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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 (00:57)
Hey everyone, welcome to another episode of Deal Flow Friday. I'm your host David Mogavum and today we got Garrett Nondorf. Garrett is actually the, associate director of Flagship Capital and they're super active, active in the middle market both debt and equity. Garrett's got a lot to offer. Garrett, you got your props, you're ready to go. We're gonna talk shop. Garrett, how you doing?
Garrett Nondorf (00:58)
Okay.
It's been great. Thanks for having me.
David Moghavem (01:26)
Good, good. After a few technical difficulties, here. So ⁓ let's get down. Yeah, let's get down to it. ⁓ First off, I'm excited to have you. Your LinkedIn game is on fire. Your meme, your LinkedIn meme game is on fire. ⁓ Every time I see you post, I'm cracking up. I'm a little disappointed that you don't have the mustache on this episode. I was really excited to see it. It looks like you went full shave. I don't know who made you do it.
Garrett Nondorf (01:30)
We made it.
Mm. Yeah.
No!
David Moghavem (01:54)
or who made you
take it off, but we need to make you grow it back.
Garrett Nondorf (01:58)
Yeah, I think I've lost some of my power with it gone. ⁓ My daughter, her basically her whole life, I've had the mustache and yesterday, I took it off and she was just confused and just feeling all around was like, dad,
David Moghavem (02:12)
Did you record
the reaction? Have you seen that trend going on where the dads, you did it?
Garrett Nondorf (02:15)
Yes, we did.
I tell you, dude, I really appreciate your optimism about that mustache. It was not a very strong one. I don't think you know, a lot of people haven't even noticed it's good.
David Moghavem (02:28)
Yeah, because it's kind of blonde. It blends in. know, like as a a Persian, as a dark Persian, when we grow a mustache, it's you see it's first thing you notice. And every man comments on it. Every woman doesn't want to talk to you. So it's really like a bro code with the mustache. So I had a little bit of a bro code with your with your mustache when I was singing on LinkedIn. So when you hopped on, I was a little disappointed. But you know what? We'll survive.
Garrett Nondorf (02:30)
Yeah, thank you. Yeah.
Yeah.
Love that.
I'll try and make it up to you with some good content.
David Moghavem (02:55)
Hi, good, good. Well, flagship, you guys are super active. Every time I run into you and the team, you guys are always up to something. When I messaged you for you to hop on, you're like, well, we got a lot going on. Three term sheets, you told me three terms you signed in the last 45 days, a multi, a flex industrial and an office. So break those down for me. What are you guys up to? What's your thesis right now? How are you being able to get deals capitalized?
Garrett Nondorf (03:13)
Yeah.
Yeah, appreciate it. So we do debt and equity. so it gives us a little flexibility on how we can treat deals. ⁓ The last few years, equity products been really popular. It's just LP equity. A lot of shops today, think, you go to them and you say, hey, will you give me equity? And I'll say, yeah, we've got a you know, Mez piece, Pref piece. You're going to love it. It's ⁓ eight and eight. ⁓
That's not us. We like taking the upside today, especially in today's environment. those three deals, two of them are equity. ⁓ One of them is a debt deal. I'll just start with that one. That's a office deal here in Houston. It's out West where a lot of the energy companies are. Correct. Yeah. So bridge debt is, what we do on the debt side. Kind of five to $15 million loans. This is kind of right down the fairway there.
and a totally empty office building when we signed the term sheet. You and I had talked kind of previously prior to this call and you were just questioning that decision, the wisdom of that decision. think for us, the basis was incredibly strong. ⁓ It's 2014 built product, so it's fairly new. And then the borrower is super strong balance sheet.
kind of put it all together and energy corridor in fact is the hottest office market in the country. That I would not have said ⁓ two years ago or especially in 2020 when oil went negative. That story has totally changed. And so we're able to come in, feel good about our basis. They've got some leasing done. So that's that story. ⁓
David Moghavem (05:14)
And is energy
corridor coming back from just AI and the demand for energy and the need for, or is it something else?
Garrett Nondorf (05:21)
Yeah, good question. don't know about AI coming into play. A lot of it is driven by demographics out West. So the population of Houston just kind of grows West. ⁓ And then the really big piece is that they stopped building office out there for the most part. so demand has sort of stayed maybe a little bit down from 2020, but ⁓ supply has corrected in a big way.
