Subscribe
Share
Share
Embed
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 (00:18)
All right, welcome to another episode of Dealflow Friday. I'm your host, David Mogavam, and today we're gonna do something a little bit different. Everyone's been listening to the pod. I appreciate everyone's support and feedback. It's been incredible. It's been almost a year. And been getting a good amount of you listeners reaching out, wanting to hear about what I'm seeing out there. And we've done a few state of the markets before, but I wanted to...
keep that spirit going, a multifamily market monologue. And if it gets ⁓ good traction, maybe we'll make it quarterly. ⁓ But listen, this isn't going to be a data dump or a cap rate chart review, but it's going to be a real conversation or a real monologue on some of the themes, recent trends, shifts.
shaping how deals are getting done right now. Think of this as like a temperature check on the market. A few key narratives that stood out to me this quarter or this year with some data points sprinkled in to back them up. So solo monologue, I actually wanted to do this last week, but I had a pleasantly unexpected early arrival, surprise of early arrival of my niece.
so Lauren and Julian, thank you again for officially making me an uncle. ⁓ And the beauty with this unexpected surprise is by doing it besides the beauty of my niece, obviously, but I also get to do this a week later and talk a little bit about the Fed's announcement today.
Powell made...
the announcement that he's doing another 25-bip cut, no surprise there, nothing really to talk about. But I think what was interesting were a few things. I think one is he's now signaling that December rate cut may or may not happen.
I'm not here to really predict that. We didn't really see treasuries react to that ⁓ just yet or anything, so TBD. But I think
What we did hear from him that I kind of wanted to unpack was he said how they are also concluding the balance sheet runoff on December 1st because reserves are now somewhat above ample conditions.
think it's interesting. It kind of took me back to 2019.
when there was a little bit of the repo rates going out of sync and shooting up for like three days. And I think him basically saying that the Fed is not going the balance sheet anymore and kind of moving away from that QT quantitative tightening position to quantitative easing is gonna really open up the market. So.
Let me just step back a bit.
The Fed, when the Fed does quantitative tightening, QT, it's basically letting its portfolio of treasuries and mortgage-backed securities shrink. Every time those bonds mature and the Fed doesn't reinvest, the balance sheet gets smaller and the amount of reserves in the banking system goes down. So the Fed, by having less reserves and instead of reinvesting it, it tightens the money supply and
If you reinvest it and start having more liquidity in the market, starts creating inflation. And if you have too little, then it starts sending a shock the system. So back in 2019, you, some people don't even remember because it only like a couple of days, but coming out of the GFC, there was a lot of QE, quantitative easing.
and they were pumping more stimulus into the market, trying to get the recovery from the GFC. And then in 2017, and this was when Janet Yellen was Fed Chair, and then it moved to Powell 2018-2019, they started doing QT. And so reserves, they started letting reserves fall in order to tighten the market a bit.
and reserves actually I looked it up the reserves fell from 2.8 trillion to 1.4 trillion and it seemed like plenty to them I mean I have no range of what's a lot or what's a little but I guess something happened that year it was it had to do with uh I think like timing with corporate tax payments treasury settlements things like that but basically
Overnight repo rates completely spiked and the rates the repo rates just so you know is the rates banks pay to borrow cash overnight and the repo rates exploded from 2 % to 10 % yeah, like like so for basically went up and It was out of sync to where the Fed funds rate is and you want it
to that to basically be in line. And the reason it spiked was not because of the Fed, but because it was just limited amount of cash. Whoever had cash reserves wasn't giving it out. it ⁓ was too tight of a liquidity system. what ended up happening was the Fed had to pump a lot of money overnight back into the system to get repo rates in line. And so ⁓
It was interesting at the meeting ⁓ this week, Fed Chair Powell said,
So Fed Funds Rate, so for all of it in line, he's basically saying, we're gonna make sure that we have enough reserves above ample ideal conditions
to make sure 2019 doesn't happen again. So I think by him basically saying that they are stopping that QT process and moving towards QE, forget about where they're cutting rates and that side of the QE. The fact that they're moving from QT to QE on their balance sheet is really dovish. I think it's opening up the markets. ⁓ And I think that's big news from the Fed that
We were anticipating, but for him to say it, think is promising. And so what we're seeing now on the multifamily side, and this is kind segwaying into what we've been seeing, what I've been seeing, is over the past few weeks, maybe even months, I've really been feeling and seeing the market tighten. And when I mean tighten, I mean competitiveness. You feel it in...
