Henry Stimler 0:00
So you’ve got two types of sellers that have to sell. You got guys that, especially on new development, construction merchant builders build the product. Typically, they’ve got a little bit of runway to lease the deal up and then put it on the market. And the banks will allow them that time. Now, the construction lenders are just scrambling to bring as much money back in. So the pressure on the merchant builders is immense. So they are under tremendous strain. And especially because they took out floating rate construction loans, when Sofer was let’s say 10. Today service first of five, so their cost is so much high, it’s astronomically high, so the pressure is on them, they’re choking. Again, lease up deals don’t bring a lot of income because you’re leasing up the properties so much and builders are really feeling the squeeze. Then on top of that, you’ve got guys that again took out floating rate debt, floating rate variable option debt, especially bridge debt that needs interest rate caps, those interest rate caps have gone through the roof that then insurance against interest rate costs, because of the fluctuate the volatility within the lending market. So guys that have loans that are coming due, they’re also under tremendous pressure to go and sell but a lot of these guys are going to struggle because they bought deals at the height of the market when Cap rates were in the threes. Today the market is in the fives so that a lot of them are going to have to sell for a loss and swallow it and just do what they need to do. And they don’t really have a choice.
Welcome to CRE PN Radio for influential commercial real estate professionals who work with investors, buyers and sellers of commercial real estate coast to coast whether you’re an investor, broker, lender, property manager, attorney or accountant we are here to learn from the experts.
J Darrin Gross 1:43
Welcome to commercial real estate pro networks, CRE PN Radio. Thanks for joining us. My name is J Darrin Gross. This is the podcast focused on commercial real estate investment and risk management strategies. Weekly we have conversations with commercial real estate investors and professionals to provide their experience and insight to help you grow your real estate portfolio.
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Today my guest is Henry Stimler. Henry is the Executive Managing Director of global commercial real estate at the firm Newmark, whose team financed 4.4 billion in deals in 2022 alone. Henry’s core focus is origination and brokerage in large multifamily debt and equity transactions. And in just a minute, we’re going to speak with Henry about the impact of the current economic factors on the commercial real estate industry. And we’ll drill down into multifamily housing.
But first a quick reminder, if you like our show, CRE PN Radio, there are a couple things you can do to help us out. You can like, share and subscribe. And as always, we encourage you to leave a comment. We’d love to hear from our listeners. Also, if you want to see how handsome Our guests are, be sure to check out our YouTube channel. You can find us on YouTube at commercial real estate pro network. And while you’re there, please subscribe. With that, I want to welcome my guest. Henry Stimler, welcome to CRE PN Radio.
Henry Stimler 3:39
Thank you very much for having me.
J Darrin Gross 3:41
Henry, I’m looking forward to our conversation. But before we get started, if you could take just a minute and share with the listeners a little bit about your background.
Henry Stimler 3:49
Sure. So I’m British born, lived in the UK moved to New York at the age of 22. In 2002, did a few things in that tent in the time there in 2017. I joined Cantor Fitzgerald, which was the controlling shareholder of Newmark in 2019. Myself and my team got transferred from Cantor to Newmark. Fast forward today we are the one of the number one lending groups in the company and I would say in the country. Our core focus is obviously multifamily where we originate billions of dollars of of deals and loans. But we also do office industrial hotels, so we touch all the sectors when our core focus is multi.
J Darrin Gross 4:35
It so let’s talk just a little bit about the current state of the commercial real estate market. When you’re doing the origination, who, who’s your typical client? Are you working with individual investors syndications? Or, or how what’s the what’s kind of a sweet spot for you? As far as the size of the, the loan, yeah, that you work on.
Henry Stimler 5:05
So I typically am looking to do larger size deals, the deals all take the same time from a $10 million deal to $100 million deal. So if I can focus on the on the bigger deals, that’s a better use of my time I cover institutions recover some of the large institutions that own 3040 50,000 apartments. Some of the largest developers, we closed alone. A few months back for Larry Silverstein, he built the World Trade Center was $176 million construction loan for new development in Queens. So it and then we also have the syndicators, we have the smaller mom and pop investors. I’m always a very big believer that from small acorns can big trees. So one of my favorite things to do is to is to help my clients build their businesses and achieve their dreams. And we’ve we’ve helped guys go from 1000 units to 10,000 units and up and up and up. So that’s what we love to do. But so we support we have the entire gauntlet of different types of, of real estate investors from the big institutions, that the syndicators, the mom and pops and then the guys just starting to get on their feet and start to expand their portfolios.
