How much have commercial real estate prices declined? Are the properties we are buying today discounted? Neal Bawa, CEO of MultifamilyU, shares his knowledge.
How were you investing in 2020, 2021, 2022?
For that property, I must be honest and say there is no horror story to tell. The property did what it was supposed to do, we bumped rents by $175 from the very beginning to the end. On the last day, we had rents $176 dollars higher. So, the property did what it was supposed to, it also stayed highly occupied. You might say, it doesn’t sound like a typical property, where are the horror stories? The answer is this, by stepping outside of the metro, we were able to buy the best property in this small market. We didn’t have to be stingy; we didn’t have to buy a really bad property in a bad area, we just bought a very nice property in a very nice area, it just wasn’t in Atlanta. As a result, our process of actually running the property for years was fairly straightforward.
What about today? Things have changed dramatically since COVID. In December 2019, probably three months before COVID, cap rates were low, but they weren’t crazy low so we probably bought the property at around 4.7 cap or 4.6 cap but if you fast forward to six months, nine months after COVID, cap rates were completely insane. Many people don’t know the answer to this question which is, when do you think cap rates in the United States for multifamily were the lowest, which means the highest prices? The answer is March 2022.
How much have prices declined?
Another question that I think everyone should be asking that I don’t see enough is, how much have prices declined? When you ask that question, you have to go back to the first question, which is when was the peak because whenever you measure a decline, you have to always measure it from the peak. First, you have to know where the peak is so that you can say how much of a decline there is. In March or April 2022, the peak is well known because CBRE has published that and a bunch of other people have published articles around that peak. We looked at our underwriting from those days, and we were losing a lot of offers, we were still making offers because you have full-time employees, and their job is to make offers even if they’re losing them. We looked at the going-in cap rate in that month for the offers that we made. None of them were offers we won and one can say that we were conservative because we didn’t win any offers and we didn’t even get into best and final so it’s nice to look at that benchmark. And then we looked at the offers that we made in November of 2023 so now the gap between the two is about 20 months and the difference is the offers we are making today are 37% lower than the offers we were making in March. Does that mean that the market is discounted by 37%? No.
What is the right price?
In the absence of crazy interest rates, what is the right price for our properties? The right price is about 15% higher than it is today and at some point, we will return to that price, we are never going to go back to 37% higher, probably not for the next five to 10 years. The only thing banks know how to do when bad things happen is to cut interest rates to zero, so it will happen at some point, but until that next Black Swan event occurs, prices are about 15% above where they are today. What causes them to go to that level is simply interest rates dropping by about 150 basis points from where they are.