The numbers, you feel it in where deals are getting done right now. You're seeing it on the bid sheets, whether you're buying or selling. There's a lot more buyers out But I also think there's a lot on the seller side that's contributing to it, where sellers are actually meeting the one of the things with sellers, I think, is anything that's hitting the market today,
has nearly three years of post rate hike data points to triangulate value. So if you're putting a mark, a deal out to market today, you know more or less what it's gonna trade for. And that wasn't the case a year ago or two years ago. It was still price discovery ⁓ or maybe even hopeful pricing where they would guide and say, well, we think the BOV is here, but let's try to get that.
And I think what's different now that we're, you know, over three years from the right height cycle is not only do we have more data points, but brokers too are sick and tired of the pricing exercises. if they're the good brokers, which I'm starting to see, even the bad brokers are learning their lesson and getting better with this is they're not going to waste their time. If a seller isn't realistic with all the data points that are out there, it's like, Hey,
This is what your property is worth. We have three years of data points. I'm not going to do tours and take it out just for hopefully getting an ambitious price that you want. If you're not going to meet the market, I'm not going to waste my time. I think you're seeing a lot of that more this year than you saw the previous two years. So anything hitting the market today is transacting not just from the data points, but because the brokers are doing their role or doing their part of managing sellers' expectations.
one other thing with sellers is we're in 2025, Q4 now of 2025. It's over three years of when rates hiked. And these typical bridge loans have been three plus ones plus ones, and the plus ones disappear during this type of the cycle. You're not hitting your debt yield covenants, you're not hitting your DSCR covenants, you're definitely not hitting your LTV covenants, whatever covenant caveat.
a debt fund had in their docs, they're gonna exercise that and you either had to get a loan mod, had to get an extension, had to get something to give yourselves some more runway. And that you probably saw more of that getting granted in the past couple of years. ⁓
You're not seeing that getting granted as much today. I just think if you didn't get your loan mod or your extension a year ago, two years ago to get more runway, I don't think you're going to get that in Q3, Q2, Q3 of 2025 and especially in Q4 of 2025 as the market's tightening. think values are now getting closer to loan balances a little above. If you're on the credit side, you're ready to move to move on. And I think
That's what you're starting to see on the sell side, almost like a seller fatigue or a lender fatigue in that regard. On the buy side, there's been a quiet but clear shift as well. mean, obviously what we saw with the bond rally completely helped. mean, when, you know, the treasury right now is 10 years at four, it's been hovering at four. I actually, I looked this up.
The 10-year hadn't hit four since it hit four, I guess, about a month ago. And then it was kind of going up and down for the 10-year. It hadn't hit four since a year ago. And I'm not counting Liberation Day, but that's pretty eye-opening of seeing where we are today versus the past year. And rates are tightening, and you're seeing it on the buyer side for sure. And...
Buyer activity getting more competitive, it's not necessarily because the fundamentals in multifamily are getting better. like we're gonna, you the next section, I kind of want to talk about some of the fundamentals, but multifamily fundamentals are pretty stagnant right now. If anything, you're seeing a little bit more cracks on the operational side, depending on which market you're in, some more than others. ⁓ But buyers are getting more competitive. And I think part of that is definitely because of
the bond rally we're seeing. Another thing, you're also starting to see all the dollars that have been parked in private credit for the last three years, they're starting to thin out for a few reasons. Private credit, if you're in the space, you're seeing how it's almost a knife fight to get the spread you need to get to get your returns. And there's a lot of money out there in private credit. And so when rates were high,
it made perfect sense for credit and PREF equity to offer those higher spreads and get better risk adjusted returns than equity. And as a value add multifamily operator, it was definitely frustrating when you're pitching the mid-teens returns and the equity providers are like, well, we're getting that with PREF or we're getting that on our credit bucket or a little bit less than that on credit bucket. It's like, yeah, you're right. mean,
maybe if you're getting that to be in a better position of the stack, go for it. I think what you're seeing now is markets are tightening, the opportunities there on the credit side are not yielding the same returns that now you're starting to see on the equity side. And so you're starting to see that shift. And on the equity side, I don't think you're starting to see like traditional equity comeback that you saw pre-rate hike like
the JVs of an operator with the LP on a one-off deal or the huge syndication money. You're not seeing that type of liquidity come back, but you're definitely seeing equity come back in a few different forms. One of those forms is platform investments. Some of the largest global managers are completely doubling down on real estate operating companies.
