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.

The Investor’s Paradox: Exhausted Sellers, Energized Buyers

Not only is this newsletter about multifamily investing and the apartment industry, it’s also about entrepreneurial life. My co-founders and I didn’t create Calvera Partners after seeing a social media post urging us to leave our W-2, build “mailbox money,” or find financial freedom through real estate. TikTok didn’t exist and real estate bros, thankfully, hadn’t come of age yet. We were at a growing real estate private equity firm, filled with MBAs from top schools, doing real estate deals in major urban markets. It was an exciting time. Then the Great Financial Crisis (GFC) hit and the fun got very serious.

As an employee, we were worried about layoffs and how long the recession would affect our industry. The firm we were with was highly active during the GFC. I personally worked on distressed debt in San Francisco that led to the acquisition (through foreclosure) of a 400+ unit apartment portfolio. Others were acquiring office buildings at high cap rates, well above of the underlying credit quality of their tenants.

Our focus then was about our work-life quality, paychecks, and annual bonuses. We weren’t thinking about how investors felt about the pre-GFC deals now underperforming, or how hard it would be to raise new capital. Even whether these new acquisitions would perform as expected wasn’t our concern. Those were issues for the principals at the firm, not for us.

Now, the shoe is on the other foot. We’re the ones who have to worry about everything. We can be optimistic about new deals, and at the same time, exhausted from turning around challenging assets.

Real Estate Decisions Aren’t Made Instantly

Unlike the stock market, you can’t sell a property instantaneously. It takes, on average, about 5-6 months to sell a property. The first month is spent interviewing brokerage firms and gathering their opinions on the value. The property is then marketed for the next month. After collecting bids and selecting a buyer, you then negotiate the purchase a sale agreement. The selection and negotiation process is another month. Then, there’s one month for due diligence and another month to close the purchase. That’s five months if all goes smoothly—and six months if it doesn’t.

It’s slow, drawn-out process, and often painful. During that time, the property must keep performing at or above its marketed level. A significant drop in performance might jeopardize the deal. This is where much of the multifamily market is today: owners desperately trying to improve performance. They must stabilize the property (i.e., maintain 3-6 months in an upward trend), all while trying to time a sale in an improving market. It’s difficult and stressful.

There’s an apartment community in a Sunbelt market that has been listed three times in the past 18 months. They’ve been hit with everything at various times: declining valuations, increasing vacancy, and a spike in interest rates. When it first hit the market, the asset was performing well, but it couldn’t hang on. All of a sudden interest rates spiked, causing a potential buyer to walk away. Another time, ownership thought the price they were getting was too low, so they waited—only to see the value drop anyway. During yet another attempt, occupancy dropped and concessions grew, calling into question revenue assumptions and thus the valuation. The real estate sales process simply took too long for them to execute. I’m sure the owners are exhausted and are ready to move on.

Room for Optimism

While today’s sales market can be frustrating for sellers, it creates opportunities for buyers. Buyers see what owners like the one above are going through and underwrite every possible contingency. Those additional costs drive the value down, but make the purchase safer for the buyer. And in markets where rents are growing, this approach can yield even higher returns. We believe this is the case in our recent acquisition in San Jose. This is also why we believe this is the best buying window in years.

At the same time, animal spirits are growing in markets like San Francisco where rents are rapidly increasing. Cap rates are falling. Rent assumptions are in excess of inflation. And new buyers are emerging. As competition increases, buyers won’t be able to underwrite for every contingency if they want to win a deal. The key will be finding the right balance. One which accounts for necessary improvements to deferred maintenance while still investing in unit renovations that drive revenue. It’s back to basics.

The broader apartment market isn’t yet experiencing what San Francisco is, and many owners of the past 5 years are running on fumes. It’s an odd moment where there’s so much pain in some markets, and so much optimism in others. Real estate has always been local, but right now it’s hyper-local. The Sunbelt will rebound, and there’s plenty of capital waiting to invest there. Until rent growth and demand return, though, the headache will linger.