The most prescient crystal balls are right about 50% of the time and we returned ours to the crystal shop because it was stuck on a big question mark. Jokes aside, we pay a lot of attention to the macro environment and consider different viewpoints from well known research analysts from Lyn Alden to Peter Linneman. There are a vast range of opinions ranging from a soft landing to a deep recession and everything in between. Truth is no one really knows what will happen but it matters less for experienced real estate operators who can stay ahead of changing market conditions.
Economic indicators like CPI (Consumer Price Index), PCE (Personal Consumption Expenditures), ISM (Institute for Supply Management), and PMI (Purchasing Managers’ Index) have been trending lower along with oil prices, and the Fed has been responding with smaller rate hikes. The bond market is suggesting that the Fed is close to pausing with the US Treasury yield curve (10s/2s) inverted. There have been more layoffs especially in the tech sector while the unemployment rate remains stable. There is also some relief in the supply chain with cheaper shipping rates. All are signs pointing to disinflationary and potentially recessionary conditions and should continue to cause lower real estate prices.
Within our industry, there have been reports of some multifamily operators coming under duress from unmitigated escalating debt servicing costs despite the assets performing relatively well. There are concerns that some sponsors might be forced to sell properties at a loss if we end up with a deeper recession and higher unemployment. Break of Day Capital has been anticipating and positioning to acquire good properties from distressed sellers over the next 3 to12 months and believe that longer term, we will be looking back at this period as a great buying opportunity. Some of the best times to invest are when it feels the most uncomfortable. Be greedy when others are fearful as Mr. Buffett would say.
We are not economists nor do we play one on Twitter or Youtube. While we can’t control macro forces, we have made additional adjustments to our already conservative underwriting to account for current economic conditions, tight lending environment, slower rental market growth rates, higher operating costs, and staying disciplined to make offers at a price that would provide strong returns to our investors. Sellers want yesterday’s rich valuation but we are only willing to pay tomorrow’s price that reflects economic reality.
At Break of Day Capital, we only acquire deals that have the highest potential to produce superior risk adjusted returns to our investors, whether in bull or bear markets. We have a light footprint and do not need to do deals constantly to stay in business. In the past, we have gone 13 months without a deal or bought several deals in just a few months by staying true to our highly selective buying criteria.
Break of Day Capital offers carefully curated opportunities to invest passively in multifamily syndications in growth markets that we specialize to maximize value and returns to investors. Multifamily real estate continues to be one of the best hedges against inflation while being resistant to recessions when managed correctly.
Please schedule a call with Joseph Fang at email@example.com to see how we can help you achieve your investment goals.