proven real estate operating companies and asset managers. the big case studies is Apollo is acquiring, they acquired Bridge Investment Group in a 1.5 billion all stock transaction. Bearings acquiring Artemis real estate partners in a 11 billion AUM platform. Blackrock acquiring HPS investment partners for roughly 12 billion. So these...
aren't distressed injections of capital. These are strategic bets that these equity groups are coming out of maybe credit or they're reallocating from credit and putting it into equity in a form of platform investments with growth equity. And you're seeing it on smaller scales too, ⁓ recapitalizations and different structures. ⁓ But
equity coming back but in a new form and one of those forms is platform investments.
And anecdotally, honestly, I'm hearing, I'm meeting with a lot of equity and no one's saying I'm pencils down. Now, where they're solving could be out of market or not really in line with how to win a deal today. And they're really looking at diamonds in the rough. But institutional capital isn't saying we're pencils down anymore. They're looking back to looking for those diamonds in the rough.
structured JVs, structured common equity, and they're looking for real partnerships in different shapes and sizes and forms than what we saw maybe pre-rate height.
So that's what I'm seeing on the overall market side. I think another trend I'm starting to see, not really this quarter, but really started this year, is how groups are shifting some of their North Star metric. I mean, I think if you've heard some previous podcasts, you've heard me talk about how we like to look at deals from a...
untrended return on cost or untrended yield on cost, which is your stabilized NOI, what your property's NOI can be if you snapped your fingers in a day and said, this is what my NOI is after performing my upside, performing my value over your total cost to get there. And without any organic growth rates or pulling rent growth from different sources. Now,
what a lot of groups are seeing and I think I really want to point out is focusing on going in yield, mark to market on cost, which is purchase price and closing costs and deferred maintenance items. Not the cost that you would spend to drive up the upside of a property, but the sunk costs, call it. And so that's mark to market, basically. Your mark to market cap rate almost on
on cost though. ⁓ I think it's an important metric because a lot of people have talked to me and they're saying like, at what price does older vintage or 70s vintage, 60s vintage deals in these higher supply areas that are going through a lot of distress and pricing correction get cheap enough to make sense again? That's like a very common question and
There's different ways people are asking it. Is that 70s functionally obsolete? Is there any demand? But I think the way you can justify or getting comfortable with what's cheap enough is when you look at this metric. So let me back up a bit. So I've seen deals in markets where an older vintage deal in a high supply market is being quoted at a seven cap
Okay, let's just say a 7-cap. I've seen that. at first you're saying, a 7-cap for multifamily in a primary MSA, good fundamentals, like that should work. That should work. ⁓ But you start to run the numbers and you realize a few things. Let's start with the numerator, the NOI. The going in NOI, someone quotes a 7-cap. You find delinquency is elevated, okay?
B/C class properties are struggling on collecting rent more than some of the B or A class properties. You're seeing that supply is really starting to seep into the market and absorption now is slower and more concessions are being given. And so what used to be a market where you can lease deals easily, now you have to knife fight to get a tenant, a good decent tenant to come in.
So you're giving concessions. So another thing too is if you're not giving concessions, you're having a negative trade out. So some sort of mark to market gain to lease concession plus higher delinquency is lowering your gross rent than maybe your trailing 12. Another thing is on the op-ex side, mark to market insurance, market to market expenses starting with insurance.
