March 18, 2021

JF2389: Is Multifamily in a Bubble? | Actively Passive Investing Show with Theo Hicks & Travis Watts


Today, Theo Hicks and Travis Watts will be answering the question, “Is Multifamily in a Bubble?” and sharing their insights about whether you should be investing right now? Or should we wait for the bubble to pop and take advantage of opportunities? Moreover, what should we be doing? They will also tackle the question, “Is now a good time to get started in Multifamily?” We get to know who we are potentially selling to, what the buying pool and the demand will look like, and the importance of an exit strategy.

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We also have a Syndication School series about the “How To’s” of apartment syndications, and be sure to download your FREE document by visiting Thank you for listening, and I will talk to you tomorrow.


Theo Hicks: Hello Best Ever listeners and welcome back to another episode of the Actively Passive Investing Show. As always, I’m Theo Hicks, and joining me is Travis Watts. Travis, how are you doing today?

Travis Watts: Thrilled to be here Theo. Thanks.

Theo Hicks: Today, as you can tell by the title, we’ll be answering the question “Is multifamily in a bubble?” We’ve talked about something similar in the past, we’ve gone over some market reports, some forecasting reports to see where multifamily has been in the past year or so with the pandemic, where the experts project multifamily going in the future… So we’ll be bringing that information back again and then using it to again answer this question “Are we in a bubble? Should we be investing right now? Should we be waiting for the bubble to pop and then take advantage of opportunities? What should we be doing?” Before we begin, as always, Travis will explain –although I kind of already did– why we’ll be talking about this topic today.

Travis Watts: Sure. Just to add to that, a couple of things came to mind here recently, which is why I felt this was appropriate now… The word bubble gets thrown out constantly, all the news headlines, CNBC, it’s always “The stock market’s in a bubble,” and then tomorrow it collapses, and then you’re unsure at that point. But real estate is a lot more slow-moving. I wrote a blog last year in 2020, “Is now a good time to get started in multifamily?” So that’s what originally kind of prompted this topic, to your point. We’ve discussed it in different ways.

I just had a call the other day with an investor and he’s saying  “It’s just my luck. I’m always late to the game and everything” and he was comparing multifamily to cryptocurrency. I thought, whoa, whoa, whoa, whoa, this is a lot bigger conversation to be had. It’s really not comparable in that type of way. So I really wanted to address why that is; and not to say that things aren’t in a bubble or that they are, but to define what that means, so that you can decide for yourself if you think that anything’s in a bubble. But today’s topic of courses is multifamily.

A lot of concern over the virus, obviously, that’s been the last 12 months in everyone’s focus. Cap rates continuing to compress; that was happening pre-COVID, and that was a big topic about multifamily. Lots of people jumping in the sector, I’ve pointed that out. I got started in 2015 as a limited partner in syndications, a lot more training, boot camps, books, conferences, podcasts… This just really exploded. But does that mean that we’re in a bubble? So that’s what we’re diving into.

I’ll get started with just what I initially brought up, which is “Is 2021 a good time to get started?” Something that I only briefly touched on a couple of episodes ago is what is your exit strategy? I still think this is so important that it bears repeating. What I mean is when you’re buying an asset, I don’t care if we’re talking about a single-family home, a mobile home park, multifamily, who are you potentially selling to? And then what does that buying pool look like? What does that demand look like?

So you really have three broad categories. You have institutional players, REITs, mutual funds, pension funds, and all this kind of stuff. You have syndicators, private groups, usually putting deals together, structuring it that way; then you have individual owners or maybe joint venture partnerships, family offices, things like that.

With institutional, I just want to reiterate this from a couple of episodes ago – you think about, “Hey, you’re a big insurance company, you’re a big pension fund. Okay, what do you need to pay out people their monthly retirement and their pensions?” Well, you need yield, you need cash flow, you need dividends, you need interest, it’s what you need. So when you have deep pockets, there are only so many asset classes to look at where you can go park 100 million dollars in capital and get a consistent type of return. You can’t be trading penny stocks, for example. So the way they’re looking at the landscape is US Treasury yield is around 1%. It might be a little higher today, but it’s hovering around 1%. It was below that recently as well. 2% yield on triple-A bonds, which are the highest-rated bonds. You’ve probably got 3% triple-B bonds; now you’re starting to get a little more risk into the mix. You’ve got an S&P 500 index that has a dividend yield of 1.5%. So you take all that into consideration – it’s all very, very low yield. I think we all know that we’re in a very low yield and low interest rate environment.

