5 Multifamily Strategies for a Flat Market
5 Multifamily Strategies for a Flat Market
Stock market trading activity is very low. According to a WSJ article because the economy is not too hot, and not too cold, investors are acting as if the best move is not to make any move at all. In the world of investing, is holding cash (and not investing) a good investment?
For NYC multifamily, after the pricing peak in late 2015 and subsequent transition (where prices declined between 5-8%), pricing has been somewhat flat in 2017. Multifamily investors are asking the same question: what is the right move in a flat market?
While the market may not be moving up or down today, investors should prepare for what’s ahead. Standing still can cost you. There are several strategic moves investors could make. Let’s explore 5 possibilities:
#1 Exploit Market Inefficiencies
One reason the market is flat is there is no industry-wide consensus that pricing is moving up or down. By definition, there is confusion. Investors should exploit this inefficiency. Its one reason to love commercial real estate. For example, certain sellers will discount the future value of their asset, by lowering future projections too much, creating a buying opportunity. Others will “overprice” their properties on the market, limiting buyer activity. This leads to something we call “sellers fatigue” and many times these properties sell 9-12 months later below market value. As DL would say, “hang around the hoop.”
Sometimes the best return on new equity actually exists in your current holdings. In flat markets, you may not be buying and selling, but it’s important to stay in motion, be creative, and create value. Renovate, utilize unused air rights or square footage, restructure leases, and reduce expenses by increasing efficiency. These value added activities will pay off in multiples in the future.
There is a paradox of the banking industry. When you don’t need money, banks are willing to lend it, and when you do…the lending windows are closed. Flat markets can be a reminder to refinance under leveraged buildings so you have a dry powder for future opportunities.
#4 Trade to Improve Cash Flow
Investment properties in NYC (regardless of location) sell at a premium, and owners can capitalize on this arbitrage. For example, selling a NYC apartment property and purchasing a triple-net leased (NNN) asset typically improves your cash flow by 2x-3x. If prices remain stagnant for several years (or decline), the benefits are multiplied. I have discussed this further in other posts you can read by clicking here.
#5 Trade to Improve Location
Closely related to “improving cash flow”, is improving location. After market peaks, class”A” properties in “A” locations are priced very similarly to “C” properties in “C” locations. Take advantage and upgrade the quality and location of your asset. Many choose not to make this move because the free cash flow may decrease slightly. This is a temporary illusion. From a net worth perspective 5 to 7 years after this transition has been made, your upgraded investment will likely be more valuable. Great investors play the long game.
I don’t like the metaphor of the real estate market as a repeating cycle. Although there are times when that description fits, often it doesn’t. It obscures your viewpoint and judgment. The only market you know, is the one you currently have, and even if its flat, there are opportunities to create value for yourself and your investors.
Keep up-to-date with market commentary by following here!
Buy Peter's Book Today! Available on Amazon.
Catch up on our most recent posts here:
NYM had an active month in December with a total of $312,882,500 in activity! This month we listed 16 properties totaling $189,885,000.
Last month we closed on 422 East 81st Street for $6,250,000. The building contains 20 units and was 80% Fair Market. At the sale price, this equates to a 4.0% Cap Rate and $568/SF.
When I was writing The Scene in 2019: What to Expect in the NYC Multifamily Market last year, there was significant uncertainty in our industry.
In the first half of the year, we weren’t sure what was going to happen with New York’s rent reform laws.
New York’s West Village is a coveted neighborhood for buyers, and 162 West 13th Street is a great multifamily asset in this popular area.
This corner building houses 36 rental units (32 residential and four commercial) and was previously owned by one family for many years.