Insurance on these C-class properties are getting really tough. It depends which market you're working on, but they're getting more expensive to insure than before. And we talked about this before on other pods, the reinsurance markets really dictate some of that liquidity as liquidity comes back into the market and the reinsurance markets come back, could get cheaper. But it's definitely a mark to market increase in insurance on some of these older vintage deals.
than maybe what they're operating at when they were bought three years ago when they inherited a grandfather policy. So mark to market insurance is one. we could talk about RNM being higher, sure, turnover being higher, that's clear as day on these older vintage properties. On the denominator,
not only on your purchase price, you got to also budget that deferred cap X. So anytime we're looking at a deal, we're not just looking at your cap rate, which is over purchase price, but we're looking now at cap rate on purchase price plus deferred maintenance, immediate repairs or deferred maintenance, big ticket items that are going to happen that doesn't add an ROI to a typical renter like replacing a roof.
or replumbing a building. And so if you start comparing Capra to apples to apples on a 70s vintage deal to a brand new construction deal, the brand new construction deal most likely is just its purchase price. It's a clean deal. You don't need to replumb a new building. You don't need to reroof a new building, but you're going to have to probably replumb a 70s vintage building. This is a 50 plus year old building. Like all those systems
are past their useful life now. And you're starting to see that 70s today is very different to where 70s was 10 years ago. And so that shift and recognition in the systems, I think makes more sense on why a seven cap maybe wouldn't work when your numerator is not only going down, but your denominator is also going up.
your costs are, your deferred maintenance costs are going up, re-roofing, re-plumbing the systems. So that seven cap can easily be a sub six yield. And a sub six yield when class A in some of these same markets are five caps, maybe five and a quarters, maybe sub five, who knows, ⁓ doesn't seem like enough premium. And then the eighties and nineties kind of
follow suit in that way. I think yield on cost and pro forma, NOI, that is something that a lot of groups looked at when that was cheap, when there was a lot more upside, there was a lot more tailwinds in the market. You're just not seeing that in a lot of these markets, with the exception of few. I don't want to overgeneralize, but that is...
That is really the difference maker that you're seeing this year and this trend from previous years.
So with these quarterly monologues, wanted to, I'm not gonna go into every single market specifically, I think that would be exhausting, but I think just based on gut.
gut feeling on what we're busy with right now for better or for worse. There's definitely a few markets I want to highlight and pick on maybe. Let's start with picking on a market right now. This quarter I'm going to pick on Denver. Everyone who knows me knows how long I've been on Denver. I love that. I'm still long on Denver. I love Denver.
Everyone calls me Denver Dave. You can always call me Denver Dave. still appreciate you calling anyone calling me Denver Dave, but I'm a little disappointed in Denver and in Colorado right now. Denver is one of the worst performing top 50 MSAs ⁓ in the nation right now. And there's a few, there's a few different reasons. mean, when I was first tracking the market and diving into the market, ⁓
think this was back in 2019. We bought our first deal in 2020. ⁓ It really checked every box. It had the cache. It was socially liberal, fiscally conservative, had that dynamic. I mean, that really resonates with me. It's that purple state. ⁓ It had strong inbound migration. It had a diverse job base. Historically, multifamily in Denver actually held up remarkably well.
during the GFC while some of these other markets, high supply markets, Sunbelt markets cratered during the GFC. So Denver also proved to be really resilient, but this cycle feels different. And according to CoStar, Denver's vacancy rate has climbed to 11.6%, which is more than doubling in the last four years and the highest in two decades. Rents are down 4.1 % year over year.
And even though absorption hit 8,500 units, it still couldn't keep pace with the 12,000 new deliveries. So supply is the easy answer for Denver on why it's had its recent struggles. And actually there's been some good publications. Jay Parsons actually had a great piece on Denver and why the supply really was a big issue.
One thing about Denver too is it had a very unique and nuanced situation where there were inclusionary zoning fees that were passed for developers and there was a certain deadline in 2022 that properties had to get submitted to planning. And if they didn't get submitted by that time, they were basically susceptible to those fees. And so a lot of
developments got passed before that deadline in order to avoid those fees and now all that product hit the market at once and it got delivered also in the winter months. And so if you know Denver, know delivering and leasing units in the winter is a nightmare. No one's trying to move in the thick of winter in Denver. It is miserable.
