As we approach the halfway mark of 2024, multifamily owners face a dilemma. With cap rates expanded and buyers grappling with higher interest rates, the cost of capital has soared. Consequently, owners wanting to sell are pressured to discount prices to make deals viable and ensure transactions occur. In this scenario, one might wonder why anyone would list their property and why not wait for market conditions to tilt in favor of sellers. This article explores seller motivations behind today’s multifamily transactions despite current economic challenges.
Three Factors Driving Multifamily Property Sales
As investors seek clarity, our Director of Investor Relations, Chris Parrinello, often asks why sellers choose to list their properties, especially when market conditions aren’t in their favor.
At Viking, where we continually uncover remarkable investment opportunities, the answer lies in understanding the dynamics driving these decisions. Here’s a closer look at the three primary reasons behind sellers taking action:
Strategic Timing:
The lifecycle of a property often dictates its fate. When a high-performing asset reaches the end of its deal term, owners face a pivotal decision: extend the holding period or capitalize on the current market conditions by selling.
Distressed Asset Opportunities:
Some properties falter due to various challenges, such as underperformance exacerbated by variable rate loans and costly rate caps. In such scenarios, owners are compelled to sell, presenting attractive opportunities for astute investors like Viking.
Capital Deployment Strategies:
Sellers may swiftly redeploy capital, particularly in a dynamic market like this one. By leveraging sales profits, they can pivot to new opportunities, maximize returns, and optimize their investment portfolio.
Deal Lifecycle: Navigating the Four Key Stages
Every investment journey follows a distinct path, comprised of four pivotal stages:
Acquisition:
The initial phase involves acquiring the property, where thorough due diligence and strategic planning lay the groundwork for success.
Executing the Business Plan:
With the property in hand, it’s time to implement the business plan. This stage is characterized by active management, implementing value-add strategies, and optimizing performance.
Asset Stabilization and NOI Growth:
As operations mature, the focus shifts to stabilizing the asset and maximizing Net Operating Income (NOI). Through proactive management and operational efficiencies, NOI growth becomes a primary objective.
Disposition or Refinance:
The final stage marks a crucial decision point for owners. Depending on market conditions and investment goals, owners may choose to sell the asset to realize returns or refinance to unlock additional value.
When an owner decides to take their property to market, it’s often a strategic move driven by timing in the deal lifecycle. By this point, they’ve likely maximized NOI and profitability, aligning with their return projections and investment objectives.
#1 Acquisition
At Viking Capital, our commitment to excellence begins with the meticulous process of underwriting nearly 3,000 deals annually. Our dedicated team oversees this critical task, ensuring that every potential investment aligns with our stringent criteria.
Of these thousands of deals, only a select few—typically 4-6—meet our standards to proceed to the next stage: placing a bid on the property. Once chosen by the seller, our due diligence process kicks into high gear—a two-week period where we meticulously verify all projected metrics against the financials provided, inspect the units and property for accuracy, and identify any potential issues, similar to a home inspection.
Based on our findings, this period offers a crucial window for both parties to renegotiate terms. Simultaneously, our financing efforts begin, involving securing hard money as a down payment, capital raising, and finalizing loan terms. Once the acquisition phase concludes, our expert team assumes property management, marking the beginning of the next phase: executing the business plan.
#2 Business Plan Execution
Success in every multifamily investment hinges on the meticulous execution of a well-defined business plan. This plan serves as the blueprint for enhancing Net Operating Income (NOI) through organic rent growth and forced appreciation via strategic value-add initiatives.
Two critical factors guide the formulation of this plan: the property’s class (ranging from opportunistic to core) and vintage (the year the asset was built). These indicators inform buyers of the optimal strategy to maximize NOI and deliver optimal returns to investors.
Once the business plan is executed, yielding the desired results and driving growth for the property, the next phase is: stabilization.
#3 Stabilization
The stabilization phase marks a pivotal milestone in the deal lifecycle—an opportune moment to reap the rewards of executing the business plan. Put simply, this phase is where the fruits of your labor begin to materialize as Net Operating Income (NOI) sees a notable uptick.
During this crucial phase, the primary objective is to maintain high occupancy levels, minimize vacancy rates, reduce bad debt, and streamline expenses. An effective combination of rent growth strategies and prudent expense management optimizes the property’s cash flow, paving the way for the strongest possible exit opportunity: selling the property.
#4 Disposition
The disposition phase marks the culmination of the deal lifecycle—a pivotal moment typically occurring between 3 to 5 years in Viking deals. This phase strategically times with the property’s peak asset value, achieved through successfully executing the business plan.
Various factors, including market conditions and the attainment of projected metrics, influence the duration of this phase. For instance, if all anticipated projections are met or exceeded by year three, it presents an ideal opportunity to capitalize on the property’s heightened value and sell.
Alternatively, if market conditions aren’t favorable or sponsors don’t realize projected metrics by year five, they may opt for refinancing. This strategic move allows them to weather market fluctuations and position themselves to capitalize on better metrics in the future.
Understanding Seller Motivations
The End of the Lifecycle
When a seller chooses to list their property, various factors typically influence their decision. While the economy can play a role, terminating the property’s lifecycle primarily drives the decision.
Owners must make a choice: adhere to the projected lifecycle timeline or opt to refinance and extend the hold period in anticipation of better returns. If the property has performed well and met or exceeded expectations, the seller will often list it to realize those profits. This strategic move enables them to maximize returns and explore new opportunities.
Conversely, there are scenarios where a sponsor opts to retain ownership of the property. Factors like underperforming assets or unfavorable market conditions typically drive this decision, where selling may not align with expected desired returns.
Distressed Asset
In today’s economy, selling isn’t always a matter of choice—it often becomes a necessity. When projections aren’t met or operations fail to stabilize, asset owners encounter a bind. As a result, they dispose of the property to alleviate financial strain and unlock potential returns.
This unplanned move is a strategic decision to mitigate losses and reposition resources for more promising ventures. While it may not align with the seller’s initial objectives, it’s a crucial step toward preserving capital and maximizing returns in the face of adversity.
Capital Deployment
Amidst today’s economic landscape, savvy owners with robust investment portfolios see a world of opportunity unfolding. With numerous distressed properties and impending loan maturities on the horizon, they recognize the strategic advantage of selling strong-performing assets. This unlocks profits and allows them to redeploy capital into promising opportunities within this buyer’s market.
Capital deployment isn’t merely a financial transaction for these astute investors. It’s a strategic move to optimize returns and capitalize on market conditions. By seizing the moment to reallocate resources, they position themselves to capitalize on undervalued assets. This maximizes growth potential and long-term profitability.
The Takeaway
Today’s real estate market presents sellers with several motivations. They range from necessity-driven decisions to strategic maneuvers and the natural progression of asset lifecycles. Each of these factors plays a pivotal role in shaping the success or failure of investment ventures.
These considerations are paramount for sponsors managing active investment portfolios. The decision to sell, maintain, or acquire assets requires careful deliberation and foresight. At Viking, we’re committed to staying proactive in this ever-evolving market, seeking optimal investments to bolster and expand our portfolio.
As we navigate the complexities of today’s real estate landscape, it’s clear that understanding seller motivations is key to making informed investment decisions and achieving long-term success.
