Dave:
For anyone looking to invest in real estate, the more passive options like investing in a syndication can be really appealing. There are great returns and you pretty much don’t have to do anything. But in recent years, we’ve seen syndication returns diminish. So today we’re diving into what’s behind the trend and whether there are still good syndication deals to be found. Hey everyone, it’s Dave. Welcome to On the Market, and we’ve got a super fun episode for you today. We are joined by Brian Burke, who’s a seasoned multifamily investor. He is been on the show many times, and he always offers very spirited and fun takes about the state of the multifamily market. And we have the BiggerPockets CEO Scott Trench, who’s also an active investor in syndications. He participates as an lp, which I’ll explain in a minute, in a lot of syndications, as do I.
So we’re gonna have a really good discussion and debate about the topic are syndications debt. And in this conversation we’re gonna talk about the pretty rapidly growing number of distress multifamily properties. We’ll talk about how syndications arrived at this point, where there is distress in the first place. We’ll talk about some regional variances and some markets that have seen the worst multifamily returns, and we’ll talk about ones that have held up pretty well. Plus we’ll also be talking at the end about whether or not we’re still personally investing in syndications and how our current deals are performing. So let’s bring on Brian and Scott. Brian Burke, welcome back to On the Market. Thanks for being here. Thanks for having me here, Dave. It’s great to be back. Always enjoy your colorful commentary, an honest commentary about the multifamily and syndication market. Scott Trench, thanks for joining us as well.
Scott:
Thank you, Dave. Super excited to be here.
Dave:
Well, I’m, I’m gonna outsource my job to both of you to just start here and just create some context around what we’re talking about today, which is of course, syndications, which in our world, at BiggerPockets, most of the time what we’re talking about is a multifamily syndication for, there are other types, but that’s mostly what we’re talking about. So, Brian, can you just explain to us what a syndication is and why the term syndication is so closely associated with multifamily, at least in our community?
Brian:
Yeah. So syndications really are just a vehicle to finance a business venture. And you know, I, I know on BiggerPockets we often talk about syndications in the context as a way to acquire large multifamily properties. And certainly that is one of the uses for syndication. But syndication in and of itself is really just a group of people getting together collaboratively to execute some business model. And that might be to start up a new company to make widgets. That could be a syndication, could be to buy, uh, office buildings, self storage, uh, any type of real estate. It could be a race horse. I mean, any kind of different thing that requires money to be pooled from a group of investors that’s managed by one person or one company is a syndication.
Dave:
So just to, to establish this for everyone, a syndication is a way to fund any type of business. It is a popular way to fund multifamily acquisitions, but not all multifamily acquisitions are syndications. It’s just one way to do it. All right. Next contextual background goes to you, Scott. There are two different classes. Uh, typically in a syndication, there’s something called the limited partner, an lp. There’s also a general partner, a gp. Can you tell us what those two things are?
Scott:
Sure. The general partner is typically raising the money and operating the deal. Hopefully they’re doing both of those things. In many cases, they and their team are doing both of those things. Sometimes duties are distributed, and I’m sure we’ll get into why that has created a little bit of chaos in the space here. And then the limited partner just basically hands over the money and most operating control and, you know, hopes that they did a good analysis in the front end and hopes to receive the, those returns in the back. That’s the blessing and the curse of passive investing in syndications. It is truly passive. You give up essentially all control, um, with limited exceptions once you hand your money over to a syndication, either in a single asset deal or a fund structure.
Dave:
Given what you said, what type of investor, let’s put the profile of the average investor who syndications appeal to, or who would you at least recommend consider being an LP in a syndication?
Scott:
Sure. I’ll build a profile of a typical lp. I mean, this can run the gamut from anybody, but the typical probably bigger pockets listener that folks might know or have met in the past that’s gonna be in this category of an LP is probably a modest accredited investor, right? So let’s talk about 1 million to maybe $5 million in net worth. Um, they can be, of course go up the whole gamut to institutional capital with hundreds of millions or billions of dollars in assets. But probably most people listening to this that would be relevant to the, uh, to thinking about investing in syndications are gonna be in that modest accredited investor category there. And the big theme is a mentality shift. Most of those people just don’t want to build big real estate businesses. Maybe they’ve got a career, maybe they just wanna live the financial independence, retire early lifestyle, and they want to put some portion of their portfolio in deals that provide either diversification away from traditional stock market investments, their existing real estate portfolio, um, or they want a different type of return, like cash flow, for example, in a preferred equity format. But that’s what I would say is a typical bread and butter limited partner in this space. I see Brian nodding his head and agreeing with, with most of what I’m saying there. I’ll talk about the GP next.