And so you've got a lot less competition. Also the floor plates on this ⁓ product, it's a four story building and floor plates are fairly large, 50, 60,000 square feet. That's a hard to find product out West right now. And so you have a lot of, you know, oil and gas engineers, managers, executives who live out West, they don't want to drive all the way downtown. That's the attraction.
David Moghavem (06:14)
Nice. So that's on the debt side, ⁓ an office deal and you guys are probably, you know, few and far in between on those providers. Let's talk about where you're putting equity because kind of what you were saying in the beginning, you're long on the equity side, not just preff and credit, but you're going long on, you know, putting common equity out. What are these two other deals that you guys got done or have tumor sheets on?
Garrett Nondorf (06:18)
Yep.
Yeah.
Getting them done. We don't want to upset the deal gods. ⁓ We so the flex industrial deal is in Columbus, Ohio. Columbus is a market you and I have talked about before. I mean, it's just popping. It's it's crazy what's happening there. ⁓ Population wise, job wise. And then Columbus didn't overbuild like a lot of, you know, really popular markets where jobs were coming. And so are not as much so.
David Moghavem (06:47)
Yeah.
Garrett Nondorf (07:11)
There's a good attraction there with demographic trends. ⁓ This deal in particular is kind of sizable office component to it. It's a good looking deal, but if you saw it from the outside, you'd say it looks like an office building. There's a base on the backs. And so you can have a mix of tenants, which we like. I think it gives us flexibility and lease up. It's a nine cap ⁓ in place, which is incredible.
Particularly I think in Columbus. We just don't see a lot of nine caps. We really don't see any of them, you know Anything kind of 7 % and up I feel good about I don't know how much you guys look at Commercial stuff. I know you guys are heavy on the multi side
David Moghavem (07:46)
Yeah. Yeah.
Yeah, we're strictly multi but you know, we're always keeping a pulse in the year on kind of what other yields are out there. I mean, I don't I can't speak for myself of what I've seen out there. But yeah, mean, a nine caps sounds pretty good. And you're they're probably borrowing at what like six, seven.
Garrett Nondorf (08:17)
Yeah, seven something I think ⁓ it's debt fund execution. And when you guys do go commercial, we want to be your first call. But yeah, anything kind of seven and a half and up, you can get positive leverage generally. And so positive leverage in today's environment. You know, if I'm going to be a five year holder, I feel good about that. That's kind of like old school real estate. Can I make cash day one? You know, we kind of went away from that in 2021. And we said, hey,
David Moghavem (08:19)
Mm-hmm.
You got it.
Garrett Nondorf (08:47)
up and coming market, rent grows, got to convince yourself to go do the deal. We've kind of gone back to am I making money? Day one is their cash flow. So commercial, you know, our bread and butter is multifamily, but commercial we've seen these opportunities here and there and ⁓ equity in our space, the smaller mid market space has kind of gone away since 2022 when rates started coming up.
Just saying advantage there. And that's a multi-tenant, multi-tenant deal. I think it's a debt fund execution, five years, ⁓ some IO and positive leverage.
David Moghavem (09:30)
Nice. Yeah. And I mean, I've seen some of your posts. You guys have been super long in the Midwest. It looks like you guys have a lot of action there. ⁓ It's actually interesting. We, so we don't own in the Midwest. If you talk to Max, I think 50 % of him is a little bit sour that he's kind of missed the way of the other fifties, maybe a little bit of truth that maybe, you know, if everyone and their, and their mother is talking about getting into the Midwest, maybe it's a little too late.
Garrett Nondorf (09:36)
Yeah.
No.
David Moghavem (09:58)
What's your take on it? Do you think the ship has already sailed at this point? Do you think we're just getting started? Like, how are you feeling about the Midwest right now?
Garrett Nondorf (10:04)
Yeah, I think Max is too cool for the Midwest is his problems. ⁓ Yeah, you Cali guys in particular, we love the Midwest. We've got my corn here. ⁓ I keep it with me just to not forget that the Midwest is there because they don't make much noise. ⁓ They're just steady markets. We did last year five deals. ⁓ Omaha, Nebraska.
David Moghavem (10:07)
Yeah.
Yes. he's got the props. He's got the props. Prop number one.
Garrett Nondorf (10:34)
Springfield, Missouri, Lexington, Kentucky. You just you don't hear much about Lexington unless it's horse racing and then ⁓ Omaha if it's college baseball and iron that you just really don't hear much about it. For that reason, they didn't build very much. They didn't build much supply. And so and you can still get a six cap. So for those reasons, I feel really safe going into the markets. They're still not building a lot for the most part.
