Welcome to The Real Estate Venturist. Every other week, this newsletter will give you a behind-the-scenes look at what it’s like to be a real estate entrepreneur. As always, this is not investment advice and merely my opinion. Here’s what’s in today’s newsletter:

• Sunbelt hangover?

• Pivoting to new markets

• Surviving in the meantime

• Authentic Mentor

Sunbelt hangover?

Real estate syndicators focused on new acquisitions in the Sunbelt are bored. There’s not much for them to do. Most properties on the market are around 10 years old, and not a great acquisition target for them. Those new(ish) properties are more expensive, both in terms of total price ($75M+) and cap rates (5% or less). The traditional value-add deals that syndicators like are hard to find, mostly because they’re distressed and being withheld from the market for various reasons.

Even if you like the basis ($ per unit) of a property in these markets, the short-term outlook isn’t great. Let’s take Austin, TX for example. From a basis perspective, some deals look phenomenal. I’ve seen new construction properties trade for prices similar to what 1980s assets were selling for just four years ago. But the numbers don’t make any sense.

Record levels of new apartment supply have caused rents to crater in Austin. Concessions of two months’ free rent, plus additional incentives, are common in some submarkets. Current rent rolls are significantly higher than today’s market rents. The groups taking advantage of the market in Austin are public REITs like Avalon Bay. Their cost of capital is lower and their time horizon is longer. They can pay a high 4-cap because the math works for them. It doesn’t work for anyone else.

Pivoting to new markets

Sunbelt syndicators face a choice: continue to wait it out or pivot to new markets. Pivoting isn’t easy or fast. Investment capital prefers to back a local sharpshooter. You don’t have to physically be in that market, but you do need experience and relationships there. Having capital follow you on a pivot is critical.

If you’re chasing rent growth and the data shows Columbus as a leader, you’re probably not going to drop everything in Nashville to go explore that market. Private equity firms can make this move. Their investment committees can say, “Let’s invest in the Midwest,” and assign staff to find a local partner. Capital can pivot easily, but syndicators have a more difficult time.

Still, pivoting is tempting. There’s the allure of higher cap rates, less competition, and chasing the data. If you’re convinced that a pivot to a new market is the right strategy, how long will it take to become truly knowledgable—knowledgable enough so that the local market doesn’t take advantage of you? There’s no magic number, but forming relationships with local brokers, underwriting dozens of deals, meeting with local property managers, and understanding which submarkets to target (or avoid) takes time. It’s hard to do that without spending meaningful time on the ground.

Surviving in the meantime

Most groups will choose to stay put. They have too much local goodwill, knowledge, and capital to move somewhere new. Especially when the prevailing wisdom is that the Sunbelt markets are poised for a resurgence in the next 12-18 months. Considering how long everyone has waited at this point, what’s another year?

Of course, they’ll still be competing against many others trying to do the same thing. Once rents and occupancy improves, do we really think pricing will become more realistic? Unlikely. These will remain some of the most competitive real estate markets in the country. That’s not necessarily a bad thing. Highly liquid markets are great when it’s time to sell—plenty of buyers, usually lower cap rates, and better terms. Finding new deals to buy is harder. But if you’ve built strong local relationships and have intimate submarket knowledge, there’s still great value to be found.

Personally, I’d focus on the markets I know best. Those are the markets where we currently own property. For us, that stretches from California to North Carolina. While California has been out of favor in recent years, I believe it’s coming back, quickly. We never left, and it’s in our backyard. We can reengage there with confidence.