Los Angeles-based Jacobson Equities is hopeful that multifamily transaction volume will pick up later in the year but for now believes investors are navigating an environment where there is no true market for multifamily real estate.
“The definition of a market is a healthy population of buyers and sellers, and to me, there is no meaningful market right now,” said Larry Jacobson, president and CEO. “There are some buyers and some sellers but not enough to have any sort of meaningful price discovery or to understand where valuations really stand.”
The firm, which has over a 50-year history of focusing on multifamily and student housing properties, looks nationally for properties of 150 units or more and targets core-plus and value-added opportunities. Jacobson Equities is a long-term holder and recently reaped the results of this philosophy with the sale of a pair of multifamily properties in Seattle at what ultimately ended up being the high point in the market.
While Jacobson said the firm’s decision to sell at that time was in part due to luck, finding an appropriate property to redeploy capital through a 1031 exchange was challenging.
“Trying to buy a deal as the cost of debt skyrocketed from historical lows was like trying to park your car while the sidewalk is moving,” he said. “We ended up finding three outstanding replacement properties but it required a lot of creativity and kissing a lot of toads.”
The competition for multifamily assets over the past five to 10 years means there will be distress. “We will see this most acutely with over-levered assets with floating-rate debt where the sponsors have insufficient rate cap duration or loan maturities on properties that were acquired when things were still frothy,” Jacobson said.
These properties, which would have been acquired when cap rates were at their lowest, likely will need slices of preferred equity or mezzanine debt to make it through the next one to two years. “It won’t work for everyone or every asset,” he said. “Plus there are markets where rental growth has slowed, making refinancing harder.”
While Jacobson doesn’t believe the Fed will lower rates this year, he believes rate increases will likely plateau in 2023. This will provide buyers and sellers greater clarity on cost of capital, with evolving price discovery as buyers lock in on pricing that enables them to hit their target returns. “I still think 2023 will find a somewhat muted market in terms of available product,” he said.
CRE markets need more clarity from the Federal Reserve on the direction of interest rates before the market can pick up in earnest.
Federal Reserve chair Jerome Powell’s comments last Wednesday included guidance for the equity markets that the central bank does not anticipate lowering interest rates later in the year. “Obviously, this is because a frothy equity market begets more inflation,” Jacobson said.
“At this point, it is clear inflation has flattened out,” he said. “If we look at the last one to three months, inflation is no longer at a frightening level. But the Fed is not looking at that, they are looking at the output gap, the difference between GDP and available labor and capital, as well as specific measures of wage growth.”
He continued: “They’re seeing low unemployment and they are not seeing the wage growth retrenchment they want to see. Powell is placing a higher premium on bringing inflation to heel than on the risk of recession. When rates do start to come back down, they will settle at levels where we can make deals but not at the 2 to 3 percent levels we were seeing before inflation took hold.”