Dave:
Well, I, I feel so seen, Scott, I feel like you’re just describing me. I invested in syndications as an LP for a lot of the reasons you, you just listed. And I do think most of the people I’ve met who also invest in syndications sort of fit that bill. It’s not typically the first thing you do as an investor unless you have a, a lot of money and a lot of comfort with the real estate investing space. I’m actually gonna throw it to Brian though on the GP here, Scott, and, and ask him since he is a GP or has been in the past, I know he is not buying a lot right now, but is a gp. What’s the typical profile or who makes a good gp, Brian?
Brian:
Well, I think, uh, there’s a difference between the typical profile and who makes a good gp because there’s, there’s a lot of, uh, syndicators out there, quote unquote gps that might throw off the average and make typical a little bit less than what would be considered good . Uh, so I think, uh, a, a typical GP is somebody that’s working their way up the real estate investment ladder, and I’ll kind of layer this in with what I think makes a good GP to, is somebody who, uh, has invested all the way up from single family homes to small multifamily, to midsize multifamily, to large multifamily, has a long history of investing in real estate, successfully creating value, uh, for themselves and for their investors, and uses syndication as a tool to grow their business into something larger than they could grow on their own. Now we see a variety of syndicator types all the way from, you know, first time real estate investors who think that you can invest in real estate with no money if you just simply syndicate out large apartment buildings and have somebody else provide the cash.
Dave:
Is that not how it works?
Brian:
Well, yeah, that’s, it’s how it’s done in a lot of cases, , but that’s also where, you know, if you were to look at syndications that are going down in balls of flames, they, uh, tend to fit that description more often than not. Uh, now I think, you know, what makes a good syndicator is somebody that’s in this business as a financial services provider and recognizes that their role is to safeguard their client’s principle and grow their investments. Not someone who is in the business to become financially free, work the four hour work week or invest in real estate with no money, no skill, no knowledge, and do it on the backs of others. And, you know, I think the, the field is, is, uh, populated with people that fit all sorts of descriptions. And it’s really important that LPs or investors are very careful in making their sponsor selections. Because I think I’ve preached this a number of times on this show and elsewhere, including in my, uh, BP published book, that the sponsor that you invest with is more important than the deal you invest in because, you know, bad sponsors are out there and they’ll screw up a perfectly good real estate deal.
Scott:
I just wanna piggyback on a, a couple of items that we talked about here, right? I would just simply define the GP as a professional investor or that’s what they ought to be here. The GP in its definitional sense, raises the capital and deploys it. It’s an active role in managing the asset at the highest level. And they run the gamut from career professionals like Brian Burke here to these folks who bought, I mean, sometimes the rackets in the space get crazy. And now with the tide coming out, we’re seeing some of the folks that really shouldn’t have been in there or just doubled the penny over and over and over again, all the way through the peak, really starting to recede. And we’re starting to see that pain come out and LPs are gonna be the ones that are gonna get smarter. The GPS will just keep doing it, right? This is ingrained in some of them. There’s this, it attracts a certain high ego person.
Dave:
Oh yeah. Like Brian.
Scott:
Yeah, exactly right. , it attracts us. And, and it should, the, the allure of money is a motivator. And the l as the lp, you wanna align those interests with the, these gps so that they work the 60, 80, a hundred hour weeks necessary to get these deals through to completion and have the big payday at the end. But that’s been the, the problem in the space that we’re coming out. And I also wanna call out that I just slightly disagree with Brian on the, the sponsor is more important than the deal piece because I believe that, uh, you can invest with a great sponsor and if you buy at the peak at a three and a half cap, you lost everything. Didn’t matter how good they were, uh, to that front. And they can behave ethically and do all the right things. Maybe you should invested them again, but sometimes you’re gonna lose the deal too.
Dave:
But would a good GP buy at the peak with a three and a half cap, is the real question, right? It’s that, would a good sponsor do that?