The hope was absorption would be getting better as we hit this year's summer months and spring months peak leasing season. But what owners saw is that absorption was pretty sluggish. It didn't really save operators in what they hoped and what they hoped for. And we're seeing compared to other markets, absorption is actually more sluggish than some of the other markets we saw.
for instance, downtown in East Denver, they're feeling at the worst. Vacancies are hovering around 12 to 13 percent. Even the C-class properties, you're seeing some negative absorption there. So absorption supply, like that's the easy answer. But let me tell you something. There is some really terrible policies passing right now in Colorado and Denver. And for anyone listening right now.
that's involved in legislation in Denver, you are not helping anyone. You are not helping renters. You're not helping landlords. There is some really bad policies that have been passing that's just made it harder for landlords to operate. And you're getting the worst of the purple state. You know, at least in a, a, it quote unquote, blue city, like a Bay Area.
you at least have rent control, but you also have supply control. Like you don't have as much supply. Now you're getting, I'm not saying there's rent control in Denver right now. Wouldn't be surprised if Denver hits next, but you're seeing some of these landlord, anti-landlord laws passing. So I just got off a call for instance, with a manager that is trying to implement HB 1090. It's a housing bill that was passed.
banning rubs, banning utilities. It was a bill that was first intended to have more transparency on junk fees, but now it's being interpreted as not being allowed to charge utilities. And so there's a whole confusion. It's a poorly written law. That's the worst part, by the way. It's not that the law itself is just how poorly written and guidance and no clarity on if it's going to get amended. It's a shit show.
Dealing with that as a landlord disincentivizes owners to further invest into a market. Another thing that we're seeing in Denver that's hit our portfolio is capping the income to rent ratios for ⁓ criteria for accepting a tenant to two times rent. if you're in the market, if you're in the industry, you know that you want to keep high standards for leasing.
to avoid delinquency at your property. So what do you do? You require three times rent or two and a half times rent if you have to. Two times rent requirement is painfully low threshold for accepting a tenant. You're setting up your tenants for failure if you have a certain rent and they only qualify two times that. And so for Denver to...
force these low threshold requirements as a minimum requirement being two times rent and you can't push it further than that makes it painfully hard to operate because you start to see higher delinquencies especially in more workforce housing properties and then the evictions are backlogged as well. I know it sounds like I'm venting here I am venting here but this is
an issue with how municipalities are operating in a market. you want investments in your city and you want housing to be affordable, yes, you want to promote ⁓ building, which is Denver has done and they've done a good job doing that. But you also want to have
incentives for landlords to want to operate in those markets. And these are just bad. This is bad legislation and is making it harder for landlords to operate. listen, there are positives for Denver. Construction is slowing down tremendously. Construction starts are down nearly two thirds from 2023 with only 12,000 units.
If absorption holds, the market could rebalance by mid-2026. So it's a grind right now, but there's hope. There's light at the end of the tunnel. I think Denver will have a really big year in 2027. I think summer of 2026, I hope, is going to be a strong year. And I think 2027 is going to be a really amazing year for Denver. And it's just going through a funk right now. I'm still long on Denver. I'm still Denver Dave.
But this is frustrating, some of these policies. I think that's one thing that if anyone listening, if I can reach anyone, it's the Denver policymakers to fix this.
So that was my little shtick about Denver. ⁓ I guess to wash off some of that, one market I wanted to highlight and really give credit and give their flowers where credit is due is the Bay Area and the city of San Francisco right now. I mean, wow, if you follow me on X, know, I retweet everything Daniel Laurie posts. Bay Area, that's a mayor of.
San Francisco for those of you who don't know. He's amazing. What the city has done, the rebound that's happening in the Bay Area, it's real. ⁓ I would say in the beginning it was quietly having its moment. The cat is completely out of the bag. I think it was a out of the bag if you were just on Twitter and people were, all the techies are like, wow, this city is rebounding.
Then you started seeing in the data while everyone had flat rent growth, Bay Area was just having its own renaissance and there's a lot to it. ⁓ First of all, to just see it have its moment again after the pandemic, I always loved San Francisco and visiting and I had friends that are in tech and it's a beautiful city and what happened to it after the pandemic was sad.