David Moghavem (10:40)
Mm-hmm.
Garrett Nondorf (11:03)
Kansas City.
David Moghavem (11:03)
And why is that?
You think that's just natural topographical barriers? Is it municipality? How much of it is artificial versus how much of it is the rents not justifying the cost of construction?
Garrett Nondorf (11:17)
Yeah,
yeah, I don't think there's a ton of artificial to it. I think it's a lot of natural. Those are just, you know, it's not like a Austin, Nashville, Phoenix, LA. Mom and dad, when I grow up, I'm going to move to the big city, LA or whatever. People, you know what saying? I'm going to move to Omaha when I make it big. No offense. No offense to Omaha. We own there. We love it.
But I think that's why I think it's just a, it builds naturally at kind of a 1 % a year, one and a half, 2 % a year, steady growth. And that to us feels safe. You could, I can bring in my other props here because this is along the line. this is, if I can hold this up.
a Kool-Aid pack from the 90s. Drinking the Kool-Aid. So there's sticks of these. Sticks, they all have these unique cap, if you remember that from your childhood. ⁓ So right now we're seeing six caps make a lot of sense. We're seeing things that were made in the 90s and newer make a lot of sense.
David Moghavem (12:19)
Drinking the Kool-Aid.
Yeah.
Garrett Nondorf (12:44)
like Kool-Aid. And then just because I'm mentioning Austin, Nashville, Phoenix markets that got overheated and very popular. ⁓ Every time I say one of those markets, I'm going to drink the Kool-Aid. So there's your Kool-Aid. Remember Kool-Aid everybody.
David Moghavem (12:59)
Yeah.
I love it.
Garrett, mean, guys are definitely long on the Midwest like what we were talking about. I love not only the yield you're getting, but you also get really good debt from an agency perspective because some of these 90s and newer, they're still within affordable, ⁓ like rent affordability, because in general in the Midwest, people aren't stretching thin to live in an apartment.
Garrett Nondorf (13:22)
Mm. Yum.
David Moghavem (13:37)
And so what you get is these really strong communities that are still within the 80 % AMI, you get mission financing. And so you start ending up getting pretty good leverage at really tight spreads over the treasury and you're getting some strong cashflow. So it's not only just a six cap, but it's a six cap with mission driven financing for good quality product.
Garrett Nondorf (13:45)
.
That's right. That's totally right. five deals we did last year, all of them were agency, just like you said, and three of them in the Midwest. we just, one was a LITECH deal where obviously mission driven is a huge component to that. got a great rate on that, great terms. ⁓ seeing it's, you know, we have seen debt go from everything went agency in 23, 24.
It felt like, you know, if you couldn't get agency, you still just wasn't going to get done. This year, I've seen a lot more. I don't know if it was the political changes or what, but ⁓ for a while, CMBS made a lot more sense. They came in on rates. ⁓
David Moghavem (14:44)
when you could just
buy the rate down as much as possible to get the proceeds. Let's do like an eight point buy down to get like a 2 % rate. Yeah. Yeah. Yeah.
Garrett Nondorf (14:47)
Yes, yes, you're gonna lock in for that's right. That's right. Yeah. And people were doing that too. I thought that was kind of interesting. ⁓
If you acted quickly, you could have done some of that. It's moved to bridge ⁓ actually has kind of become popular again, it's less of a bad word in my investment committee room for a while there.
we were all feeling the effects of the stuff we bought in, you know, 2020, 21 with bridge. And so every asset management meeting that they're coming out of, they're like, Oh man, that bridge deal we did. And then you go pitch a deal and in, you know, an investment committee and they're like, you want us to do bridge? So that we had to time it just, had to run some time and bridge, frankly, we've done the steel we closed in Des Moines two months ago. It was a 50 unit.
David Moghavem (15:18)
Mm-hmm. Yep.
Garrett Nondorf (15:44)
There's another Midwest deal. That was a debt fund execution, debt fund out of Chicago, five years IO, fairly low rate. We like that. It's fixed.
David Moghavem (15:59)
Yeah. And
sorry to cut you off. mean, it's, ⁓ you said five years. think people have learned also to like really have the runway this time, you know, ⁓ to have the runway. ⁓ it sounds like you, fixed it, maybe swapped it, or there's some sort of product where you're not as exposed to variable rates. It's better to just have something that's somewhat fixed so that you can just know what you're going to be paying. So I think bridge is coming back, but people have learned from their mistakes a bit.
