Finding Motivation in an Unmotivated Market

Great deals are harder than ever to find. Transactions are broadly at a standstill with multifamily volume down ~70%. Owners that don’t have to sell are not. Many buyers have to deploy capital (to keep the lights on or follow through with fund mandates), so deals are bid up beyond reason. Despite this mess, there are great opportunities. You have to be wise enough to find them.

We want to find deals that are downside-protected, have strong support for the upside, and are executable. Downside protection in the investment world means Yield and Basis. Protected Yield is day 1 or a clear path to achieve enough where servicing appropriate debt is no issue. Protected Basis is a relative price below comparable assets in context to appropriate time (this means peak valuations really aren’t helpful). If you want to create above-market returns, then you must acquire lower prices and/or create stronger yields than your competition.

The multifamily market sentiment is incredibly bullish. Most operators buy into the thesis of outsized rent growth in future years as development has come to a halt today. Simply put, a supply imbalance. Furthermore, many buyers have capital deployment mandates or simply need to drive fees to stay in business. So they are willing to pay a “scarcity” and “future-growth” premium. But not you. You are looking for discounts.

There are two problems with snatching discounted quality assets: Finding the right deal and combining it with seller motivation with You as the buyer. I think the right deals with downside protection and upside support are the first-gen value-add Core+ deals in strong demographic markets. These opportunities benefit from:

• Less competition in widely-market process (deal size too big)

• Liquidity at any point in the market cycle

• Tenancy Risk is low with runway in affordability (what if rents do pop?)

• Supply Protection as the cost to develop far outweighs acq. prices

• Probability of upside from both sale and yield

Unfortunately, other REPE groups see this too. And they will pay much more. So I need to get to the owners before others do. But not just any owners… Motivated Owners.

Motivation drives decisions. Depending on the time or current events, I would designate motivated decision-making into two buckets: need-to and want-to.

Want-to motivations are generally weaker rationales. The owner is selling their property because they want to. Motivators in this category could be:

• End of investment horizon (return of capital)

• Thinking it’s the “right” time

• Changing investment thesis

• Seeking improved property (think 1031)

These are reasons why an Owner will decline a sale if their price and terms aren’t hit. In other words, Want-To’s are sellers at prices that generally aren’t going to make for a great deal. It’s pricing high enough to capture some of the future gain today. You have to pay up as a buyer. Most sophisticated, well-capitalized owners are want-to sellers. They also own the deals I want. However, the current rate environment has created more Need-To sellers.

Need-To motivation is pressure, usually with a shot clock involved. The Owners are motivated sellers because they have to make a move. The forcing function to make a decision with a deadline allows for a buyer’s opportunity to find seller capitulation. Capitulation is how you capture arbitrage. Arbitrage is the pathway to great deals.

Need-To Motivations today are:

• Forced LP sales - capital groups handling redemptions

• Debt Maturity - cash in refinances or bad options

• Rate Cap Maturity - floating rate debt that will not be serviced

• Technical Default - going against loan agreement, too little cash flow

• Legal issues with operating partners - lawsuits are coming

• Operational Collapse - asset/property management falling apart

You can find these motivators by tapping into the market. You become tapped into the market by consistently talking with owners, brokers, managers, and other market participants. Trades notes and stories. Collect all this information and track it.

By far, the two most common Need-To motivators are near-term debt maturities from acquisitions since 2021 and forced LP sales. Both of which affect all types of owners across the market. Your job is to get to them first with a win-win solution before the competition.