It was not long ago – May of 2022, to be more precise - when market volatility increased in response to inflation, higher interest rates, Russia’s invasion of Ukraine, and the Federal Reserve’s subsequent aggressive policy response. The Fed Funds rate now stands at 4.25 to 4.50%, up from 0.25 to 0.50% in March, a simply remarkable and unprecedented move. As a result, multifamily deal-flow and transaction volume have slowed significantly, as buyers and sellers respond and adjust to this new debt and broader financial and economic market reality, characterized by significant increases in borrowing rates and spreads (rate lenders charge above underlying indices), alongside far more conservative underwriting.
Despite these market conditions, we have 36 new deals in our pipeline as of this week, 24 deals in various stages of underwriting, three potential letters of intent, and one property under contract. Meantime, while the market is typically slower this time of year, regardless of broader market conditions, we anticipate that the slowdown in transaction volumes will persist through the first half of 2023, though we expect to see more deals in the latter half of the year. Following the National Multifamily Housing Council Annual Conference in late January, we anticipate a larger number of “marketed” deals, but off-market deal-flow will likely stay the same.
At this point, we believe we will have four investment offerings in 2023 and hope to continue to expand our investor base which grew by over 30% in 2022. We will continue to host property webinars for new investment offerings and regular property updates where the Capital Markets, Asset Management, Acquisitions, and Investor Relations teams will provide updates on specific assets, the financial and real estate markets more generally, and answer any questions you (or others) might have.
Clear Capital’s strategy is to seek assets with high value-add potential, allowing us to elevate any particular property and increase value through:
- Unit upgrades and renovations
- The addition and improvement of common area amenities
- Active cost management
We do all the above while we raise rents and net operating income over a three- to five-year hold period. Once our accredited investors acquire an interest in a particular property, they share in net cash flows and receive a pro-rata share of value appreciation realized upon any refinance or property sale. When the property is sold, investors receive their proportionate share of the gain, or a 1031 exchange may be offered. Fortunately, this approach has served us well through several market cycles, reflected by our substantial and consistent growth in new investors and the $1.2 billion in assets we now have under management
Our track record and experience should serve us well as we maneuver the challenging economic, market, and political environment, managing both our existing portfolio while seeking attractive, perhaps even distressed investment opportunities. That is not to say that the work we have ahead of us will be easy. Increases in borrowing costs and all expenses (e.g., wages, insurance costs, repairs and maintenance), coupled with a shortage of available labor have presented significant challenges in 2022, conditions that will likely persist into at least the first half of 2023 and perhaps beyond. However, regardless of market changes, the Clear Capital team will continue to stick to its knitting and exercise even more caution in our underwriting. It goes without saying that in a high(er) inflation and rising interest rate environment, it is even more critical to be mindful of how proforma rents, expenses, and cap rates may respond.
As always, the entire Clear Capital team appreciates your continued trust and confidence in our team. We wish you well on your investing journey and the happiest of holiday seasons.