Garrett Nondorf (16:29)
Yes, and it won't be too long before they forget those lessons, but that's America.
David Moghavem (16:32)
Yeah, exactly. Exactly.
That's that's how it is. That's how that's why we have cycles, you know. ⁓ So long on the Midwest, does this mean you're sour on the Sun Belt or are you still what's your take on the Sun Belt right now?
Garrett Nondorf (16:39)
Ha
Sunbelt's still good. It's picked over a little bit. ⁓ Just like 90s and newer, everybody is doing it. Everybody's looking at the Sunbelt. It's got great demographic trends still. ⁓ Some of those markets have seen change, but ⁓ for the most part, it's still really good place to invest. so we are fortunate. We sit in a position where sponsors are out there digging in.
David Moghavem (16:57)
Mm-hmm.
Garrett Nondorf (17:18)
with sales brokers, sellers, trying to get somebody to shake loose on a good deal. We're the beneficiary of that ⁓ as we sit here in our office in Houston and they say, hey, finally got somebody to capitulate. Will you look at my deal? So they're doing the hard work. You guys are doing the hard work to try on ⁓ and we appreciate it for what it is. ⁓ We're lucky that we can kind of wait for those things to come to us.
David Moghavem (17:47)
Yeah, it makes sense. And I think when you and I were talking, you were saying how, you know, the Austin, the Phoenix is the Vegas, they're, kind of coming to an interesting point for supply and demand for those willing to take a bet. could be interesting. So are you feeling that those markets are a little bit of like a buy the dip moment or could be potentially catching a falling knife where it could get a little worse? What's like your take on that right now?
Garrett Nondorf (18:12)
Yeah, I was in a conversation with another GP of ours about Austin, Phoenix, Nashville, those kinds of markets. And he was, was saying, Hey, if you look at the supply curve, it just drops off totally in 2026 on a lot of those markets. They saw a ton of supply. His counter was they saw a ton of supply.
and they're still absorbing that and it's going to take time to absorb that. And so if you're looking at buying a deal today in one of those markets and you're thinking I'm going to get rent growth in 26, you might be wrong because there it's going to take time for vacancy to go away, you know, and historically it happens ⁓ bottom up ⁓ where class C fills up then class B then class A, right? And so if you're a builder, you know, you may be waiting a while, but
⁓ My counter to his was, if I'm building today, and Flagship doesn't do any development equity, we're just acquisitions, so this is a little bit outside my realm, but if I'm building today in one of those markets, I feel pretty good because I can look, I mean, it's not an opinion, it's a fact. You can look at what shovels are in the ground today, what projects are gonna be delivering in,
18, 24, 30 months, and I know what my competition is going to be. And I can look and say, there isn't much competition. So I can be the new thing on the block. And I can charge a premium for that. That's, that's my thesis. ⁓ I think on older stuff in those markets, it's been super difficult because everybody bought the class C there was cap rate compression, especially in those markets. mean, think of
David Moghavem (19:48)
Mm-hmm.
Garrett Nondorf (20:03)
Think of Phoenix in particular, you would know it well. Man, ⁓ class C was trading like class B, trading almost like class A. It was crazy. It was crazy. like, ⁓ you know, Tucson was trading like Phoenix, you know, and it just, it didn't make sense. And so those deals are stuck at prices that don't make sense to transact for the seller. They don't make sense, perhaps even for the lender.
David Moghavem (20:13)
Everything was the same. It was crazy.
Garrett Nondorf (20:33)
to come in and say, you your term's up. And so everybody continues to kick the can. Here we are. Everybody survived till 25. It looks like we're have to exist to 26 or something, but.
David Moghavem (20:46)
I
can't believe you went there and you said the same. You said that in the mix to 26, but it's true, it's true. And I think what you're seeing also right now is like on this classy stuff, there's so much operational distress happening at these lower tier, lower quality deals, where before it was cap sack distress, now it's fully operational. ⁓ Some markets worse than others, but like the delinquency is starting to hit.
Garrett Nondorf (20:48)
I know. I hate it.
Yeah.
David Moghavem (21:14)
Especially if a deal has CARES Act, you're seeing a lot of late payers, you're seeing a lot of vacancy. mean, mid-90s occupancy is almost non-existent in most markets. It's at least low 90s. 90 is kind of the norm, low 90s if you're a really good operator. So everyone's feeling the cracks now. It's not catastrophic by any means, but...