Brian:
But what you’re describing there, Scott, is a risk adjusted return if you’re getting those high returns because of those ultra low cap rates you’re doing so at higher risk. And yeah, that’s how some of those deals blow up. And just to kind of dovetail onto something else that you said there about LPs and their knowledge, there’s an old saying that says, you know, when a deal starts out, a GP has the knowledge, the LP has the cash, and when the deal is over, they switch places, .
Dave:
All right, so now that we’ve gotten all those definitions outta the way and we’re all on the same page about what syndications are and the upsides and the risks, we’re gonna dive into the juicy stuff. Brian will walk us through the state of syndications today and how we got here right after the break. Investors welcome back to On the Market. I’m here with Brian Burke and Scott Trench talking about syndications. All right, well this has been helpful context to just make sure everyone understands sort of where we are and how we got here in, in the world of syndications. But before we get into where we’re at today, Brian, I’m just curious, you’ve been doing this a long time as a GP and I was just kidding about your ego. You’re a very humble, very competent person. Has it changed? I hear this narrative that social media sort of invented these sort of inexperienced, I should say, uh, GPS and that it got popular. But has this always been the case? Has there always been suspect operators in this industry?
Brian:
Yeah, of course there have, I, I had a friend of mine, uh, 15 years ago that lost her entire savings, investing in a real estate syndication when the sponsor turned out to be a crook and basically raided the account, stole the money and let the properties all go into foreclosure. Uh, she’s, you know, broke for life and he’s wearing an orange jumpsuit in a prison to this day. So, uh, these kinds of antics have been going on for a while. And, you know, that’s one of the jobs of a, an investor is to try to root that out. Now, one of the problems I think we’ve seen, uh, over the last, I’d call it maybe 12 years and got exacerbated over the call it, you know, 2019 to maybe 20, 23 period, is you have this blind leading the blind situation where you have newer gps that probably shouldn’t even be in the business but are able to be in the business because there’s this low barrier to entry.
And the low barrier to entry was there was a lot of LPs that had cash that didn’t know any better, and were funding these, you know, newer GPS in deals and, you know, basically nobody knew what they were doing. You know, the, the, the gps were inexperienced and, and untested. The LPs were just blindly throwing money around because it was a, it seemed like a better investment than maybe the stock market. And ultimately that, you know, led to complete collapse in a lot of these deals. And, and, and that’s really been part of it. Now, in the earlier part of this, uh, they were getting away with it because, as Scott alluded to, the market was re, you know, cap rates were compressing, rent growth was growing, interest rates were declining, and the market was essentially bailing out, uh, these blind leading the blind deals, and they were actually making really good returns.
And to your point, Scott, earlier, yes, they were even more than our returns in a lot of cases, I wasn’t willing to take the same amount of risk. So, you know, those days are over. And I think, you know, when you ask if things have changed, they’ve changed a lot because going forward, you know, you’re the operator’s skill and, you know, finding good deals is gonna make a world of difference because the market’s not going to bail you out. When things start to come around and get better, they’re gonna get better slowly, and it’s gonna take work and, you know, solid fundamentals to make these things pencil, not just blind luck.
Scott:
One of the things I wanna talk about is, you used the word antics, um, earlier, and one of the things that bugs me, right, is somebody raised a syndication in 2019, exited in 2021 or 20 18, 20 21, did really well and thought they were awesome and thought things were going well and raised a bunch more capital. You know, when, when going after it, let’s actually take our 20 years of syndicating and all that type that take that hat off and just say, is that unethical? Is that, do we have, is it an ethics problem or is it a, is it just a, a mistake? Is it just people getting too excited on there? Like again, I bought that three and a half cap and I, I don’t think the operator was unethical. I think that was just very silly. In hindsight, we should obviously not have bought a three and a half cap multi-family deal. Um, and those days aren’t coming back. So what is your opinion on that, Brian?
Brian:
Yeah, I, that’s, that’s a great question, Scott. And I think, uh, I think there’s unethical operators out there, and I think that there’s ethical operators that don’t know any better and got in over their head. And, you know, you see the whole, the whole, uh, bit of it there was, I remember looking at a deal one time where it was so badly messed up, and it was a newer property in a great market, and it was just fundamentally operating horribly. And when I asked, I was trying to dig in to figure out, you know, why is this such a problem? Obviously the owner couldn’t possibly be an idiot because this was being sold as part of like a five property portfolio. And, and so I’m talking to the broker, I learned that the, the operator had bought thousands of units in about a two year period of time.
