Apartment Investing in 2023

There’s an old proverb that states:

Best time to plant a tree was 20 years ago. The next best time is now.

I think that statement has been true for thousands of years and will be for thousands more…

If you want to sit in the shade or eat the fruit of a tree, you need to have planted it 20 years ago…?

If you want the benefits of a mature tree in the future, the best time to plant is now…

I think the same holds true with real estate.

The best time to buy real estate was 20 years ago. The next best time is now.

Real estate over the centuries has consistently gone up over the years and almost without exception, any property you could have purchased 20 years ago would be worth much more today.

But that’s over a 20-year period… what if we zoom in…

So why is it an especially good time to buy now?

The real estate market (and economy in general) is cyclical and there are and will be short periods where real estate may lose ground. If your investment horizon is long enough, however, real estate has and is most likely continue to go up and up and up.

Let’s look at what’s happened over the last year.

2022 started out with real estate in somewhat of a frenzy. Properties had multiple offers and prices seemed almost unattainable for most investors.

But then the Fed stepped in to tame seemingly rampant inflation...

A year ago, the federal funds rate (FFR) was essentially 0%, which made financing apartments relatively easy and was a large contributor to the amazing growth in prices over the past few years. At the time of writing, however, the FFR is 4.25%-4.50%, and that rate affects almost every other interest rate in the country.

When the fed first raised rates, it did so by 0.5% in March 2022, but that didn’t change much… interest rates went up a bit, but pricing on apartments remained strong in most markets. Then the Fed raised rates by 0.25% in May, then 0.75% in June, and another 0.75% in July…

For at least the first half of the year, nearly every commentator and news source predicted the Fed would pivot, reverse course, and bring rates back down before the year was over. Most people thought that the Fed Chairman was using threats of future raises to move markets - and maybe he was - but essentially nobody believed that the fed had the resolve to keep raising rates at the expense of the economy.

With that being the expectation, prices in most markets held firm.

Then the fed continued and raised rates again by 0.75% in both September & November, with an additional raise of 0.5% in December, which is a total of 7 rate increases in a year of 4.25%. They’ve also signaled another rate increase when they meet at the end of this month and that they’ll keep rates around 5% for most of 2023.

Now that most of us have realized that this will be longer lasting than expected, it finally will have a significant impact and multifamily prices will adjust accordingly. I believe most metros will see a decline in prices (though nothing on the scale of 2008-2009).

Second thing to consider is many operators in the past few years have financed properties with bridge debt - or short-term loans that are fairly easy to qualify for. For a time, many lenders would routinely give 80% LTV plus throw in some money for renovations… but these loans come with expiration dates, and there are a fair amount of apartment owners right now that are faced with having to either refinance or sell because they're at the end of their loan term.

There are others still that have variable rate bridge loans and have seen their debt service expense more than double over the last year, and once again will be forced to refinance or sell.

I don’t think there will be a wave of distressed properties hitting the market - maybe some distressed ownership groups - but I do think there will be an uptick in owners that need to sell under less than favorable circumstances.

What do I expect in 2023?

Put the price reductions due to higher interest rates together with the amount of properties from distressed ownership groups hitting the market, there will likely be numerous good deals and buying opportunities in 2023.

And just like planting trees, we buy now and wait for the market to do its thing. When the Fed starts cutting rates, prices will start to rise pretty quickly - similar to what happened when the Fed cut rates in 2019...

And I, for one, intend on being on the right side of this downturn...

As always, don’t wait to buy real estate… buy real estate and wait.

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