December 6, 2023

JF3380: Reid Bennett - Navigating Distressed Deals and Market Realities



Welcome the the Best Ever midweek news brief, a new series where we will highlight the top headlines CRE investors should be paying attention to this week, followed by a deep dive on a larger news topic or trend alongside a CRE expert.

Today's Headlines:

  • Music City Migration: Nashville has crashed the list of top migration destinations in the U.S. for the first time since 2021, with people mostly looking to leave Los Angeles to relocate to the Music City.
  • Rents Remain Flat: Rents inched up from 0.08% growth to 0.16% YoY in November, basically staying flat. Economist Jay Parsons expects them to remain flat for a while, as new supply volumes are set to spike (and likely peak) in 2024.
  • Rent Growth Forecast: RealPage projects Richmond, Va., and San Jose, Calif., to lead rent growth in 2024, each rising at a 4% clip. West Palm Beach, Anaheim, and Pittsburgh round out the top five.


Today's Guest: Commercial real estate broker and National Council Chair of Multifamily Properties for SVN, Reid Bennett, joins host Paul Mueller to discuss the trends and challenges that investors should keep an eye on as they navigate the complex landscape of commercial real estate in 2024. From rising insurance premiums to supply chain issues, Bennett shares valuable insights that will help investors make informed decisions in the coming year.

Key Takeaways:

  • The Three Ds of Selling: Bennett emphasizes the importance of monitoring owners' motivations, often driven by "death, disease, or divorce," which can lead to opportunities for investors. Additionally, lenders are facing tough decisions as debt service coverage ratios drop, potentially resulting in distressed property sales.
  • Timing the Market: Bennett advises investors not to try to time the market's bottom but instead to focus on deals that make sense with today's debt. He highlights the potential for deals to work out well even with current interest rates, stressing the importance of realistic assumptions.
  • Prepare for Distressed Opportunities: With a prediction of increased distress in 2024, Bennett suggests that investors act swiftly when opportunities arise. He cautions against overestimating rental increases and expense reductions, advocating for a conservative approach to assumptions.

Reid Bennett | Real Estate Background

  • National Council Chair of Multifamily Properties for SVN, a full-service commercial real estate franchisor of the SVN® brand comprised of over 1,600 commercial real estate advisors and staff that continues to expand across the globe. Multifamily real estate broker who works without council to serve multifamily clients in over 170 markets around the country.
  • Based in: Chicago, IL
  • Say hi to him at: 


Previous episodes with Reid Bennett:


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Paul Mueller (00:09.102)
All right. So as we creep into December here, it's getting to be that time that not only we start digesting what's really happened in 2023 across commercial real estate, but more importantly, it's going to be that time where we start looking ahead to 2024 and what that could have in store for investors. So today for our main story, we're going to take a look at some of the trends that investors should be monitoring going into 2024. And joining me today to discuss those is Reid Bennett.

Reid is a return guest. You can check out his recent appearance on the podcast, episode 3286, which we'll link to in the show notes. And Reid's joining us today from Chicago, Illinois. He serves as a National Council Chairperson of Multifamily Properties for SVN, where he serves multifamily clients in over 170 markets around the country. Reid is a multifamily broker who's invested in several deals, and he's worked in the multifamily space for more than 22 years. Reid, it's great to see you again and great to have you here today.

Reid Bennett (01:03.564)
Paul Mueller, excited to be back. I'm a long time listener, second time caller.

Paul Mueller (01:07.766)
Yeah, definitely. We're excited to have you. So look, a lot of investors are grappling with, you know, the challenges brought on by inflation, rising interest rates, rising costs, you name it. And a lot of these will continue to be factors for the foreseeable future, especially in 2024. But let's get right to it. I mean, you talk to buyers and sellers all day, every day, what are you hearing that people are focused on most as we go into 2024?

Reid Bennett (01:30.868)
It's kind of the convergence of a number of different things right now that we're seeing. One is the rental market is really stabilizing right now. You're not seeing these double digit percentage increases that we were seeing through 2021 through really the beginning part of 2023. That's kind of slowing. And at the same time, that's slowing down.

A lot of the inflationary pressures are still in effect from the end of that period and just driving a lot of the expenses up. You know, the expenses we talked about, you know, the insurance costs have gone up. You know, it's interesting because we sell most of our apartment complexes up in the Midwest. And what I'm hearing from a lot of my colleagues in the Sunbelt region is, you know, the insurance costs have gone somewhere, you know, close to $2,000 to $3,000 a unit, which is just ridiculous for us to hear. But we're starting to see that up in the Midwest as well. So, the insurance premiums have risen 28 to 155%, depending on what market you're in.