And this was, I think around 20 18, 20 19, and then decided to take management in-house and go vertically integrated, did that, but really knew nothing about what he was doing. So he hired all the wrong people, he had a lot of turnover, people were quitting. The thing just fell into complete chaos. And ultimately it got so bad that they couldn’t even evict non-paying tenants because the syndicator wasn’t even, didn’t pay the bills to their eviction company, and the eviction company wouldn’t process evictions for them. It was that bad. And, and so, you know, I don’t think the guy was unethical. I think he just got in way over his head and didn’t appreciate the risk of growing too quickly. And, you know, when you have early success, you think you’re invincible. And that real estate is like being a kid in a candy store. Everything looks like a deal. I mean, isn’t there an old saying, like, when you’re a hammer, everything looks like a nail. And it’s kind of the same thing with, you know, some of these groups that got in and had early success in a really good favorable market environment, uh, that think that they did that ’cause they were great operators and really they did it because they had high rent growth and cap rate compression. So not unethical, no, but certainly disastrous.
Scott:
One other thing i i, that always comes up for me when I think about this situation is the incentive misalignment. When you buy a hundred million dollars of real estate as a gp, you often collect a one to two and a half percent acquisition fee. Forget the other millions of dollars in fees potential that can come up in that situation. You got two and a half million dollars for buying a few apartment complexes in there. And look, I am all for paying a gp, right? If I’m gonna give somebody a hundred grand, I want them to earn a high enough salary where they’re not worrying about their side hustle or their Instagram account or whatever it is. I want them earning enough money to be focused full time, and I want them to have a huge carrot. I want them to have many millions of dollars at the end of that. I just want them buying their beach home after my money is returned , not with the money I just gave them. How important do you think that structure is in creating misalignment here? It’s very easy to convince yourself that what I’m doing is ethical when the more I buy, the more money I make right up front, right? Is that a part of this?
Brian:
I think it’s a part of it, but maybe not. It, it just depends upon the, again, going back to the sponsor, right? For a newer sponsor that’s doing this ’cause they don’t have any money, uh, the, the lure of a big payday, even if it’s a few hundred grand, is overwhelming to them. And, you know, they’ll, they’ll take a 300,000, $500,000 acquisition fee for a deal that they have no money in just because they can, you know, whether it’s a good deal or not, no one cares. Or at least on the GP side, you know, that’s not, that’s not their focus right now. Somebody that’s been in this business for the long haul, on the other hand, I think looks at it differently. You know, the way I look at it is I look at the future potential of, you know, the aggregate of acquisition fees and other fees that you earn over the long haul. And if you screw up a deal, you have a real tough time raising money for the next one. And if that next deal doesn’t happen, that next fee doesn’t come in. And you really have to look at this as a career, not as a transaction. And I think that’s kind of the difference between what you see with newer sponsors and season sponsors.
Dave:
All right. This has been a great conversation about the state of syndication, specifically what’s going on with LPs and GPS right now and some of the challenges that have arisen over the last couple of years. But what we’re here for today in this podcast is to talk about are syndications dead? Are there good syndications to be invested in today? Will there be good deals in the future? And so I think we need to turn our attention now towards the state of multifamily in general, not just the the ownership structure of a syndication, but what is going on with the asset class. Most people like Scott and myself as LPs invest in in today’s day and age. So Brian, maybe you could just give us an overview of h how would you describe the multifamily market today?
Brian:
Total crap . Uh, that’s, that’s, that’s probably the best, the, the best way I could put it. If I’m, if you really want me to be succinct and clear,
Dave:
I said in the intro that you’d offer colorful commentary and you’re, you’re living up to the billing. Thank you, .
Brian:
Well, you know, I, I try, if you look at some data on how far prices have collapsed since the second quarter of 2022 and look at peaked trough measurements, uh, I’m seeing reports of like 25 to 30%. Now, if I look at data myself from deal to deal, uh, peak to trough, I’m actually seeing deeper decline than that. Uh, about 35 to 40% in value. And here’s an example. We had a property that I had an accepted LOI, uh, that I was looking to buy in 2021 for $55 million it brand new construction. And the seller, after accepting the LOI didn’t sign the purchase agreement because he said, you know what? I think I’m selling this too low. I’m just gonna keep the property and sell it for more next year. Now, how do you think that worked out for him? Well, I’ll tell you how it worked out.