J Darrin Gross 6:13
And are you geographically limited to New York? Or were no, no,
Henry Stimler 6:18
no, no, no, no, I do deals all across the US. The last deal I closed was in Dallas. It was a new built multifamily deal bought by a group called Harbor Group. Close the deal in Columbus, Ohio. Another multifamily deal we are closing an office deal in Dallas again, closing a taking out a construction that we did in 2017 in Boca Raton of a hotel, condo, an apartment building with a golf course performance $60 million dollars. So I’ll go with the businesses.
J Darrin Gross 6:49
I’ve heard you mentioned construction quite a bit. What percentage of your business is new construction versus an existing property?
Henry Stimler 7:00
So I would say that those numbers have changed dramatically. In this year, obviously, with the rise in interest rates, a lot of construction property, a lot of construction deals that were shovel ready, developers are taking a pause because their cost of capital has risen. So incredibly, so I would say right now less construction, more buying and holding or buying and fixing.
J Darrin Gross 7:24
Got it? Got it. And on the the buy side of the existing stock. Is there a what are the typical length of the or the term of the loans? Are they 10 year holds five, what’s the what’s there.
Henry Stimler 7:45
So it always varies always changes last year, when when interest rates were historically low. A lot of people were taking out floating rate shorter term loans for Domine. Bridge loans, the bridge lenders were very aggressive in the space lending 7580 all the way up to 85%. LTV those were three plus one plus one three year term plus two extensions. But now with the incredible volatility and interest rates, it we advise our clients to lock in fixed rate money, because the indices and the Treasury just keep on moving against us. So rather than to be exposed to continued hikes to continue fluctuation, lock in the lock in five year money, seven year money 10 year money, but it also really depends on what your business plan is. So if you’re buying a transient asset, if you’re buying a building that sits in 1970s, building it in need of a lot of love and TLC and care, but it’s in a fantastic market and a fantastic neighborhood. You know, your comps and other buildings that are in better shape are getting higher rents, those type of deals you want to go in, you want to fix it up, push your NOI and then be able to do a refi. So pull your money out. So if it’s something that’s super transient, you don’t want to lock up long term money, because there’s gonna be it’s gonna be very difficult then for you to pull your equity dollars out. But if you know that if you do the work, you’re gonna get a big pop in rents, I would advise them to take a floating rate loan, do the work, fix up the property, once you’ve fixed up the property, once you’ve pushed noi through the roof, come back, lock in a fixed rate deal and pull out some of your equity.
J Darrin Gross 9:17
And as far as the different loan products, you talked a little bit about bridge loan and then kind of referenced the different length the terms is it agency or is it
Henry Stimler 9:29
Yeah, so today, I would say that the biggest players are in the space, a little bit to my chagrin, because it gives them a lot of power is Freddie Mac and Fannie Mae right? So they’re really not competing with anybody else because the regional banks have pullback tremendously. The debt fund lenders have pullback tremendously. So for multi besides, I would say on much bigger deals when you can access Blackstone’s money you KKR as life insurance money, areas as money these big conglomerates. The really only game in town you have is Freddie Mac Fannie Mae, but that’s amazing. And that’s what makes multifamily such an such a unique asset class is that you have these government backed programs that have 160 100 $70 billion to put out in 2023.
J Darrin Gross 10:12
Right. Now it is. It’s almost scary when you see just how the the cast of players has changed so much. And just the rates have changed so much. What are you seeing from the, I guess, let’s talk about the seller side of the equation as far as somebody who’s got an existing property, they’re looking to exit What what are you seeing as far as their expectations versus the reality of the market and
Henry Stimler 10:40
so of course sellers are always want to get top dollar, they always want to sell at the highest price they can. And for many years, they’ve been able to get it’s been a it’s been a buyers, it’s been a seller’s market, the seller says this is what I want, I want a three and a half cap. And they’ve been able to achieve those staggering cap rates. Today, it’s not so much a seller’s market, it’s more buyers markets. But there is a disconnect between buyers and sellers, right sellers still want to sell things in the mid four caps. buyers don’t want to buy take negative leverage, they want deals that are five and a half cap. So there’s there’s that disconnect time. That’s why we’ve seen We’ve seen that transactions fall off a cliff, I think there’s a 75% drop in transactions from 2022 to 2023.
