2024 NMHC Conference: Crucial Real Estate Investing Insights And Takeaways From Stakeholders – Paul Hopkins

Get valuable snapshots of the current real estate scenario and forecasts for the near future straight from the 2024 NMHC Conference. In this episode, we have our very own Director of Acquisitions, Paul Hopkins, to deliver crucial real estate investing insights and takeaways from stakeholders and brokers attending the event. Paul lays out the market trends observed over the past couple of quarters, focusing on key regions like Jacksonville and Tampa, and further sheds light on the challenges faced in 2023. From the impact of distressed deals to the cautious optimism for 2024, find out about the abundance of capital waiting for the right opportunities. Plus, learn Paul’s predictions on potential Fed rate cuts, stabilization of insurance costs, and the expectation of a more favorable market in the latter half of 2025.

—

Watch the episode here

 

Listen to the podcast here

 

About Paul Hopkins

Paul has 17+ years in the construction industry, and 7+ years in the real estate acquisition, reposition and development business. Prior to joining CPI Capital, Paul consulted for a private equity multifamily and condo development real estate investment company. During this time, he handled all aspects of acquisition, underwriting, financial analysis, due diligence, asset management, investor distributions, monthly investor reporting, development and construction on multifamily assets. This included new ground-up developments and repositioning assets through redevelopment efforts.

Paul has also been a construction engineering consultant to heavy civil contractors working on signature bridge structures in North America, including the Peace River Bridge, Pattullo Bridge and Massey Tunnel Replacement Project.

Prior to his position as a consultant, Paul was an operation manager on a $2B Design-Build Infrastructure Project in Vancouver, British Columbia, with a heavy civil contractor, Flatiron Constructors, Inc. Paul led a team of engineers and contractors and was responsible for contractual relationships with engineering consultants, sub-contractor RFP, selections of vendors, budget estimating, forecasting, project scheduling, user coordination, and overall project delivery.

Paul spent his entire construction career on Design-Build and Public-Private-Partnership (P3) projects in the US and Canada where Paul led the engineering coordination with some of the largest design consultants in North America to build and successfully delivered multi-million and multi-billion dollar infrastructure projects.

Paul always placed himself into a role which was challenging and on the critical path of each project. Starting off as a field engineer on the world’s first ever horizontally curved incrementally launched bridge, to being the cable stay and deck erection superintendent of the worlds widest, and North Americas second largest cable stay bridge.

 

2024 NMHC Conference: Crucial Real Estate Investing Insights And Takeaways From Stakeholders – Paul Hopkins

Thanks for being with us. We’re shooting a special segment of our show, which is going to be somewhat of a market update here with our director of acquisitions and my good friend, Paul Hopkins.

 

 

How are you doing, Paul?

I’m doing great. Thank you. How about you?

Great. Thanks for taking the time. I  wanted to make this video. This has been with our conversation over the last few months and also the work we’ve been putting in myself as the chief investment officer and yourself as the director of acquisitions in relation to deal flow underwriting, analysis, and what we’re seeing in the market.

Jacksonville And Tampa Markets

Maybe give us an overview of what you’ve seen in the past couple of quarters. What have you seen in the markets that we’re focused on in the Jacksonville and Tampa markets, which are our main primary markets we’re focused on? We also look at Southwest Florida, Naples, Sarasota, and Fort Myers. We look at Space Coast. Give us overall what you’re seeing in the market if you don’t mind.

It’s no surprise that 2023 was a pretty unique year. Overall, deal volume compared to previous years is about an 80% drop. It’s pretty evident as to what we’ve been seeing in Jacksonville and Tampa. Not a whole lot of deals are coming out for 2023 mainly because of the rise of interest rates which also increased cap rates, at least for the buyer’s side, and there was a big disconnect between the sellers. There’s a lot of interest or sellers that want to sell or maybe need to sell. There was such a big disconnect between what buyers were willing to pay and what sellers were hoping for.

Out of all the deals that we looked at, we had about 170-plus deals that we looked at in the Florida market. Out of those 170-plus deals, we took a serious look at 22 of them and put in offers on half of that, so about 11. We made it to the best and final, but we couldn’t come to an agreement on the price and terms with some of these sellers. Out of those 11, I would say maybe 10%  traded.

That’s mind-blowing. We have software that follows the lifespan of a deal as it comes into our inbox to the data that either we pass or lose on a deal. What you do that’s extremely important is you follow up with a broker to say, “Did the deal trade? Who ended up buying it?” The research that you put into it. Continue there if you don’t mind.