Uh, he’s still trying to sell it. They just brought the property back to me. My new offer was $35 million, so that’s $20 million less for the same property and I’m underwriting to essentially the same performance. Now, I’ve never been more happy that I didn’t get a deal, I’ll tell you that. Uh, but that’s an example, just a real live deal example of how far values have come down. Now why is that? There’s a lot of reasons. I think I described this on a previous show as a traffic collision where if you imagine a four-way intersection and all the lights are green and from one direction you have interest rates from another direction, you have rent growth from another direction, you have cap rates and from another direction you have expenses. And they all went the wrong direction at the same time and they collided in the middle of the intersection and left this tangled mess of metal. And that’s what we’re dealing with right now. That’s the state of the mar multifamily market. Now we’re at the bottom. That’s another discussion, but it’s certainly, I think we’re closer than we, uh, than we have been.
Scott:
I love that. I just wanna agree very, uh, emphatically with Betty, the points Brian made. I will say, I’ll go, I’ll even one up a couple of those and say, if interest rates are 5%, cap rates should be 6%. I bought a deal at a three point a half cap. That thing should be trading at a six cap. Like that’s what I would be wanting to buy it at today. One of the things Brian didn’t say is, transaction volume is not happening in this space. So even more than what you’re seeing from a a, a valuation drop in the multifamily space, you’re seeing no transactions, right? We’re, we’re doing a, a capital call on a deal. I meant, and I don’t know if there’s any comps to, to tell what the thing is worth at this point and that should scare multifamily investors that are out in, in the industry right now.
So there’s no comps. I believe that multi-family properties should trade at a premium to borrowing costs. Uh, fundamentally I think that’s an absolute, like that’s a, a fundamental thing for me. I’m not gonna put any more money into multifamily until that is true. The opposite of that, buying at a cap rate that is the same as your debt costs or below it in a negative leverage environment fundamentally means that you are all in on NOI growth either through rent growth or expense, um, expense reduction. So you better have a real good plan if you’re gonna go into something like that. Or you better pray that the market delivers, uh, massive rent growth that will bail you out because that’s the only way out of a negative cap rate situation. Um, and then you have the supply headwinds. I mean, this is the year 2024 with the most multifamily construction hitting the market ever.
You talk about how there’s a housing shortage all you want, multifamily developers are doing everything they can out of their own pocketbooks to solve that housing shortage problem. So we have debate on the demand side, but the brutal reality of what is going to happen to you on the supply side will drive your absorption down and will drive your rents down at the same time. And that will happen through the middle of next year. It will abate in 2026 by that point. So maybe you get some rent growth at that point. But this pain is here through 2025. And I don’t think there’s a world where cap rates don’t end up being above interest rates in markets like a place like Austin, for example, uh, in the near term. So I think that that’s, that should scare the heck out of people and I’m very bearish on the space for the next 12 months in most regions.
Dave:
Yeah, I was actually just gonna ask you about some regional changes and uh, shout out to our colleague Austin Wolfe, who pulled some data for us about the multifamily market. And Austin, Texas is one of the places he pulled Scott. And to your point, just in the last year, they’ve had 28,000 units delivered in Austin and rent for multifamily has gone down 6%. Just like you said, even though there is population growth, even though there is employment growth markets like that, where there’s just this oversupply are getting hammered. Meanwhile, if you look at markets, to your point, Chicago places in the Midwest where there is a lot less multifamily construction rents are still growing. So even though Brian, uh, categorically described multifamily, uh, as total crap, I think was exactly the words you used, I agree, uh, there are, of course there are of course regional differences, but I think the national summary is spot on.
Scott:
But even Chicago, right? Like I, I don’t know what’s going on with cap rates, but it’s hard for me to imagine that the asset value is not impaired. So like in Chicago, I would be surprised if you’re seeing cash flow really getting crushed for many in the multifamily space. I’d love to hear some feedback on that. I’ll not be surprised to hear it getting absolutely wrecked in a place like Austin, which by the way, that’s just the, that’s just the, the rent growth, the expense growth in the south has been even worse. You have huge increases in insurance and that is the worst possible thing for a multifamily operator. ’cause there’s nothing you can do about it. And it just gets taken right outta NOI and right outta your valuation on top of whatever cap rate expansion that you’re seeing in the asset. So I worry like in a place like Chicago, you’re still gonna see valuation declines, but your cash flow has an evaporated and in Austin you’re seeing both.