Garrett Nondorf (21:33)
Yeah.
David Moghavem (21:42)
it's starting to crack a little bit operationally.
Garrett Nondorf (21:46)
I agree. That's what we're seeing too. Some of the Sunbelt markets ⁓ on the East side of Sunbelt, know, not as much the West stuff that was really hot is seeing that too. mean, Atlanta, you saw a ton of bad debt, just like crazy bad debt, almost unique to the U S. ⁓ I think the way that they handled it on a local level was made it tough. ⁓ But they're getting through that. I think there's opportunity there.
David Moghavem (22:05)
Mm-hmm.
Yeah.
And there's now a stigma towards it, which as you're saying, that's why there might be an opportunity. ⁓ People have kind of been conditioned with, Atlanta, the delinquency so bad. It is what it is. We're out on Atlanta. Now you're seeing outsized cap rates for good product.
Garrett Nondorf (22:17)
That's right.
That's totally right. When I bring up an Atlanta deal and committee, you get that like a visceral response from committee. Why are we talking about this? It's Atlanta. It's like, well, things are changing. So I think that's, I put that in the bucket, same bucket as bridge. It's a bad word for a while, but it will, things will change.
David Moghavem (22:40)
100%. 100%.
Yeah. You guys doing anything in the West Coast? Like ⁓ coastal California, Oregon, anything like that?
Garrett Nondorf (23:07)
So don't do anything in Cali, ⁓ just a different political environment and ⁓ it's a different place really. It's beautiful place. ⁓ And we do have stuff in Portland, Oregon, and then we've got something in Spokane, Washington. So wouldn't call it exactly coastal, but we do have a few things out further west. And then kind of the next closest would be
David Moghavem (23:12)
Mm-hmm.
Garrett Nondorf (23:35)
Las Vegas, and then we did some stuff in Phoenix ⁓ that we sold in early thankfully. ⁓
David Moghavem (23:43)
Yeah, we'll try on. We cut our teeth in Pac Northwest and in Portland and ⁓ the political environment got a bit bad heading into COVID. But what you're seeing today is a really good supply side story where there's just no supply being built. And contrary to what you're seeing in the Sun Belt, where it's just oversupplied right now and you're just getting through absorption, Portland has none of that. ⁓ Is the demand the same? No.
Garrett Nondorf (23:52)
Yeah.
So.
David Moghavem (24:11)
And that's why it doesn't get the headlines. It doesn't get, you know, talked about in investment committee as, as excitingly. But what you're seeing is the supply side is really strong and robust, especially in the suburban neighborhoods and people are paying rent. would say Portland, our Portland deals and our California deals actually have the least amount of delinquency out of all the eight states that we own in right now. so there's something to be said there.
Garrett Nondorf (24:37)
I think that's right for us too. Yeah.
David Moghavem (24:41)
of maybe a somewhat out of favor kind of market due to some political headwinds that you're actually getting better fundamentals on what you're buying.
Garrett Nondorf (24:50)
That's right. And Cali, as well as Oregon, Portland, particularly, they have that artificial keeping supply low. They love to have a thousand rounds of approvals for a multi-deal to get done. And it ends up, you know, a hundred units goes to eight units and you don't really solve the problem. ⁓ I think I saw Jay Parsons post this morning about,
David Moghavem (25:13)
Yeah, very true.
Garrett Nondorf (25:21)
a affordable housing deal on Cali getting built for 1.2 million per unit.
David Moghavem (25:28)
Insane, is that in LA? I think that was the one in LA. It was maybe like a Skid Row, affordable. I think it was something like that.
Garrett Nondorf (25:30)
can't remember where it was.
He was lying was like, you would expect that this has washer dryer, but no, it does.
David Moghavem (25:43)
Cable package, yeah. Nope. Yeah, mean, LA is all over the headlines even right now with, and I'm born and raised in LA. So it's as a, as a native, it's, it's sad to see. Does this make it an opportunity? It's, it's just hard to quantify as listen, as someone who raises equity and we'll get into the equity raising right now. Cause as you know, it's tough right now, ⁓ but it's even tougher when you're
Garrett Nondorf (25:45)
Yeah.
Very tough.
David Moghavem (26:11)
doing a business plan that you can't quantify the risk, right? And so that's where LA makes it really tough.