J Darrin Gross 11:24
And as far as the gap there, are you are you seeing more sellers? Well, as far as the sellers that are selling because the deals that are getting done, are those sellers that have to sell or is are they at the end of their financing, or what are you seeing there.
Henry Stimler 11:44
So you’ve got two types of sellers that have to sell, you got guys that especially on new development, construction, merchant builders build the product, typically, they’ve got a little bit of runway to lease the deal up and then put it on the market. And the banks will allow them that time. Now the construction lenders are just scrambling to bring as much money back in. So the pressure on the merchant builders is immense. So they are under tremendous strain. And especially because they took out floating rate construction loans, when Sofer was let’s say 10, today service first of five. So their cost is so much higher, it’s astronomically high, so the pressure is on them, they’re choking. Again, lease up deals don’t bring a lot of income, because you’re leasing out the properties so much, and builders are really feeling the squeeze. Then on top of that you’ve got guys that again took out floating rate debt, floating rate variable option debt, especially bridge debt, that needs interest rate caps, those interest rate caps have gone through the roof that then insurance against interest rate costs, because of the fluctuate the volatility within the lending market. So guys that have loans that are coming due, they’re also under tremendous pressure to go and sell. But a lot of these guys are going to struggle because they bought deals at the height of the market, when Cap rates were in the threes, today, the market is in the fives so that a lot of them are going to have to sell for a loss and swallow it and just do what they need to do. And they don’t really have a choice.
J Darrin Gross 13:09
Ya know, and as far as that goes, Do you see or is there a lot of debt that’s due to reach the the end of term? Yes here or what’s the
Henry Stimler 13:20
Yatra a tremendous amount of of debt put on three years ago, and that end up getting you they would say, well, we have we have another two plus we have to one year extensions. But to get those extensions, you have to meet certain DSCR requirements. And a lot of those deals are not going to meet those DSCR requirements. And they’re not going to get those extensions. So guys that took out about five year paper with a three year plus the one plus one when that three year term comes through, and they’re going to either have to refi out of that existing loan into an agency loan and the agency loans many times I’m going to size to where the bridge loan was or they’re gonna have to sell. But I do want to just caveat and say that the multifamily space is incredibly strong. The fundamentals are incredibly strong rental growth is still very, very strong demand is still very strong. The high cost of buying a home only makes your tenant stay in longer. It’s so much more economical to rent right now than it is to buy. So the fall off in the single family home buying market is a boon to the multifamily investment multifamily MSL. So if they can find a way to refi out of their high octane bridge loan into an agency loan and buy themselves time they’re going to be okay, so there’s no huge distress coming. There’s no massive fire sales coming. It’s kind of just kind of an equilibrium has to be found. So that’s very important for your listeners to know that the multifamily space is not a boom and bust space. It’s very stable in a very strong and secure asset class.
J Darrin Gross 14:53
Right but but as you were relaying there the the dead that cover surface or the debt service coverage ratio? Is that not really what’s going to drive a lot of what the options are based on? Yeah,
Henry Stimler 15:09
yeah, for sure, for sure. But there’s a Yeah, but there’s a lot of solutions as well. So, so there’s a lot of ways to create a cap sack. So let’s say that let’s just use round numbers, let’s say you bought $100 million building in 2019 2020. Let’s say you put on a floating rate bridge loan at 80%. You on $80 million loan, three years later, you want to you want to get out of this loan, you come to an agency lender, like me, are size the deal based on the DSCR. And let’s say your own, my agency load is only sizing to let’s say 60 $65 million. So now you’ve got a gap from the 65 to the $80 million, there are prep lenders out there, that will give you the gap financing, so you can layer on top of your senior you can layer a prep piece, and that press piece will will be able to take out your senior loan. So there are solutions, rather than just being forced to sell as long as you’ve done a good job running the asset. Your collections are good, you’re pushed your noi over the last three, four years, you should be able to refi using a combination of senior agency debt and pref equity on top. And there’s a lot there’s a lot of private lenders there’s there’s a there’s this drove a private lenders that are sitting on a lot of dry powder.
J Darrin Gross 16:24
Right? And are you seeing that that’s typically the case that if somebody has come in and they’ve been able to get there no I up to that the numbers are still working, or is it Yeah,
Henry Stimler 16:34
yeah. So many times by themselves, but just on a senior you still you’re not there. But when you combine the senior and the press, you’re pretty much getting there, nine times out of 10. Got it. And the prep the prep component is is a is an accrued payment, so you’re not stressing the asset. So the prep lender your senior loan will have what their interest rate what you have to pay monthly, the prep lender many times will accrue their amount to either sell or refi. So you’re not stressing the property with a 12 13% grass piece, they’ll have a harpy component of four or 5%. And the rest will accrue.