Brian:
Well, one one quick comment is that, uh, the, the things that you described there, Scott, are the very reasons why I haven’t bought anything in three years. I’ve been completely pencils down. I think a lot of prudent buyers have been completely pencils down, which is why transaction volume is off 80%, uh, from the peak of the market. So that, that definitely speaks to, uh, to why no one’s buying. You can’t, you can’t make the numbers pencil simple as that. Now, can you make the numbers pencil in some markets, perhaps, but it’s still difficult. Now, Chicago has actually had a higher, uh, level of transactions in a lot of other markets because it does still have rent growth and the cap rates never got as low. So the cap rate decompression has been less of a factor than it has been in other markets, uh, just because of that.
But I can’t find deals in any market right now that make any sense at all. Now, if I were to find them, uh, it depends on how you’re evaluating them. If you’re looking solely at like historical, uh, near term rent growth, the Midwest markets have been kind of ruling the day over the last couple years while the Sunbelt markets, which were far favored in earlier years have been getting hammered. Now, having said that, they’re getting hammered mostly because of new apartment deliveries. You know, like, like you said, Scott, the developers recognized that there was massive rent growth and they wanted to capitalize on that by building more units. And boy did they ever, uh, now that’s starting to fall. I mean, construction permits are down 50% over last year. There’s a lot of units still in the pipeline that will be built and delivered. But when those are done and delivered and leased up, the market’s gonna get back more into balance.
Now that’s gonna take one to two years for that to play out. But when that does, I think that the southern markets, the sunbelt markets are gonna once again return to be the bell of the ball because you still have people moving there. And I always believe that you want to invest where people are moving to, not where people are moving from. So if you’re looking at this in the very short term, you know, maybe those sleepy Midwestern markets look really good, but if you’re looking at this in the long term, uh, those, uh, Sunbelt markets will look much better. And there may be an opportunity to buy some undervalued distressed assets in the next year or two in those markets at the bottom, and then capitalize on the ride back up after all the new apartment deliveries have tapered off.
Dave:
Okay, time for one last quick break, but if you’d enjoyed the conversation so far, if you’re curious about passive investing, BiggerPockets has a brand new podcast for you. It’s called Passive Pockets, the Passive Real Estate Investing Show. And you can listen and follow now wherever you get your podcasts. We’ll be right back. Welcome back to On the Market. Let’s jump back in. All right, super helpful. Brian, I have one more question for you about this. Uh, tell me about distress in the market. ’cause you, it’s like every day in the Wall Street Journal or some financial news talking about, you know, some credit emergency in the commercial real estate space. Are you seeing a lot of distress in the multifamily market? And if so, is it coming from banking or where is it coming from?
Brian:
There is a lot of distress and it’s coming mostly from loan maturities and, uh, floating interest rates. You know, your fixed rate loans that still have many years left on them. The, the subset of deals that rather maybe small subset of deals financed that way, uh, are doing fine. You know, their values have declined, but they’ll ride it out. ’cause you know, their debt service hasn’t, uh, gone up and their maturities aren’t steering ’em in the face. So those deals aren’t, aren’t really, uh, problematic, but there is a lot of distress that’s, uh, coming forward in shorter term lending. And, um, you know, Austin pulled up some great data before this show, uh, talking about, uh, 8.4% distress rates in the multifamily lending sector. Uh, that some data that came through and, and I actually had seen that data, and there’s newer data now, uh, from the same source that that multifamily distress rate has reached 11%.
Now the headline is, wow, multifamily distress is 11%. That’s a lot. The nuance though is that data was restricted to a subset of loans called CMBS, which was commercial mortgage backed securities, which comprises only about 10% of the multifamily market, uh, for financing. So if 11% of 10% are in distress, that’s only 1%. But what about the other 90%? How were they financed? Well, a lot of ’em were financed with short term bridge debt that had three year maturities. Now, if the CMBS is generally a five year maturity, and if 11% of those loans are in, uh, distress because of a maturity issue, which, which is the case in most of those, that means that, you know, you’ve got 5-year-old loans reaching maturities they can’t get out of. What about the 3-year-old loans that are now reaching maturity? There’s a bigger number of those. And, and this is where I think things start to get kind of interesting. I got some data from Yardi Matrix on this acquisition since 2020 with two to three year loan maturities. There’s 3,200 properties and these are, uh, multi-family properties, a hundred units and larger. 3,200 buildings were purchased since 2020 with two to three year loan maturities. That’s a lot of inventory.
