November 2023 Insights: Creativity Unlocking Opportunities
As we gather around the table this week for Thanksgiving, Vanamor would like to extend our heartfelt gratitude to all of our investors, colleagues, and readers for your unwavering support and trust. Your commitment propels us forward, and we are truly thankful for the collaborative spirit that defines our journey. Wishing you and your loved ones a joyous Thanksgiving celebration filled with warmth and gratitude.
Upcoming Opportunity
We currently have an accepted letter of intent (LOI) on a property in Beaverton, Oregon. The property is in close proximity with one of our existing portfolio properties, adjacent to Intel’s Aloha campus, and a few miles from Nike’s global headquarters. This is an off-market transaction that we anticipate acquiring at a 6% in-place cap rate, has substantial value-add potential, and benefits from seller financing at an interest rate significantly below market. When we come back from the Thanksgiving break, we expect to have the complete details on this compelling investment opportunity for your review.
Market Update
As we begin the holiday season, transaction volume has remained low which is typical for this time of the year but after a short reprieve from rising interest rates, there is growing optimism that activity will increase in 2024. After hitting an intra-day high above 5%, the 10-Year Treasury has retreated to 4.43%. While still a 16 year high, there is a sense that interest rates have likely peaked and with less uncertainty, multi-family values will begin to bottom. With that said, there remains a sizeable amount of distressed properties, specifically in Sunbelt markets, where operators continue to delay the inevitability of foreclosure by diluting common equity via Preferred Equity and/or loan modifications. While many operators have yet to communicate this to their investors, we have begun to see numerous media articles highlighting some of the larger operators that will be most affected. While the number of distressed properties nationwide is increasing, Vanamor’s portfolio continues to perform and, with downside protection in mind, no loan maturities sooner than 2026. Going forward, the bottoming out process will be a balancing act between supply (available properties) and demand (investor capital) but make no mistake, there is significant capital ready to be deployed once the market perceives it to be safe, evidenced by the large amount of preferred equity available in the market today.
Price declines have led to a much-needed improvement in multi-family fundamentals, and while likely painful for 2021-2023 investments with short-term hold periods, the cyclical nature of investments indicates that the years ahead are bright. A recent study done by Johns Burns Research & Consulting highlighted the decelerating construction market with developers expecting a 20% decline in new starts, and 25% of respondents believing apartment starts will slow at least 50% over the next 24 months.
What does this mean? After a wave of supply coming online in 2024, the housing market is once again expected to be under-supplied which will lead to further rent growth and appreciation.
Creatively Unlocking Opportunities
We’ve all heard the saying “a stock picker’s market” to define a market in which the overall market is sluggish but opportunities prevail for those who have the discipline, skill, and creative aptitude to find value. Despite not having the same ring, today’s multi-family market is best defined as a “property picker’s market”. After prices have declined 20-30%, are we at a bottom? We could be is the answer… but many risks remain and we have yet to see the impact of increased supply from the distressed properties that will be foreclosed on in 2024. At the same time, just as investors may be pinpointing that precise moment to jump back into real estate investments, so are billions of other dollars waiting to be deployed.
So, what is Vanamor focusing on? We’re looking for the outliers and using negotiating power to creatively bridge the gap between buyers and sellers. We’re having discussions regarding seller financing which hasn’t been prominent since the 1990s and focusing specifically on non-industry sellers with significant trapped equity in the property that are seeing their cash flow squeezed by slowing rent growth and rising expenses. By employing these unconventional tactics, we’re finding win-win scenarios, albeit in very select cases. Over the past 16 months, we’ve underwritten 640 opportunities, written offers on 61 of them and were off on an average of 15% on pricing. These unconventional tactics are helping us bridge the pricing gap while staying disciplined in our approach.
Inflation Update
According to the latest data from the United States Bureau of Labor Statistics, year-over-year inflation took a 0.5% dip in October, while monthly inflation remained steady. This stability was primarily influenced by a significant 5.7% drop in gas prices for the month. However, inflation would have dropped further if not for shelter costs, particularly rent, which has continued to stay elevated despite real-time data showing rents flat year-over-year.
CPI Rent continued its predestined downward ramp in October but has significantly further to drop before catching up to real-time data from RealPage and Zillow. As such, inflation is expected to drop further and some indications are that we will be back at the Federal Reserve’s preferred target of 2% by the summer of 2024.
Federal Reserve’s Path Forward
In early November, the Federal Open Market Committee announced again there would be no change to the federal funds rate, remaining at 5.25% since their July meeting. This decision was in line with expectations from the market but the Fed still projects one additional rate increase before cutting. The market’s perception is that the Fed is done increasing but regardless of whether there is one additional increase or not, the tightening cycle is likely finished and one additional increase will not have a material impact one way or another. Furthermore, the market is now projecting interest rate cuts by the summer of 2024 while the Fed maintains its stance of “higher for longer”. The labor market has softened but remains in positive territory: The U.S. added 150,000 jobs in the month of October, down from the 336,000 increase reported in September and below Wall Street’s expectation of 170,000 jobs. The unemployment rate rose to 3.9%. We will closely monitor the Fed’s next move and continue to analyze future economic prints to stay attuned with the market.
What We Do
We are strategic real estate investors.
At Vanamor, we combine an institutional approach with an often overlooked middle-market focus to employ a flexible and disciplined investment philosophy. Our goal is to provide stable cashflow with above-market total returns. Since inception, Vanamor has averaged a greater than 33% annual return with an average of 8% annual cashflow distribution.