We're also, couple that with what we've seen with these drastic Fed interest rate hikes that have tripled in some instances for a lot of the borrowers. And we have a lot of multifamily owners and operators that have, that have variable rate debt or bridge debt that is coming due, it's starting to come due now and next year there's a ton of it coming due. We're already working with a number of special servicers and receivers right now to help them understand if they should continue to release funds to owners and operators of multifamily that are renovating units to try to hit certain benchmarks on rents. So it's interesting to see what's going on out there. And, you know, it's kind of hitting operators from all different angles right now.

Paul Mueller (03:32.062)
So Reid, I want to go back to the insurance premiums that you discussed. I'm down here in Tampa, Florida. So we all know what's happening in Florida with insurance rates and people are leaving in droves. Investors are staying away for the most part, especially in the multifamily space. I've talked to Slocum about this a lot actually. And he, he says that to date, they haven't really seen the same in the Cincinnati area up in the Midwest, mainly because obviously there are, there are

natural disaster factors, other factors down here in Florida that simply don't exist up there. You say that you're starting to see this permeate into the Midwest. Why is that? Are they just following that trend and these companies are taking advantage of those opportunities to raise those rates or is there a practical application for that reason?

Reid Bennett (04:18.263)
I mean, it's a great question. It's a great question. You know, my belief is that, you know, it has to come from somewhere and, you know, down in Tampa, you know, in the, in many of the Florida markets, I was just down in Miami two weeks ago, just the, the amount of increases in what people are paying for per door and they're even, they're even leaving out wind damage out of their premiums, because a lot of the times the wind damage parts of the premiums, you know, aren't even paying out.

So, you know, but then a lot of these owners, if they don't pay for the wind, they're in default to their loan, depending on what kind of loan they have. So, you know, it has to creep. So, I mean, it has to, the bucket has to be filled somehow. And if, if people are being outpriced in the Sunbelt regions in Florida, it has to come from somewhere else. So it's just, you know, even the premiums up here in the Midwest, we're seeing them go up, um, you know, we're looking at a complex that we're marketing right now that it increased, uh, you know, $20,000 on a smaller deal and that $20,000, you know, on top of, uh, you know, what we're going to be expecting to see with some of the other, uh, increase in expenses is just wiping out any double digit increases that we've seen over the last three years of rental rates, just wiping it out.

Paul Mueller (05:46.378)
And you mentioned other operational expenses, obviously insurance is a big one. What are some other operational expenses that people are going to be paying attention to going into 2024?

Reid Bennett (05:54.796)
Well, there's a number of things besides insurance. You're going to also have the real estate taxes, which are paid in the rears are just starting to catch up to the drastic increases we saw in 21 and 22 in some markets. And so these real estate tax increases are going to start crushing a lot. Again, just with real estate taxes and insurance.

You know what that's doing to the operational if you know costs of these apartment complexes It's going to be drastic. So that's why you have to have a significant amount of cushion Um, you know, hopefully that's with your with your uh with your interest rate, but you know, we're not seeing that either as well So kind of hitting it from all sides, but you know the big saving grace is and a big difference between what we're experiencing in 2023 that we saw in 2008 and 9 and 10 and the great financial crisis was anybody that had a pulse could get a mortgage and they were all leaving apartments and going and buying homes or condos that they couldn't afford. And so there was a 70%, 80% occupancy levels in areas that were typically in the low 90s that we saw during that time period, that we're not seeing because anybody that has a sub 3%, 30-year fixed interest rate in their home is not selling their, they can't afford to sell their home and move to a new house anywhere and pay 8% on their mortgage.

So the fact that there's no inventory, very little apartment dwellers are leaving to go buy their first home like they normally would. It's keeping the metrics pretty robust for occupancy levels and rental rates across the multifamily landscape.

Paul Mueller (07:54.686)
Yeah, and Reid, before we started recording, you had spoken a little bit about deal flow, right? And how that had come to almost a screeching halt this year. What are you looking at in terms of deal flow? I mean, I know there's been a lot of stories out there about how much dry powder and institutional capital is sitting on the sidelines, waiting to pounce on these distressed assets when they come up. But institutional capital is different than interest rates coming down and small mom and pop investors getting back into the game and getting into competition. So what does that look like?