Dave:
Wow.
Brian:
Uh, since 2021, there were 1700 properties with floating interest rate loans. There’s 3,500 properties with construction loans between 2021 and 2023. Now, construction loans, for those of you who don’t know, tend to have short maturities. Generally two years, maybe three years, maybe five years if you’re lucky.
Scott:
They’re just hard money.
Brian:
It’s, it’s essentially hard money and or bank money, which is recourse, which is a real, uh, a whole other can of, and there’s over 2000 properties with debt service coverage ratios, uh, less than a break even. And, and that’s just in this subset of data that was found. And there’s concentrations of this in certain markets. , you’re talking about crap here,
Scott:
You’re stressing me out, man. Please stop. Please stop. , I’m just kidding. Keep going with this in a second here. But I wanna interrupt and I wanna talk, I wanna talk about this deal that you passed that you didn’t get the deal you used to . Let, let’s go through that example. Okay, 2021. Let’s say you buy this thing for $55 million with one of these three year fixed rate GSE debt loans, right? Today it’s worth $35 million. What would’ve been your debt to equity when you bought it?
Brian:
Well, it would’ve, when we bought it, you know, generally those three year loans are 80% to cost, sometimes 85% to cost. So your debt to equity is really high. You know, your sometimes, you know, 70 to 80% is debt and the rest is equity, and that’s all gone. It’s, it’s a hundred percent wipe out.
Scott:
Let’s literally do that math. It’s down $20 million. So you would’ve bought with, with, uh, $11 million in equity and 44 on your GSE debt. The NOI has gone nowhere to refinance it today. What would, you know, what, what would that take? How you, you’d have, you’d have a $35 million property. E the equity is well gone. How much would you need to raise to refi it?
Brian:
Well, I can tell you that in preparing to write this offer, uh, the debt sizing for the acquisition this time around was 25 million. So that’s the size of the loan. So now let, let me clarify one thing before we get too far down this road. I would never have bought that property with a high leverage three year loan. Uh, we would’ve been at like 50 to 60% LTV with 10 year maturity. So I wouldn’t be stuck in that position. But other buyers who were looking at that deal at that time would’ve been looking to finance it that way.
Scott:
But that’s it. You just said there’s 3,300 deals that did that. You just said that. That’s right.
Brian:
Right
Scott:
On. That’s right. So, so those deals, so now you’re the operator on that deal. Are you, and, and let’s not, let’s not take you, let’s take somebody who’s a little bit more naive and not as you know, in this, the one of these folks we talked about earlier in the call, are they gonna actually say that the deal is now worth $35 million?
Brian:
No. And you know how I know that they aren’t? I, so I have a deal that, that I got stuck with when the market, uh, fell. Uh, we had it in contract to sell, but the switch got flipped on the market and the buyer couldn’t close because the market had declined. So I still own that property. I got a broker’s price opinion of value on that property. And when the broker, uh, had the number for me, he called me on the phone instead of sending me the price opinion, he called me on the phone and he said, you know, this is what the number is gonna be. Do you want me to send it to you? And I’m like, of course I do. Why wouldn’t I want you to send it to me? He said, because a lot of my clients are asking me not to send the broker’s opinion of value, because if they, if I did, they would have to share that with their investors, and they don’t want their investors to know. Wow. And I was floored. I couldn’t believe it. I mean, sponsors are actually hiding this stuff from their clients.
Dave:
Okay. There’s the immoral, uh, GP that you were talking about, Scott,
Scott:
And that’s the, that’s, that’s the problem.
Dave:
Yes.
