Outlook on the current economy on how it’ll affecting the multifamily space?
Kathy Fettke: Well, the biggest word for 2022 was inflation. That was the keyword. Very shocking that the people who sort of run our economy, the Federal Reserve system said a year ago that inflation wasn’t going to be a problem. And then a few months later it was a big problem. So that’s scary when the Federal Reserve is tasked at controlling inflation. And a year ago, they weren’t aware that it was right around the corner, whereas many of us were aware that, we knew what was happening, that there was tremendous amount of stimulus, trillions and trillions of dollars printed.
And, then the idea that that wouldn’t have an impact on the economy. Its mind blowing that our leaders couldn’t see that because we had this rare time over the last two years where production completely stopped, right. Worldwide, there was no production, yet all this money was printed worldwide. So if you stop supply but create all this money that the obvious thing is inflation, especially when the thing you stop making is the, the thing that everybody in the world needs. You know, food, energy, housing, these are, these are things that people need and if you stop producing it, but then increase the money supply, it’s just so obvious that now you have less supply and more dollars.
So, you know it was scary to think that the people who run the economy couldn’t see that. Or maybe they could see it. And who knows, that’s where conspiracy theories are created when you say, how could they not see it if I don’t have an economics degree? And I could see it as clear as could be. But with that said, whatever’s going on, the manipulation of our economy, which did not exist prior to this, I don’t want to say it didn’t exist, but prior to 1971, I remember being a young girl and there wasn’t this freedom of the government to just print unlimited amounts of currency.
I remember it would be headline news and you would see the printing of actual currency because it wasn’t really digital yet, the computers hadn’t really taken over the world yet. So it was a literal printing of money. And you would see it, if they did it, it, it was a major concern for everybody because they knew what that meant. And today, it’s just digital. We’re going to add a few more zeros. And of course, again, if you add more currency, but you don’t increase supply of the things people need, there’s going to be inflation. What that means to people like us is that you want to have your money and your investments and things that inflate, because otherwise you’re going to really get left behind.
Currency becomes less valuable as you print more of it, but the things that are hard to make and that people need become more valuable in that environment.
what are the top concerns that you are seeing in real estate and multi-family market?
Kathy Fettke: What we do know right now is that the Fed came in aggressively of course early this year and said, we’ve got to kill this inflation that they created. Right? So the way that they know how to do that is to stop demand. They don’t know how to create more supply that would also solve the problem. But what they do know how to do is demand destruction. And that is killing jobs. Because if people don’t have money, they can’t buy things in that curbs inflation because there’s less spending. So it’s a very sad way to do business. But that’s what they do, which is to increase interest rates, pull money back out of the system, they flooded the, the system with money and then they want to pull it back out.
And, and they do that through quantitative tightening and raising interest rates. That’s been what we’ve experienced this year. Is the tide going out, the money going out of the system? And of course that’s going to mean, you know, that’s a slow down a potential recession. They certainly haven’t created it yet. Right. Some people thought we had a recession this last summer, but it was really just a lack of imports and just a supply chain issue because we’re still seeing massive job creation. There’s still an overhang from all that money that was printed and we’re still obviously not seeing the job losses that the Fed wants to create.
And inflation hasn’t really come down quite yet. It’s stayed fairly steady, but I think the year over year numbers are going to look good. But when it comes to residential, we know that with these high interest rates, far fewer people can afford to buy a home. It’s twice as expensive to own a home the payment as it was last year. So people are renting and now renting is approximately 30% cheaper than owning depending on e every city’s different. And of course some areas that won’t be true, but in general it’s cheaper to rent and that’s what people are going to do if they can’t qualify for a house or if it’s that much more expensive to own a home, why wouldn’t you just rent?
Real estate or multi-family market next 12 months or 18 months?
Kathy Fettke: I think there’s going to be tremendous demand for rentals. As I said, there’s this massive group of millennials that are creating households. They’re between the age of 29 and 34 and they’re getting married and they’re having babies just like any generation before them. And this huge group of people will be doing that until 2024 creating households. So demand is certainly there, even though the fed’s trying to destroy demand, they can’t, people want a place to live unless they’re going to move back in with mom and dad. Which, you know, that’s, that’s always possible too. Or bunk up with other people. So demand will be there.
The problem with multifamily is it may not work out so much for the landlord, for the operator, simply because of these high rates. I just got back from a conference and IMN, it was actually a single family rental conference, but there were a lot of apartment owners there and build to rent operators. And so it’s basically a horizontal apartment, right? They, they just build more like town homes, but it’s, it’s, it’s multifamily but people feel like more like they’re in a single family. Yeah. And the biggest concern that came out of this convention was the lack of liquidity. Because again, the, the Fed is trying to pull money out, back out, they flooded it and now it’s leave. there’s not as much money going around for lending and as a result they’re, the lenders for commercial real estate are saying that bridge loans could go up to as high as 12%. So that’s really concerning. And many multifamily operators were not anticipating that because last year was a very different story, right? You know, you could buy a multifamily property, get in a bridge loan and, and then expect to refi at a decent rate. And that may not be there. The numbers may not be working out. This was the conversation at the conference that many of these build to rent operators cannot make the numbers work anymore.
And it was kind of scary because they said the people on the panels today may not be the same people here next year because there was a lot of aggressiveness, high LTVs expectation that interest rates would remain low and that the numbers would work. And if they don’t, you either got a fire sale or you got to put more money in. So this is the same thing that is happening with multifamily where people just did not expect rates to be this high. And so that just really means opportunity. I just think that means that operators and buyers might be able to solve some problems for another operator by either taking over their project or coming in with more money.
It doesn’t mean that there’s going to be a bunch of foreclosures because there’s still so much demand. It just means that prices are going to go down. And there are probably going to be a lot of investors that lose their equity, quite honestly, just because, if the values go down on these multifamily properties simply due to increased expenses, that difference is the equity, which is the investor money. So its opportunity for some and it’s going to be loss for others. And that was really the highlight of the conference. They also said the strong will survive, the weak will not. So those who understood what was happening and knew that rates would never stay low that was just temporary people that got into fixed rates, they’re going to be just fine.It’s just those who didn’t anticipate change.
What are the top three trends you are seeing in the multifamily space?
Kathy Fettke: Obviously cap rates, I want to say increasing, but everybody’s expecting that, but we haven’t necessarily seen that yet. The biggest trend is that the LTVs are coming down. So more you’re going to have to find a way to find get more capital if you’re acquiring or if you already own the asset, you might have to come up with more capital. So definitely lower LTVs, again, with this is across the board in real estate, but labor shortages, material shortages, although that is definitely getting better than the last six months. But your costs, your CapEx are going to be higher. So expenses up incomes may be, you know, rents not so much. Rents are going to stabilize. They’ve already done their thing, they’ve already gone up. So you’ve kind of, you’ve got to be aware that costs have gone up with interest rates and, and CapEx and yet rents are going to stabilize.
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