Then to speak a little bit about syndicators, JVs, individual buyers, etc. – they’re looking at the same stuff, of course, but additionally, things like certificates of deposit at the bank. I just looked that up the other day – they’re paying half a percent annually to lock up your money for six to 12 months, sometimes longer. Additionally, pretty much we’ll just stay zero in the bank as far as checking, savings accounts, money market accounts. It’s so close to zero, it’s not really worth even mentioning. 2% on annuities for folks looking to retire on a fixed income… So here’s the point that I’m trying to make – we’re all looking for yield; institutional, Main Street, you and I and everyone wants cash flow yield, dividends, and interests. So that makes for a lot of demand on something that is producing that. So what produces that? Well, multifamily does, and we talked about before, cap rates.

The cap rate, again, quickly, if you just paid all cash for a property, paid the operating expenses on it, the cap rate is basically your yield. Nationwide, we have approximately 5% cap rates across the US. So you get approximately a 5% return having no leverage, no debt, no mortgage on the property. So that’s a pretty conservative approach to investing in multifamily, especially for institutions who may have that 100 million dollar to go put to work. Clip a 5% coupon, it sure beats all the alternatives that we just discussed.

To that point, there’s a healthy demand, there’s a necessary demand for yield. So I think that we’ve still got some room to go, as crazy as it may sound… Historically cap rates were more like 8%, and now we’re at five; that seems extreme and chaotic, but the same thing with interest rates. It’s just the environment that we’re in today.

The last thing I’ll say on this intro topic is it really depends on what markets you’re in. We talked a lot about is it a good time to get started? Maybe not in San Francisco, maybe not in Manhattan… Maybe, I don’t know. But you’ve got to look at the macro-level trends, where people are moving to, where taxes are the highest, landlord/tenant laws, etc. So there are definitely markets that are going to be less lucrative right now compared to others, like Albuquerque, New Mexico, for example; cap rates are 6.5%. So it really depends… Compared to a San Francisco, where there’s 2.75 caps, something like that. So it’s pretty extreme. That’s a drastic difference.

So we talk about Texas, Florida, the Carolinas, Georgia, Arizona, Idaho – we did an episode on that, top 10 markets based on a lot of different research, a lot of different metrics. So pay attention to your markets, look at where jobs and people are moving to. It’s a good, I think, intro to this segment. I’ll turn it over to you, Theo. That was kind of long-winded on just kind of your thoughts there and anything that you want to add to that.

Theo Hicks: No, that was all amazing. It kind of brings me back to the point we’ve talked about a few times, which is very key and related to that exit strategy. That’s people are going to invest in something. So when you look at an absolute cap rate of 5%, you say, “Hey, I want to make more than 5% return on my money. Because five years ago, I was making 10% easy.” So that means that real estate isn’t a bubble; I should invest because the return is going to be half what it was before. But you’ve got to look at it relative to everything else. As Travis mentioned, keeping it in the bank is basically zero, no point to even talk about that return percentage is. He gave all other examples; so it’s the institutional players, syndicators, individual owners – if you are going to invest your money in something, your money is going to be somewhere. So just because the return is not going to be as high as it was, say five years ago — now, it might be. But even if it isn’t, it’s more a relative comparison as opposed to absolute numbers. I think that is something that’s also super important, and it definitely relates to the exit strategy.

Something you mentioned in the beginning is a blog post you wrote that we did a show on, about is now the right time to invest in real estate? One of the key things we talked about in that episode would be your risk tolerance. So as you mentioned, it kind of depends on what you want, how much risk you’re willing to take. But at the same time, keeping in mind that you have to put your money somewhere. And so just because you might think that it’s a little bit of a more risky time to invest in real estate, what’s the risk of doing nothing and is living in the bank, as Travis mentioned. Everyone says, “I wish we would have gotten in 5 years ago, 10 years ago.” There is always some time frame where they wish they would have gotten in. So five years from now, people are probably saying the same things about now.