Garrett Nondorf (26:18)
Yeah, because there's a big policy risk.
David Moghavem (26:20)
Yeah, exactly. you
guys have, you know, you tell me what kind of what fund you're at at this point and what you've raised. But it's I mean, you and I can both agree and we'll be lying if we told each other that's easy to raise that capital right now. It's very tough. Investment committee is tough. ⁓ You guys are one of the active ones out of the rest from who we talk to. ⁓ Talk to me about.
Garrett Nondorf (26:36)
Thank
David Moghavem (26:48)
I guess, how hard really is it? Who are you ⁓ selecting and what kind of deals are you kind of nitpicking to have conviction in to get through committee? And do you think this kind of dislocation in the market is creating an opportunity? And if so, what exactly?
Garrett Nondorf (26:53)
you
It's a question. Good questions. I'll try and address all of them if I can remember them all. I'll give you a good example of what makes, what activity is like today. So for us, flagship, we've got a $50 million fund today.
We closed that fund, the initial closing 10 months ago. And then we didn't do a deal ⁓ till two months ago. That is not for lack of trying. I probably looked at, we probably looked at, I don't know, hundreds of deals, ⁓ certainly more than a billion dollars in that time of requests, not total cap, but requests. And we're talking average request size ⁓ prior around
somewhere in the five to 10 million mark. That's a lot of deals coming through that you just say no to or that don't work out for some reason. A lot of them are sellers. You've experienced this. I'm sure you guys have sellers. What can I get in the market? Don't like the number and they pull it from them. So frustrating. ⁓ If I was a sponsor.
going through all the work of underwriting a deal, bidding, et cetera. my gosh, that would annoy me to no end. Thankfully I'm not. You guys are out there doing the hard work. ⁓ Then you asked, and I guess we did five deals last year. And when I went to NMHC in January, I was a little bit downhearted about that. And I would say to people, well, we did five deals last year.
and the jaw dropped because they're like, that's so many, you know? ⁓
David Moghavem (29:02)
That's right, exactly. When you
said you were disheartened, I'm like, that was before you talked to everyone. Yeah, exactly.
Garrett Nondorf (29:06)
That's right.
And now I feel like almost good about it. If we could do 10 deals a year, that's kind of more ideal. So that's, I think, a sense of volume. ⁓ We've got three term sheets today. I'm hopeful all of those close. And we'll have done four kind of halfway through the year. It comes in waves. It's great.
David Moghavem (29:32)
Mm-hmm.
Garrett Nondorf (29:34)
summer for real estate is a slow time just generally but ⁓ yeah what is getting attention in investment committee? Six caps, ⁓ 90s and newer and markets where you can point to honestly secondary and tertiary markets have gotten a lot of attention lately so we did that deal in Des Moines I'd call Des Moines a secondary market ⁓ you know top
200 markets probably or an ⁓ outlying exurb of, you know, like a Kansas city that's got good demos, not much supply. You can kind of craft a story and then say, hey, and it's a six cap. So I'm positive leverage on a multi-deal that was built in the last 30 years. just like a great story. There aren't a ton of those. So I'm not going to say that that is the market.
but that's what gets attention for us right now.
David Moghavem (30:35)
I think it's hard to find high demo, you know, secondary tertiary that you have renters by necessity, right? So sometimes you find these obscure markets, not obscure, but they're just, you know, a little bit more out there, but everyone that's living, you know, it's, it's six figure incomes and good schools and low supply. But then you also tell yourself like,
Do people wanna rent here? I think the people that are here wanna own a home here. This isn't a renter's market. And so you run into that issue a bit, but at the same time, when you're looking at some of these rental apartments in the urban primary MSAs, you're getting hit hard with operational issues. And so sometimes when you're kind of out there, some of these secondary markets, you might not feel as much of the pain and the delinquency because
Garrett Nondorf (31:04)
you
Yeah.
you
David Moghavem (31:33)
They're renters by choice rather than necessity. So they're not stretched thin as much, theoretically.
Garrett Nondorf (31:41)
I think it's real. We have that conversation, the rent versus own, particularly when we're talking about a tertiary type market. You don't have a ton of people flooding into that market generally. Although sometimes you can point and say to committee, this market's growing 10 % a year.
They grew by 50 people. Yeah.
David Moghavem (32:03)
Yeah,
10 % a year, from 40, yeah, from 45 to 50.
