When Do You Hop Back In?
Almost every industry conference, lunch or round table dinner I attended for the last 5 years has asked some form of the question “what inning are we in?” Cyclicality has long been the reality of the real estate industry and after 10 years of strong economic growth, it was a looming shadow over every investment decision in the industry. (A small side note….every “experts” answer to this question proved to be 100% wrong over that time period and none ever considered “global pandemic” as the reason for the next downturn) While we now know exactly what “inning” we are in and that we have begun some form of a recessionary time, the next question considered in the real estate investment industry is when do you hop back in.
The first step in making this decision is understanding if all your assets are in safe harbor. We recently wrote about our approach to asset management during the pandemic –and at Wildhorn, we feel very fortunate that all of our assets have performed remarkably well nearly three months into the pandemic. Feeling like our current flock is well taken care of and positioned strongly for whatever the rest of this year might bring, we can cautiously turn our attention towards acquisitions.
Obviously for us, that means we’re going to be looking at Multifamily assets in Austin and San Antonio. Our previous article laid out the stats about how Austin fared during the last recession, and why we think it will again outperform the nation during and coming out of a recession. Just this week, JLL released a study showing Austin and Central Texas are among the very top performing multi family markets through this pandemic. The anecdotal data we have heard verifies the strength of multifamily relative to other asset classes across the country as well.
The next investment consideration is what type of discount or value are we looking for. In a Post-COVID environment, there are many questions about underwriting, market futures and all the other levers you need to factor in when underwriting a new deal. As we will discuss in future articles, much of the argument and value discussion is based on assigning a cap rate to your exit assumptions. At the end of the day, the cap rate is a somewhat arbitrary opinion that two grizzled veterans of the industry could dramatically disagree on. Furthermore, we haven’t seen data in Austin to suggest that the market wont quickly resume to Pre Covid numbers once folks are fully allowed to return to work. In talking with multi family owners, large investors and institutional equity groups from across the country, it’s very clear that Austin will continue to be a priority market for multi family investors for many of these same reasons. So back then to the question of the day, when do you hop back in? When do we hop back in?
There have been a few new deals that have come to the market since the pandemic hit. Nearly all of them are being shown to local groups who have a good track record. Thankfully, Wildhorn has been a part of those short lists. And we’ve dug into each deal. What we’re seeing is pretty straight forward. No assets are under distress, and no sellers are willing to take a big haircut. We also saw that nearly every asset that was under contract before March 13th, has since fallen out of contract. What has caused these assets to fall out of contract or prevented marketed assets from going under contract, has really centered around a disagreement on how much of a discount a seller is willing to give in a Post Covid market. Buyers with the ability to capitalize deals are waiting with baited breath for “distress in the market” or the proverbial “blood in the water” scenario. But what happens when there isn’t that much blood?
At Wildhorn, we try and think about value in a multifaceted way. We’ve written about how we plan to be opportunistic–and that was before COVID hit. Obviously, underwriting coming out of this pandemic needs to be adjusted and business plans will be much less aggressive than previously contemplated. We also think looking at a longer hold period could be a unique way to account for a change in value that doesn’t reflect a dramatically different price. We are, of course, long-term believers in the Central Texas story and the 150 people that move here every day. The debt market is settling down, and currently sitting at historically low and attractive rates. You can get 10-yr agency loans around 3.0%. All the ingredients are there to be an opportunistic buyer–if you believe in the location and the duration of your investment.
The big question we’re asking ourselves–are our investors feeling the same way? Where is their mindset today? How have they been bettering themselves during this pandemic? Are they wanting to invest or sit in cash? Do they believe in the safety and security of multifamily? Of Central Texas? We’ve spent an awful lot of time talking with investors over the last several weeks and months. And we’ll continue to do so. As dynamic and unprecedented as these times are, things change quickly. Texas is opening up, and so far hasn’t hit a second wave. Behaviors are changing rapidly; attitudes even faster. As an investor, we would love to hear from you. Where is your head in all of this? How are you thinking about investing? And to bring it back to the big question of the day…when do you hop back in?