Reid Bennett (08:28.744)
Yeah, absolutely. I mean, then that's going to be the biggest question mark for next year is, you know, what will interest rates do? It will that allow, uh, you know, some of these buyers to get back into the game that are using traditional financing. Um, you know, that that's been the main bid verse ask gap right there is, is the, is the debt. Um, because if you you know, a lot of the owners are saying, look, my metrics are fantastic. I have 97% plus occupancy with a waiting list. Um, you know, and I'm, you know, some of them are continuing to slightly raise rents, although that's slowed down considerably, but the transactional volume is down 63 to 75%, depending on what market you're in. And, um, you know, it's just a lot of the owners, if they don't have to sell.

They're, and they still have the prices that were thrown. I mean, we were, we were delivering offers to owners in 2021 and 22 that were just, I mean, completely ridiculous. And, you know, what I was telling those owners, if you're not buying, you know, you're not selling it at this price, you're buying your own deal at this price. Um, really, you know, most people are kind of coming back and trying to catch up to the bus is what we call it and getting to the next bus stop. And then the pricing has kind of dropped again, but, that is going to be the biggest key for next year if the sellers that want to sell or need to sell can sell at a price that makes sense for them and the buyers can still come back up to that price and bridge that gap. And that's going to be the big question for 2024.

Paul Mueller (10:11.342)
Yeah, and I think that's a perfect pivot point to another topic that I know you wanted to discuss, which is supply and demand. And the housing shortage that we're facing, obviously, we're not even, regardless of how many multifamily deliveries we're going to get in 2024 and 2025, we're still way off from covering the gap. I think you had the number before, way off from covering the gap of the housing shortage right now. But then also, multifamily starts are down year over year as of October, I think 32%. So that may have some impact in 2024, maybe not beyond. Tell me about the supply issue that we're facing and how you think that's gonna manifest itself in 2024.

Reid Bennett (10:52.052)
Yeah, I mean, depending on what articles you read or what sources you look at, it's somewhere between 4.3 and 4.5 million apartment units as far as a shortage that we have in the U S that we're not going to be able to, you know, really catch up to it's like almost not in our lifetimes. We're going to be able to catch up to that because the other problem we're seeing is the governmental regulations that are keeping a lot of the apartment developers down. 

Um, the, the only way to, to alleviate the affordability crisis that we have in this country is to build and build many more. 4.3, 4.5 million units. The problem is all of the bureaucratic red tape that a lot of these developers have to go through, it's cost prohibitive to building deals. So the only multifamily assets that we've seen built over the last three to five years have been either the high-end, highly amenitized Class A, lifestyle deals in core markets or low income housing tax credit properties You know for the 60% or below the area median income group Nothing is in for the middle class. Nothing's been built the garden, you know, the garden apartments Virtually zero has been built. There's there's a few here and there in some markets, but it's cost-prohibitive to build those.

Paul Mueller (12:17.366)
So where's that going to come from? Like how, how does, how do we solve that problem? Not that you and I are here to solve it, but.

Reid Bennett (12:24.3)
If we could solve it, we wouldn't be talking on the, on this video right now. But, you know, so there are a lot of things. So a majority of it, probably, uh, 18% of it is, or more is, is going to be governmental regulations and, and easing a lot of the restrictions that they're placing on developers. Um, that, that plays a huge role in allowing more units to be built.

Um, you know, the, the other thing is, a lot of the supply chain issues and you know, if I ever heard supply chain in my life Again, it'd be too soon But if you remember during that was just jacking all of the cost of the lumber and all of the products up So it just the cost just rose You know drastically during that time period as well. So between the increased costs and then we have labor as well I mean you can't even find labor you know, in this market right now, people are offering, you know, pretty substantial rates and, and they can't find enough talent to fill the roles. So between labor supplies and governmental regulations, I don't see, I don't see the supply of housing increasing anytime soon to, to alleviate that 4.3 million shortage that we have in this market.

Paul Mueller (13:50.014)
So as an investor, right, as a multifamily investor, small mom and pop or a syndicator going into 2024, what am I looking at? What's the landscape look like for me?

Reid Bennett (14:01.248)
Well, I think you're gonna have to be looking at triple the amount of deals that you were looking at before to try to uncover a good deal. Look, there's always groups, owners, some kind of a reason. We call it the three Ds. It's either death, disease, or divorce. And divorce could be a partnership dispute where the partners wanna go somewhere as well. So there's always going to be situations that come up that owners are going to need to sell, have to sell. The other thing that we're going to see is, and we're already seeing it, are lenders are trying to figure out what to do with deals that they know they're not gonna be able to refinance.