Garrett Nondorf (32:07)
Yeah. ⁓
David Moghavem (32:12)
Yeah,
so that makes sense. just can't get caught with your pants down there. But you know what? It's how you find good yield for good quality product right now. ⁓ I guess on the operational side, we talked about delinquency. ⁓ But on the OPEC side, you're seeing that there was a lot of turbulence on specifically the tube top, expense items, taxes, insurance. You and I were talking about how that's kind of stabilizing. I know personally in our own portfolio,
Garrett Nondorf (32:31)
Hmm.
David Moghavem (32:40)
we've seen a 15 % reduction on our Southeast master policy, which is huge. I mean, that's a game changer. And we're starting to see renewals come in lower on the insurance side. Like we're really just starting to see stabilization. I guess, where are you seeing that with some of the other offers and deals that you're coming out with? And how are you underwriting looking through that as you're developing your investment thesis?
Garrett Nondorf (32:46)
Really big.
How much of your Southeast portfolio is Florida or Carolina's coastal type?
David Moghavem (33:14)
Yeah,
good question. would say like a little less than half Florida. Another third, George. Yeah, like ⁓ probably another 20 % Atlanta and another 20 Savannah. So like you got it's just a mix on some Carolinas. So
Garrett Nondorf (33:20)
Okay, so a really good shot.
Yeah, so I mean, a really good chunk of that is coastal that where you'd be, know, insurance companies are thinking hurricanes and flood type risk. That's great. 15%, you know, on a cap rate is a huge difference in value.
David Moghavem (33:48)
Yeah, exactly.
And I think what you're seeing is part of that spike was the reinsurance markets kind of freezing up, right? And then now that there's a little bit more stability and these insurance carriers have increased their loss capacity. And this is a new normal that these losses are kind of here to stay and they've already upsized their books for it. Now when
Garrett Nondorf (34:09)
Yes.
David Moghavem (34:17)
you have these catastrophic losses that are already baked in, it's like, okay, that was big, but it wasn't as big as what we underwrote. So people are starting to come back into the market. They're like, we can make money here. So I think you're starting to see that right now.
Garrett Nondorf (34:24)
I think
that's right. And they've probably reworked the deals, you know, with their reinsurers, ⁓ the account for the increased risk. And so I'm sure they're paying more premiums to those guys. But it's such a huge market. You just know, in America, someone's got to figure out a way to make money there. And it seems like they have.
I would say yes on insurance, we're seeing stuff much calmer. ⁓ Some things coming down, I wouldn't call it significantly, not really double digits, but ⁓ you can underwrite for it now. ⁓ Taxes depends pretty heavily on locality, ⁓ municipality, but ⁓ here in Texas, we've seen them calm down as well.
Houston, could, you know, you could underwrite 70 % of purchase, you know, in the good times prior to 2020. And get a you know, that would you'd be feeling good. Now you probably 9095. A lot of these deals are getting so reset that your basis, you know, you can underwrite to 100 and you can get paying at 100 and you're still paying less than the guy was prior to you. So
there's some wins to be had there, a silver lining, I would say. yeah, OpEx wise, it's come in significantly from an acceleration standpoint. It's still up there and sellers who haven't had to go underwrite new insurance or new taxes can't believe it when the broker tells them. ⁓ So that makes it more difficult for somebody who's gonna go try and get a seller off market to say, hey, I'd love to pay.
X for your deal. They're gonna be like, what are you underwriting for insurance? And they say, well, you know, it's 1400 a unit. And you say, what are you talking about? It's like, well, go ask somebody, you know.
David Moghavem (36:23)
Yeah.
Yeah, exactly. It's a little bit of a reality check. And I think that's why there's still a big dislocation on the off market channel because like there's still sellers that haven't seen the full OPEX reset that of what they're paying. So, and I think from a taxes perspective, there was so much uncertainty on kind of where these things were getting reassessed because there just weren't enough data points. And so there was, you know, some of these assessors were still using yesterday's pricing in order to get more tax revenue.
Garrett Nondorf (36:54)
Right.
David Moghavem (37:00)
and the appealing process was just getting tougher and tougher. Now you have a lot more data points ⁓ from the past two, three years of a down cycle. And so I think that's, as you said, tailwinds moving forward on where we can kind of expect these things to shake out as an assessment of purchase price.
Garrett Nondorf (37:09)
Yeah.
