody was paying right on time. And now in some of these markets, if you really look at your EGI and you take away everything, you really kind of strip out everything you're running a low eighties.
between vacancy, concessions, delinquency. You've never seen this. And when you started looking at those numbers and then you start adding up top, insurance went through the roof, right? You're paying higher for payroll now. You know, operationally it's been a challenge, but I think you're finally starting to see that start correct itself, right? I think overall occupancies are starting to go up. Supplies obviously falling off a cliff and I'm hoping the market's going to recover operationally.
Max Sharkansky (39:57)
Great. Operations have been brutal. The bad debt, the concessions, the economic vacancy has just been absolutely.
David Moghavem (40:07)
markets
worse than others. yeah, overall, right. Like as you said, like West Coast might be a little bit better. I mean, Colorado has been brutal. I was just talking to a Colorado broker a couple days ago and they were just saying how it's been extremely painful to even BOV things because you get the AR report back and it's just even worse than it was before. like it's out of the owner's hands at this point with some of these laws and ordinances and
It's and people are stretched thin. That's it. That's the bottom line. People are stretched out. hopefully better year ahead and we'll survive. And yeah, thanks for hopping on the party guys.
Mitch Paskover (40:45)
We all know one thing, if the real estate market doesn't get better, I think you've found yourself a great new place. Timo the podcaster. got everything set up. I'm getting great reviews.
David Moghavem (40:57)
You gotta
diversify the revenue stream somehow, you know? Yes, exactly.
Mitch Paskover (41:02)
So
Rogan, ⁓
David Moghavem (41:05)
Hey,
I'm Philippe and I actually call me Jew Rogan. So we'll do something like that. But guys, always amazing having you. Hopefully we can make it recurring. But this is great. I appreciate it. Thanks.