And the third thing, because Travis was talking about the markets to invest in… It depends. You can exceed this 5% cap rate –that is just a national average– in certain places; you gave the New Mexico example.

Something else to keep in mind too is that the person or the group you’re investing with is also super important. Travis and I have a three-part episode on the three major risk points of apartment investment in particular. That would be the team managing the investment, the business plan/deal, and then the market. So you could invest in one of these amazing markets, but the business plan doesn’t fit to that market, or the team doesn’t know what they’re doing, and it’s not going to perform very well. You can invest in a really, really bad market on paper, but if the team knows what they’re doing, they’ve found some very niche business plan that works really well in this “bad market”, and they can perform very well. So it’s kind of balancing all three of those factors and knowing that people have been successful in real estate during all times since real estate has been a thing. So it’s just understanding what works and what doesn’t work depending on what part of the market cycle we’re in.

All these stats are very important, but also at the end of the day, you could be investing in a place that has the lowest vacancy rate, the most rent growth, but then the team doesn’t know what they’re doing, or it’s the wrong business plan, they’re still not going to perform very well.

On that same note, I’ve got a couple of other statistics that we’ll bring in, that I think are very fascinating, when it comes to how multifamily performed during the pandemic. Compared to all the other asset classes – retail, office, hospitality, industrial… Only industrial outperformed multifamily. Multifamily basically outperformed every other asset class, except for industrial, during the pandemic. Obviously, it was doing really well beforehand, but during this past 12 month period, it still performed really well. More specifically, vacancy rates dropped slightly, and now they’re, in a sense, basically back to what they were pre-2019. But we’re still talking about in the 4% range, which is still historically very, very low; the lowest it has ever been. Because for the book we’re working on, I did a very big deep-dive in the last five recessions, starting in the 1980s, and vacancies have just consistently been decreasing and slight little ticks up on the way, but overall going down.

Similarly, rent growth overall was negative over the past 12 months, but again, it dipped and then started of recovering. Loan origination is something else that we’ve talked about on the show before; those slowed down a lot in 2020. Volume is down 20%, but now the projections are that it’s going to rebound and be at just below the 2019 levels. So again, 2019 – a great year for multifamily. If 2021 is supposed to be from a vacancy, rent growth, or loan origination perspective, very similar to 2019, then it seems like we’ve bounced back.

One more thing that I want to mention quickly that maybe Travis had mentioned is that his article that these were based off of, these forecasts and projections, weren’t taking additional economic stimulus into account. It’s just saying if there’s no more economic stimulus, here’s what we think is going to happen. So that’s something else to keep in mind.

Travis Watts: Absolutely. That’s Freddie Mac, by the way. We can put a link somewhere or you can reach out to us for that link. But yes, it’s a Freddie Mac survey; very knowledgeable folks in the space. So just to piggyback off of those topics… In my mind, I’m trying to look at the pros and cons here. I don’t want this to be just a totally bullish “multifamily is the best, yadda yadda.” So let’s look at some of those cons in fairness. The unemployment rate is still high.

So when you’re investing in multifamily, it’s all about your tenants, it’s all about your renters and their ability to pay rent. People losing jobs is not a good thing; the government pulling away unemployment benefits – not a good thing, etc. These eviction moratoriums are still in place. There are still some negative elements to all of this. The unemployment rate, I believe, last I checked is still around 7%, which is still a little bit high. It did spike up drastically in early 2020 when lockdowns first happened, but it kind of flattened the curve, so to speak, at this point.

Rents in a lot of the largest markets are expected to remain depressed during this year. So it’s something to think about as a limited partner. If you’re doing these syndication investments, always look for conservative underwriting. If you’re looking at projections that we’re going to take written from 1,000 to 1,300 overnight, that’s probably not realistic. So just read through the lines there.

And then vacancy rate is expected to increase slightly on a national scale. But to Theo’s point, it really depends on the market that you’re in whether or not that’s going to happen, and that is just a slight increment. To the pros, more markets are expected to see rent increases versus not; that’s just looking forward. That’s through a bunch of different sources, not just Freddie Mac; that’s CBRE, Marcus and Millichap, on and on.