That was an indication, too, that there’s still that disconnect. The people who sold in 2023 were those that needed to sell. They had a debt that was coming due. They were at the end of their term. It could be that they’ve held onto this property or their property for a long period of time and they needed to capitalize on it and put their money elsewhere. There was slow deal volume for 2023. We were hoping for an uptick. It seems like there’s quite a bit of optimism out there from the brokers that we’ve been talking to that 2024 is going to be better. Once you hit rock bottom, there’s only one way to go, which is up, so we’re all pretty optimistic about 2024.

It seems like there's quite a bit of optimism out there from the brokers that we've been talking to that 2024 is going to be better. Click To Tweet

A quick note here, when we talk about hitting the bottom, we’re not necessarily talking about only the prices and the market hitting the bottom. A lot of scholars believe that a recession is coming in later on in 2026 or 2027, like a full-on market recession and what have you. There are a lot of different theories on what’s going to be happening with the market. It was a 70% year-over-year drop in multifamily transactions nationwide, but particularly in Jacksonville and Tampa, that’s even higher at 80%. Maybe you can give us some stats on Jacksonville. We had some great stats on that. I’m very interested for people to know those numbers.

In Jacksonville, there were only 11 properties that were over 100-plus units that closed in 2023. That’s a big drop. When you have that, it’s really hard to know exactly where the market stands as far as the cap rate is concerned. With only eleven properties, that could be a handful or a mixed bag of A Class, B Class, and C Class properties. They’ll trade for different reasons, but it’s hard to get a good gauge of what the actual cap rate is in that market.

As new deals come in, we have to make our best guess in forecasting where we feel that the market is going as far as cap rates and what deals are going to be trading. With the potential Fed cuts this 2024 or the potential 3 that we’re all hoping for, this will help bring those cap rates back down or more into an alignment with what we’ll call the norm. Maybe there is no more norm, but at least a little bit more stable.

The last item on this that’s also another interesting thing is the KPIs that we keep here at CPI. From the deals that made it to the best and final, over 50% of the deals were never even traded. The sellers took them off-market for whatever reasonings that they had. These were sellers who had the privilege of not needing to sell and taking a deal off-market. That was very interesting as well.

That’s right. Some of those deals resurfaced back up with a different broker maybe. The seller was probably not too happy with the results that they got with one broker, so they went to a different broker firm. We see these deals pop back up 4, 5, or 6 months later. The sellers aren’t getting the pricing that they’re expecting, so they decided to hold onto it. Lots of those deals are resurfacing and it never gets traded. We’re seeing a lot of that too.

 

2024 NMHC Conference

Let’s get to the purpose of this episode. A lot of brokers have been telling us about the light end of the tunnel, the sunny day after the cloudy and stormy weather. It all culminates with this NMHC, which is a conference that a lot of investors, stakeholders, and brokers attend every year. Tell us about NMHC and why has this been such an important event and a catalyst for more deals coming into the market.

NMHC is an annual event that’s held at the beginning of 20234. It’s a chance for everybody to come into one location from different geographic areas. This 2024, it was held in San Diego. It was over a couple of days. Many of the brokers that we work with attended this conference along with lots of institutional buyers, other buyers, and syndicators to provide an economic overview of 2024 and what happened in 2023. They will be sharing some statistics and their overall opinion of what’s going on.

It’s also traditionally a milestone where activity starts to happen immediately after that, so more deals start to surface. There’s usually an announcement of several deals from brokerage firms at NMHC. There was anticipation for us that there’s going to be a lot of deal flow and volume coming out, but after getting some feedback from some of the attendees and the brokers that attended there, they’re still very cautious and optimistic about how 2024 is looking. It sounds like there’s going to be a volume of deals that are coming, not as fast as we thought, but more toward the later half of 2024. Broker Opinion of Values or BOVs have gone up. There are lots of sellers that are interested in selling.

 

 

BOV is when a broker evaluates a property for a potential seller out there that gives the price that they believe they can sell the property for. They’re getting more of those.

They’re getting a lot of those. That shows that there’s interest for sellers to put their properties on the market. If the seller receives a BOV back on a valuation that doesn’t quite align with what they were hoping for or what they underwrote for, they’ll probably hold onto it and it doesn’t get out to market. We know that there’s a lot of BOV volume that’s up. We’re waiting for that right moment to happen when maybe the interest rates come down and there’s more of an alignment and more deal flow coming to everybody out there. Overall, it was pretty positive.

Maybe we can break them down a bit. What was the consensus when it comes to interest rates? Was it talking to all the brokers and everybody who attended? What’s the consensus you’re getting? They believe Chairman Powell will reduce rates. What does that look like?