Honestly, it was sad because it had so much vibrancy in life. And then the Exodus headlines, you saw it in the Bay and the market got decimated and you were walking the streets and it was empty. And the homeless and the crime, it got out of hand and it was just, it was like a zombie land. And it's such a beautiful city ⁓ and a fun city. And to now see it kind of coming back to that is exciting.
So some stats, vacancy has fallen to 4.4%. It's the lowest in a decade. And anecdotally, I mean, it is very hard to get a unit right now in San Francisco. I don't think it's as hard as like renting an apartment in New York. That's like probably the hardest of the hardest, but it's up there. Rents are up 5.9 % year over year. It's the strongest rent growth in the nation right now. Average monthly rent just passed
$3300, surpassing pre-pandemic heights.
If you remember pre-pandemic rents in the city, I don't know if that was really affordable. San Francisco was one of the most unaffordable markets at that time as a renter. to be past pre-pandemic, yes, there was lot of inflation, cost of living, incomes are higher too today. So it's maybe not the best liptiness test to compare absolute dollars to pre-pandemic.
But just remember how that was pretty unaffordable at the time and a little bit of sign of caution. But it is definitely, you know, this is a supply demand game and Bay Area has one of the best supply side stories. So let's talk a little bit about some of the drivers. Obviously, the biggest driver is AI. ⁓ AI, AI, AI. You hear it on the pod, hear it on all, ⁓ and on every news channel, you hear it everywhere, you look, AI is everywhere.
and OpenAI planting their flag in the city completely changed the culture and the vibe of the city. Billions in AI capital are flowing back into the city. Mission Bay, Soma, Soma like where people didn't want to live, didn't want to rent is now having a bunch of these bigger and smaller AI companies. Who knows how many of these smaller AI companies will last? That's
kind of the bubble you're hearing of like, AI bubble, AI bubble. I think some of that bubble can be like these AI companies that are starting up and taking up some of this office space might not last, but it's for sure bringing renters and employers back to the urban core.
Another big driver is return to office. What you're seeing is a lot of these employers are mandating coming back to the office and not only on the tech side, but the mayor as well is getting workers back into the office.
And then of course, the mayor, Daniel Laurie has done an incredible job. He's
Pro-police anti-crime. And...
He has an 80 % approval rating.
And if you follow him on Twitter, you know he's doing such an amazing job. He's doing also an amazing job with some of the drama you're hearing with Trump and the National Guard. And he has a great way of talking to his base and talking to Dems, but also talking to the other side and
controlling the temperature and the sentiment with the Trump administration and saying, all right, we appreciate the help, but we don't need it right now. And we are on the same page and we want to make the streets cleaner. And it's not like a clash. He's working with both sides. He's amazing. Daniel Laurie has done a great job. And that is really an incredible.
Lipness test for what this city can become.
Trion, we had a great play pre-pandemic of buying around the BART in the East Bay. And that was due to the
unaffordability in the city and the unaffordability in the peninsula for people forcing to move to the East Bay and take the BART. And the BART to the city is less than a 30 minute BART ride. I mean, it's very efficient. A lot of people take it. And you're already seeing the East Bay benefit from this as a spillover. So East Bay vacancy has dropped to 6.3%.
and rents rose 3.1 % year over year. Deliveries also slowed to around 2,800 units, so it has also supply side story to it, and absorption nearly matched that. So there's clearly a demand for whatever is being built there. And then there's San Jose. San Jose has absorbed 4,500 units against 4,100 deliveries, bringing vacancy down also to sub 5%. And rents are up 3.5%.
⁓
So across the region, new construction now represents less than 2 % of total inventory. If you want to see markets you want to invest in right now, look at the supply of those markets. Not where people are moving, like yes, you have the AI boom here, but supply is really the new indicator where pre-rate hike, people were looking at, all right, where is everyone moving? Where is everyone flocking to?
the exodus out of California going into red states. Now you're starting to see the real rent growth is on the supply side and you're seeing that perfectly in the Bay Area.
So the narrative has flipped from people leaving California to now people are coming back to California.
so we're bullish on the Bay right now.
All right, this has been a great time talking to myself, but I'm glad we got to get the first ever multi-market monologue in the books. And we have a lot of great interviews lined up for the weeks to follow, so stay tuned. Thanks, everyone.