Scott:
Right? Like that, that I see in here. So you just described all that, but what is happening out there is that $55 million deal that’s now worth $35 million is getting capital called by the sponsor. Yeah. Who’s saying it’s worth $45 million and somehow they’re making that case look palatable to investors. And that’s showing up in the BiggerPockets forums, for example, and on passive pockets as a question. And I think that’s, I I think that you’re gonna see transaction volume down until cap rates are at least at or above interest rates for the time being here or until the supply abates. But that’s the decision that syndicators and their LPs are facing with right now. And Brian, I guess the question here is what do you ethically do in that situation?
Brian:
Well, I’ll tell you what we did. I mean, in the deal that, that I just described to you a second ago, uh, I, we fully disclosed what the value was. You know, I’ll take the phone calls from people who are like, oh my gosh, I can’t believe the value’s falling that much. I mean, what are you gonna do? That’s the truth. All you can do is tell the truth. Sponsors ethically should just be telling their investors the truth and let the chips fall where they may, that’s what they should be doing. Now in terms of like this, uh, $55 million deal that we were describing before, if you finance that thing at max leverage, let’s say 80% to cost bridge debt, that’d be a $44 million loan, $11 million in equity. Now it’s worth 35 and your loan is 25. So to refinance the $44 million loan with a $25 million loan, you need $19 million of equity, right?
So there’s your capital call, but here’s the rub. You only raised 11 million. So that means you would have to be asking your investors to put in basically two times what they originally put in just to salvage this deal. It’s a complete wipe out. The best choice for the sponsor in this case is they have to let the lender, they would have to let the lender foreclose take the property back and everybody’s a hundred percent wiped out. And you’re seeing that happen in some of these deals for that very reason. And there’s 35, 3200 of ’em here that might be in that position. Now, us as a buyer in the future, those are the deals I want to be buying because those are the ones I bought after we came out of the last recession when I was buying stuff at 50 cents on the dollar from lenders. I mean, that day could come again.
Dave:
Well, that, that just sets up a great transition to what the future holds. To answer the question of our episode, our syndication’s dead. I feel like we’ve sort of answered it. Uh, I’ll, I’ll defer to you, but my summary of this conversation is that syndications aren’t dead, but multifamily is dead right now, let’s just call it. It will of course come and run through a cycle, but it’s not the structure of syndications that’s causing problems, it’s just the multifamily market that’s causing problems. Would both of you agree with that?
Brian:
I would agree with that as a, uh, broadly, yes, certainly there’s some problems with some syndications
Dave:
Yes,
Brian:
Uh, where people run over their head. But the, the most of the issue here is actually with the market. And I think the market’s been in the toilet for three years. That’s why I haven’t bought anything for three years. But from every disaster opportunity is bred there, there will be a moment when, uh, multifamily acquisitions make a lot of financial sense. Uh, I don’t think we’re quite there yet, but that day is coming and there will be opportunity. I mean, this isn’t all doom and gloom. Uh, housing is a, is a very valuable and sought after resource and it always will be. And you know, this, this too shall pass.
Scott:
I’ll also chime in that I had a debate with our analyst Austin, who is phenomenal. And I told him about how supply is such a good predictor of negative rent growth like in Austin. And here’s the silver lining for everyone listening here. He said, Scott, that’s right, generally, but what you missed here is that long term that supply growth is correlated with even better rent growth and appreciation on assets in those classes. So if you’re in a place like Austin, for example, that new supply that’s all coming on the market has a high correlation to predicting long-term success. So it’s not all doom and gloom forever, uh, but you’re gonna be in a lot of pain of you have some of a, a loan maturing in the next year or two, I think, in those markets.
Dave:
Well guys, I have to say this, this episode came at the right time for me. Someone sent me a, a multifamily deal the other day that I’ve been looking at. It’s pretty interesting actually. But I think you talked me outta it, . So I’m gonna pass on it. Thanks for the advice. Well, Brian, thank you for joining us, Scott, as well. Of course, if you wanna connect with either of these two, we’ll put their BiggerPockets profiles in the show description below. Scott, thanks for being here.
Brian:
Thank you Dave
Dave:
And Brian, always fun to have you.
Brian:
Thanks for having me back, Dave,
Dave:
For BiggerPockets. I’m Dave Meyer and we’ll see you next time. On The Market was created by me, Dave Meyer and Kaylin Bennett. The show is produced by Kaylin Bennett, with editing by Exodus Media. Copywriting is by Calico content, and we wanna extend a big thank you to everyone at BiggerPockets for making this show possible.
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