Correct. A statistic that I heard was that about 80% of the economists that were at NMHC had predicted three Fed cuts this 2024. When that might happen, I’m not exactly sure, but that’s what 80% of them are predicting. That’s a positive sign that there’s going to be three Fed cuts this 2024.

Distressed Deals

Deal flow, we talked about it because they’re doing a lot of BOV. Their potential deal flow is higher. Let’s discuss distress. Were there predictions of a lot of deals and a lot of syndicators who are in trouble? All the news that we’re hearing from a lot of groups that are in trouble, what was the consensus on the stress?

I couldn’t tell you the exact number in each of these markets, but a lot of deals were purchased. There was a heavy amount. There was a record-breaking number of deals that were purchased in 2021 or 2020 on these short-term bridge loans that were about 2 to 3 years. That year for maturity is here. There is a bit of distress.

There are sellers or owners whose notes are coming due. They’re at the end of their term, the interest rates are much higher. They either need to make a decision like, “Do we need to buy a next rate cap, insurance interest rate cap? Do we sell? Do we refinance?” There is a lot of distress, but banks also realize that they’re in a position too. They can’t foreclose on all these properties because then, that leaves them managing all these deals and putting them in a position that they’re not comfortable with.

They’re afraid of bank runs. They’re afraid of what happens to the Silicon Valley Bank and other banks. They’re being very lenient. Even not only banks but also other institutions that do lending. We’re seeing, for example, Arbor who is being very lenient on their borrowers. That’s something that was shocking to us because Arbor is known to be a very rigid type of lender that if you’re late on a payment, this could result in litigation or what have you. They’ve been lenient with their borrowers.

Exactly. They’re working out deals. They’re making agreements to improve their operations or improve their NLI, giving them another year or two extensions. They’re kicking the can down the road, hoping that with the interest rates that are coming down later this 2024, that’s going to really help. There are also rate caps. To purchase a rate cap went wild in 2023. Banks realized that that’s not normal and not necessarily fair to a lot of the operators.

There has been a lot of pressure to bring these rate caps back down to reasonable levels where a good operator would’ve set aside enough of a reserve to buy these rate caps. When the rate cap has tripled in price in a couple of months time frame, nobody’s going to be able to be prepared for that. There has been a lot of pressure from financial institutions to bring those rate caps back down, which is going to help out a lot with the distress. We were also hoping for some distressed deals to come in so that we could come in and save the day, but it may not pan out that way from how everything is shifting, what we’re hearing, and all the banks working with these operators.

There's been a lot of pressure from financial institutions to bring those rate caps back down, which is going to help out a lot with the distress. Click To Tweet

Rent Growth

Let’s talk about another very important topic. Let’s talk about rent growth because that’s a metric that’s super important. Every time you’re underwriting a deal and then we get together and look at our assumptions on the rent growth, a small increase or decrease in our assumed rent growth affects the LP return significantly.

 

 

Historically, syndicators or fund managers put in 3% rent growth over the holding years that they have for every single year. In certain markets that have had such a boom like Jacksonville and Tampa, they were both over 20% rent growth in 2022. We’re seeing with hypersupply a lot of deals coming to the market. Orlando as well. Orlando is not a market we look at, but we’re cautious. We’re not investing. It’s not one of our acquisition criteria for locations that we invest in. What was the consensus around rent growth? What are you seeing in your conversations with brokers, lenders, and others in NMHC or otherwise?

Something’s got to give. With the record growth in rents over the last couple of years, we’re playing catch up or the market is playing catch up with itself. It has to level out, we feel. On top of that, there’s a record number of deliveries that happened all across the US, specifically in Jacksonville and Tampa.

That was because debt was so cheap. Borrowing money was so cheap. There were a lot of developers and a lot of landowners that were sitting on these lands. It made economic sense to build. They started building it. Absorption is there as well in many markets, but there’s still a wave of construction and newly built projects. Some are potentially in distress we’re seeing as well. Keep going, please.

Luckily, at least in Florida, there’s migration that’s happening. There is population growth. These new units are being absorbed. Meaning, they are being occupied. The occupancy is coming back up in these units that are brand-new developments. What it does is it takes away potential tenants from other properties, mostly the Class A and Class B areas or properties that the absorption is coming from. It makes the occupancy drop in similar comparable properties.

It’s because of all that activity that’s happening that it creates a slowing, stagnant rent growth in a couple of the markets that we pay attention to. Some of this rent growth has reversed. It’s gone negative over a couple of quarters because there’s so much new supply that’s coming on. There’s a lot of competition. In order to keep occupancy high, which is important, operators are cutting the rents and offering more concessions to keep the tenants staying put and keeping that occupancy high.