That's a very interesting point I hadn't considered in a market like Texas where it's a non-disclosure state. ⁓ The assessors are seeing way more data points, way more actual sale contract prices because they're saying, your deal is worth 21 million and you can go say, here's the contract, it's 19 and a half. They're seeing a lot more of that, which is just funny.
David Moghavem (37:28)
Mm-hmm.
Yeah, exactly. Yup.
Yeah. I guess, Garrett, know, one piece of advice for sponsors trying to get capital maybe from flagship, you know, or maybe just out there, what's kind of some advice as you've been talking to investment committee and you've been allocating capital, whether it's any part of the stack, credit, preff, common.
What's advice you could give to some other sponsors out there looking to capitalize their deals?
Garrett Nondorf (38:16)
Yeah, guess several things come to mind. You know, if you did some deals in 21, 22, we all did. You know, if you can point to performance around that working with a lender, if that you know, if it got to that point on a deal and say to whomever the point of contact is at the fund you're trying to raise from.
look at the asset management we've done. We've been able to do through the hard times. Then you've survived and you've proven yourself. You're now battle tested veteran. It should be easier for you to raise money. I know it probably doesn't feel that way, but here, you know, in the investment committee room, we're saying, who are the people that made it through, who know how to buckle down and survive that OPEX increase, that rate increase and got through it?
You know, if you can make it through the next, you know, this period, however long this lasts, you're just going to be viewed differently than people who did.
David Moghavem (39:22)
Yeah, you could show your battle scars, right? ⁓ I think, yeah, 100%, exactly. Chick sticks, scars, so does investment committee. I think what you're gonna see coming out of this is a lot of sponsors who have scars to show, but it's all gonna be a little bit relative, right? Some are getting wiped, some are going out of business, some...
Garrett Nondorf (39:24)
Exactly. Investment committees dig scars.
David Moghavem (39:50)
have personal guarantees getting triggered. While others did not only honor, like good work, but honorable work, they saw that, hey, this might've been a loss, but we moved the NOI this much. We moved operations this much. We have this to show. We learned from our mistakes. We made some new hires. We have strong asset management team. And I think a lot of allocators, I hope, can at least see through that and see, hey, this is a group that has gone through
Garrett Nondorf (40:03)
Thank
David Moghavem (40:19)
multiple cycles including this recent one, we can work with them.
Garrett Nondorf (40:24)
That's right. Then the best thing you can say, maybe the best thing you can say on an investment committee call today, at least to my group is we're going to go see the deal. I'm you know, me personally, the sponsor, I'm going to be at the deal constantly. You know, whatever that is, every
week every two weeks where I'm gonna I'm gonna go live in one of the units, you know, that's a little extreme. But some some people do it. ⁓ I don't know how they have a family and do that. But they do. Because investment committee before that call just stepped out of an asset management meeting where they're probably upset at some sponsor who they bought 70s and 80s vintage stuff with in 21.
David Moghavem (40:51)
Some people do it.
Married to the game. Married to the game. Yeah.
Garrett Nondorf (41:14)
who isn't, they feel like, paying enough attention. And so if you can ⁓ massage that for them, it helps a ton getting a deal done. And I hope you'll also do it when the deal does get done. Yeah.
David Moghavem (41:29)
Right,
not just show it and then, yeah, exactly. So, all right, Garrett, well, do you have any more props to show before we hop off? Anything we missed?
Garrett Nondorf (41:33)
Not just safe.
There's one at my desk that I just couldn't bring myself to bring in here. It's a huge piece of turf from my ⁓ garage. Secondary and tertiary markets, we're seeing a lot of investment committee loves them because you can get six cap plus in there. And I could not think of a prop for secondary and tertiary. And I was in my garage just like looking at the shelves and I was like, turf sherry?
David Moghavem (42:09)
Turf, terf, terf,
terfier.
Garrett Nondorf (42:12)
⁓ So that's there. Yeah, and it's going to stay.
David Moghavem (42:14)
I love it.
Awesome, awesome. Garrett, thanks again. Really appreciate it. This was a fun one. We gotta run this back. Maybe we'll get JC on the next one too. So we'll make it happen. Garrett, really appreciate it. Looking forward to ⁓ seeing you post your next meme on LinkedIn. Hopefully you grow this stash back. We're all rooting for it. ⁓ looking forward to keep showing you deals.
Garrett Nondorf (42:24)
Get JC in here, dude. Get the real action.
Thanks, buddy. Thanks for having me.
David Moghavem (42:43)
Awesome.