When To Take Multifamily Investment Opportunities: Hypersupply, part 4

Timing the market is as important as getting a good deal.  The Portland multifamily market is full of investment opportunities that create perfect situation to enter or reposition equity.  This installment, the 4th in my When to make multifamily investments, covers the climate for new investments during the Hypersupply phase.

The Hypersupply cycle in investing is like Fall.  In Fall trees slow their growth, flowers fade and the days turn cooler.  Some flowers open and close and follow the sun each day.  That’s a luxury that condo converters and large project builders don’t have in investment real estate.  Due to the barriers to entry and time it takes to permit and build apartments we can’t just shut them down.   At the beginning of Hypersupply it sometimes looks like the economy is just taking a breather before getting a second wind.  While absorption rates are a key the fundamentals of a Hypersupply cycle market include:

  • Increasing vacancy rates
  • Moderate to high new construction
  • Low to negative absorption
  • Moderate to low employment growth
  • Medium to low rental growth
  • Per unit prices tend to peak at the transition of Expansion into Hypersupply
  • Increasing value attributed to all cash offers
  • Tight lending standards

The strategies that worked great in Recovery and well in Expansion are not as plentiful in Hypersupply.  Buy and hold long term is viable…but it is important to use proper financing to avoid a Debt Service Coverage issue later on in the cycle.  Flipping is very perilous with large numbers of new units coming on line, absorption challenges, stagnant rent growth tend to lower values.  Condo conversions already under way may continue, but new projects are often delayed or cancelled.

There are some good deals to be made during Hypersupply, but cash becomes more important.  Lenders tend to raise DSCRs, lower their LTV’s, and Non Recourse Loans become rare or non-existent.  Lenders change their underwriting from focusing on the deal (is this going to work and produce the profits the investors had hoped for?) to focusing on the dealmaker. (How solvent is the borrower; does he/she have the resources to weather the storm?)

The other analogy I liken Hypersupply to is coming over the top of the roller coaster.  There is a slowing of upward motion then a brief period where things almost stop then….

Next up: The fourth and final phase of the investment cycle: Recession…or “the race to the bottom.”

More posts in our Timing Your Multifamily Investment Series:

 

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