The moment the occupancy drops, you become in a pretty critical situation. You could break some covenants with your lending. You’re not meeting the debt service requirements or the coverage. There are a lot of bad things that can happen once your occupancy drops. A lot of operators are doing what they can to keep the tenants there, so they lower their rents or offer more concessions.

That has spread across these different markets, softening the rent growth. The amount of properties that are being delivered in 2024 and 2025 is still a pretty high number of deliveries, but it drops off at the end of 2025. At that point, we can project that rent growth is going to continue up to its normal levels. By 2024, it’s going to be pretty flat. In our underwriting when we’re looking at deals, we might go 0% to 1%, and then after that, we could set it back to the norms of the 3% rent growth. That’s what we’re seeing and how we’re evaluating deals.

 

Paul Hopkins, you put the conservative in conservative underwriting. A lot of time, our team gets together. We look at other groups and some deals that have traded for $1 million more than what we were planning to pay for it. When we plug in those numbers into the model, we’re like, “We’re getting single-digit returns to our LPs. When the LP can go put their money in money markets and get 5% or buy treasuries for close to that 4%, why would they come in and put their money in for 8% in syndication?” A lot of these groups are very aggressive. What changes those LP numbers is the exit cap and the rent growth that they’re assuming. These are important questions that LPs and JV partners need to ask from the sponsor that they’re partnering with.

As far as the deals that are closing where the offers have been accepted from other groups, they may have increased their rent growth and lowered their cap rates to what they feel is in a normal market. We’re not yet out of that lull within these markets. We need to be cautious and prepared. 2023 was a good indication of what could happen in any market. We have to keep that in mind as we move forward.

Was there anything else from the NMHC that you took away from your conversations with everyone who attended? Were there any other items?

There is a lot of capital out there that is waiting. There are lots of institutions that are hungry for deals. There are lots of syndicators like us that are looking for deals. That may be why also some of these other syndicators are super aggressive and not very careful with their underwriting. It’s because they have a lot of capital that they don’t want to lose. There’s lots of money that’s sitting on the sidelines ready to jump in for the right opportunity. They need to invest this money wisely too. That was another key thing that I heard. There’s lots of money out there that’s waiting for the right time.

 

 

They have to keep those talents that they have employed because it takes so long for these large institutions to bring on a talent, employee, and executive to head a division. If you don’t have a deal flow, what do you do? Will you get rid of that person? That’s going to be very difficult. We have some friends as well in the space. They’re keeping their teams busy with other aspects internally, building the company internally. They’re trying not to lose that talent but also staying afloat. It’s a very interesting time.

Market Predictions

We talk about this next item on a daily basis, me and you, on a few of the weekly calls that we have or whenever we jump on a call and chat with each other. Let’s talk about some predictions you’re seeing here, the personal predictions that you have. What do you think about interest rates? Do you think that the Fed will decrease interest rates? Do you think that inflation will be able to be controlled ultimately here? What is your view on interest rates?

I have to follow some of the expert economists that are out there as well. You can’t ignore what they’ve been saying. In reading between the lines, there are going to be potentially up to 3 cuts this 2024. At least two is my prediction. I’m hoping for the third. That’d be the best-case scenario. What I’m also predicting is insurance costs. I feel that the insurance costs got wild, especially in Florida, where they could have tripled in certain locations. I feel that the insurance costs are going to stabilize or come back down. There’s more of an appetite for a couple of the insurance companies that got out of these markets. They’re going to come back in creating more competition with insurance and underwriting.

You’re hearing that both from brokers and insurance salespeople?

That’s correct. The conversations I’ve been having with our insurance broker and also different lenders and brokers, they’re all hearing the same thing. Unfortunately, insurance companies look in a rearview mirror as to what happened in the previous years. There’s been an increase in natural disasters and claims across the US. They have to make up their money somehow. They’re in the business of making money. Unfortunately, it falls back onto the operators and then eventually the tenants.

There’s an obvious sign that something needs to happen. Everybody from the government to these insurance carriers to everybody that’s involved in this space, including tenants, needs to have this control. It’s not just in commercial real estate. It’s also in single-family that it’s also impacting. There seems to be a consensus that insurance rates are going to stay where they are or probably come down a little bit. I have a prediction that it will get better and not be too much of a wild card. We’ll have to keep our fingers crossed that the natural disasters level out, but we shall see. That’s the other prediction.

I really appreciate you coming on. We should do this more often. I felt that you were having some engaging and great conversation together on our calls. I said, “We should jump on here, record this, and send it to our audience, our investors, and others.” I appreciate your time. Thanks for being here.

Thank you.