I just did a speaking event at the Best Ever conference and I tried to pull as many sources as I could from all different outlets just to paint the picture of what everybody “is thinking as far as forecasts go.” That would be very true in that case.

So the rolling out of vaccines, additional stimulus… By the time you’re listening to this, that probably would have passed, this 1.9 trillion stimulus package. We’re still kind of in the works on that at the moment. Long-term fundamentals of multifamily are still on solid ground as far as just supply and demand, the amount of renters we have, how expensive it is to build new products, how much time that takes versus what’s available now… All your fundamentals are there.

And yes, cap rates have compressed, but as we talked about, there’s still a margin there that still looks pretty lucrative to a lot of institutional buyers. So think ahead and think of who you’re going to potentially be selling your properties to. Yes, it’s a crowded space. We talked about that. I did mention Albuquerque and other examples. Kansas City, Missouri – they have higher cap rates out there as compared to… Even internationally too, you look at Toronto in Canada. We’ve got a lot of investors that are Canadian that I speak with, and there are like three caps out there in Toronto. So a lot of those folks are shifting over to bordering US to start looking into US multifamily, and single-family for that matter. So just something to keep in mind – London, Singapore, so many examples of lower cap rates than what we’re seeing stateside, especially in certain markets.

With all that, we’ve had a lot of disruption in 2020, we all know that. To your point, Theo, multifamily really held up well, at least thus far; we’re not completely out of the woods. But industrial did outperform, but most other asset classes didn’t. I’m continuing to invest, on a personal note… I did a lot of deals in 2020 myself in the multifamily space. I’m still very bullish, and no, I don’t think that we’re in a bubble per see, but I’ll leave it to you, the listeners, to decide for yourself if that’s a bubble, and perhaps there’s a strategy or an asset class you’re more familiar with that potentially has a higher yield with lower risk, etc. Then maybe that’s the right fit for you. But the way that I look at it from the complete landscape I see, this is still a great asset class, both for Main Street and Wall Street investing.

Theo Hicks: I appreciate you doing the cons as well as the pros, because I get very inspired… [unintelligible [00:15:49].21] “Oh, that’s great. Let’s invest.” So I appreciate you bringing those up.

I do want to bring up one thing I did forget – it was the moratoriums. We’ve got the eviction moratoriums… Because historically, when I did my recession analysis, when the recession hit, more people start to rent, because it’s traditionally cheaper to rent than to own. But I wonder, since the previous recession didn’t have the eviction or the foreclosure moratorium, that did have an impact on why some of the metrics during this time around were different than other recessions. I think that’d be something interesting to look at… Because recession happens, you lose your job, you’re not going to go homeless; you just downgrade to a smaller apartment or something. So the demand for multifamily goes up, and usually rents go up as well. Whereas now it seems [unintelligible [16:31] rents went down, and I wonder if it has to do with the fact that people didn’t have to leave their homes or their apartment. I think they have some sort of declaration.

So it sounds like, as Travis mentioned, when you listen to this, more stimulus is happening. That should continue to hold up and support multifamily, and then hopefully that continues until people can get back to work and pay their rent. Then once it goes away, things go back to normal.

You mentioned something too that I think would be good – people can definitely reach out to us. Email me,, what your thoughts are on what we’re talking about today. This is kind of all speculative, we’re basing it off of different expert reports and forecasts… But again, none of this stuff is going to be perfect. They even say it in the report, these are all just averages and projections based off of certain assumptions and scenarios. So let us know what your thoughts are as well. If you think that a certain asset classes will perform better, if there are specific opportunities you see that you’re focused on, we’d love to hear that. If it’s a lot of info, maybe Travis and I can have a quick talk about it on the show or turn it into a 60-second question segment. Travis, is there anything else you want to mention before we sign off?

Travis Watts: No, I think we covered it. Appreciate it.

Theo Hicks: Perfect. Well, Best Ever listeners, thank you so much for tuning in today. Make sure that, as I mentioned, if you want us to answer a question on the show, we’re going to answer a fast question on our 60-second segment. Email me,, with those question or questions. Thank you so much for listening. Have a Best Ever day and we’ll talk to you tomorrow.

Travis Watts: Thanks, Theo. Thanks, everybody.

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