The debt service coverage ratios have dropped and we have a number of systems that we're tracking these debt coverage ratios that are dropping way below one. And when that happens, the lenders are going to have a big decision here whether to either get into the chain of title, take the property back, do some kind of a short sale. The challenge that I'm mentioning to owners currently is if you're in a position where you want to sell or need to sell at this point, there's still, like you said, a ton of capital chasing deals, we're still at historically decent mortgage rates. It's probably 25, 30% below the ridiculousness we saw in 2021 and 2022. So if you are interested or need to sell, right now is the best time to sell.

Going into next year, we don't know what's gonna happen because if there are deals that become distressed, that end up selling for you know, discount prices, right? You know, 30, 40, 50, 60 cents on the dollar. That's the new comp for your property. So when you go to refinance your deal, all of the appraisers are going to be looking at the most recent deals that have sold. And if those are gonna be distressed deals, those are the new comps for you as the owner in that market. So that's why when I see a new deal trade hands.

Reid Bennett (16:07.688)
I'm talking to all of the owners around that marketplace saying, hey, I just want to share with you XYZ Complex that's sold, that's going to have a direct impact on the value of your property. In 2021 and 22, that impact was extraordinarily positive. We just set a new record on this price per door in your markets. That's what I'm sharing with you. So would you take a look at an offer? Now we're going to be saying, hey, this bank had to let this property go for $1.5 million, 45 percent less than they bought it for That's going to have a direct impact on the value of your property now So if you don't have to sell or don't need to sell you're in a position where you're going to be holding The market is always going to return. It always does the cycles always go around. They always do It's just you're going to be holding it for a little bit longer.

Paul Mueller (17:00.598)
So 2024 or at least early 2024 is gonna be the year or the quarter of the distress properties.

Reid Bennett (17:08.464)
I think we're going to see, we're definitely going to see more distress in 24 than we saw in 23 because everybody kind of froze. Everybody went back on their heels this year to try to, they hit pause. And, you know, um, I was a speaker at a number of conferences here in Chicago and, um, you know, all I heard from a lot of the big owners and operators was patients. They just kept saying patience, we're having patience, we're sitting back.

And, you know, a lot of the other people in the room that make money off transactions, you know, patience doesn't pay their mortgage. So it's like, you know, we'll see what happens in 2024. If people, you know, a lot of the owners and operators that I know, they're just constantly wringing their hands to do deals. They wanna do deals, it's in their blood. They're gonna try to find deals to do. Transactions will always happen, but 2024 might be the year of certain distress. I mean, we're talking right now with a number of lenders that are asking us these questions and we're underwriting deals at 30 to 45% less than they have them on their books as the loan. So these are in markets that are going to get crushed early, which there are typical markets around the country that fall first, they rise fast and die quicker. Here in the Midwest, we don't have those huge upswings and downswings, but it's going to hit some people for sure next year.

Paul Mueller (18:39.35)
So Reid, I think the last thing, taking all that into consideration, right? The economic landscape, mortgage rates, interest rates, insurance rates, operational costs and all that. As we go ahead into 2024, what would be your best ever advice? One piece of advice for investors as they prepare for 2024 and they strategically build out their business plans for the year.

Reid Bennett (19:00.64)
Well, I would say don't try to time the bottom. You know, everybody that tries to do that misses it by, you know, six months. So I would say, you know, you have to, you cannot make, uh, very aggressive assumptions, but if there's a deal that makes sense right now with today's debt, you need to buy it and you need to buy it quickly, um, before everybody else that that's, that's having analysis paralysis kind of steps off the sidelines and buy it because you know, one of the things, and I've been doing this for 23 years, this is my 23rd year.

Um, you know, early in the two thousands, I saw people buying deals that made sense with higher interest rates, and then they became multimillionaires, just simply doing cash out refinances when, when the interest rates were cut in half. So interest rate rates, you know, who knows where they're going to go, but if you can buy a deal right now that they make sense, the deal is going to work out for you. Do not push your you know your assumptions on rental increases and do not push your assumptions on expense decreases. That's what a lot of the owners say. Just, you know, the new buyer can just raise rents and, you know, decrease expenses. So it's just, I wouldn't be counting on that. I wouldn't be counting on that.

Paul Mueller (20:14.91)
Yeah, that's great advice and great perspective, obviously, from your experience as well. Reed, thanks so much for joining me today to discuss what we got going on heading into 2024. It's definitely going to be an interesting year, maybe more interesting than 2023, if that's possible. So it'll be interesting to see how investors react and how brokers like yourself react. And once again, Reed, thanks for joining us today. And I appreciate it. Have a best ever day.

Reid Bennett (20:38.764)
All right, Paul Mueller, thank you. Talk to you soon.

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