J Darrin Gross 17:14
And on that, is that almost like an equity position that they take? Or is it is it just strictly a debt for the for the lender?
Henry Stimler 17:22
It’s the prevalent is strictly debt because an equity position is like equity is like a marriage. The minute you bring an equity partner, you’re married to the equity partner for life, no matter what you refi three times you sell it in a crazy multiple your partner, the pref equity is not really a partner, the minute they’re paid, they’re gone. So they’re there a little bit. So they are really debt in terms of how you treat it. It’s treated as debt as well from taxes.
J Darrin Gross 17:48
Got it. But it helps bridge the gap between what the agency will do now versus direct the full amount you need to earn is that is that a typical percentage you’re seen as as far as what the maximum loan to value that the agencies will do right now? Is it 60 is of interest?
Henry Stimler 18:09
No, no, that that’s not how the agencies work the agency work to a DSCR covenant. So as long as you can hit the DSR, so so it’s very simple. The higher the cap rate, the higher the loan is from the agencies. So in places where you’re buying six caps, you can get up to 80% LTV from the agencies or 75% LTV from the agencies, the tighter the cap rate, the lower the agencies are going to go so that just based on noi, they’re going to underwrite your inplace noi, adjust it to the new taxes on it on acquisition. So as long as your NOI is good, you can get quite good, good octane leverage from the agencies.
J Darrin Gross 18:44
And what is the debt cover or the debt service coverage ratio that the agency has right to fiver
Henry Stimler 18:50
it to be a 120 5:30am? Or it’s to or in some cases can be a 130. So it depends, it depends on how the agencies view the deal depends on how you talk to the agency to view the deal, but it’s going to range from 121 to five DSCR to 130 DSCR and on lease up deals obviously they underwrite to a lower DSCR and then you have a Freddie Mac value add program that one right so one oh DSCR so there’s there’s different programs with different DSLRs but just for the sake of the listeners to keep it simple 125 DSC is typically what they’re looking for.
J Darrin Gross 19:22
And as far as the the amortization schedule, is it usually a 30 year Amazon
Henry Stimler 19:29
30 year Amazon and in some cases, you can push the 35 year ARM with certain exceptions to get you more proceeds.
J Darrin Gross 19:34
Okay, so there, there does tend to be like there’s a there’s a way to make the equation work for somebody that’s been operating the property well, and as far as push the NOI up, it’s not necessarily there’s going to be solid blood in the streets. No. But with respects to the opposite side of that coin. Somebody who bought something didn’t buy The recaps Yeah, had a plan of getting get out kind of thing. And also now they’re stuck. What? What are your what do you see in there with something with those types of opportunities are those.
Henry Stimler 20:11
So again, it’s very hard to, to, to to, to mess it up so badly because we’ve had great rent growth, we’ve had great demand. And occupancy is at a very high spirits high point, there’s not as much we need a lot more units that come online that are coming online, less people are moving out to buy homes. So if you’ve botched it up, you’ve done a pretty bad job, because there should be no reason why you butcher somebody, I’m able to drive anyway and drive occupancy. But if you have then yeah, obviously you’re gonna have some pain, right? The vultures are gonna be circling, but you haven’t done your job, you haven’t looked after your property, I always say this to my clients. I said, at the core of the business, it’s not just heads in beds, you’re providing a service, you have to look after your tenants, you have to make sure that you’re a good landlord, a good a good custodian, a good steward of the property. If something is broken, you have to fix it. If you have a million bad Yelp reviews, no one’s gonna want to live in your buildings. And that only comes down to you.
J Darrin Gross 21:07
Yeah. So looking ahead here for the next couple of years, is there any kind of an expectation on the volume of loans that are that are due to expire? Or that are going to need to be replaced here in 23 years? 24? I mean, does it ramp up? Because I know there was, there was kind of a little bit of a cycle. You know, in the in the years prior where it seemed like you’re really ramped up, especially during COVID. There. Yeah, so
Henry Stimler 21:38
so so we’ve got time with those deals, because the last year was just insanity. With the explosive growth in multifamily, everybody and their uncle jumped on the bandwagon and bought multi. So there’s a little bit of runway, there’s a staggering amount of there’s a huge number of deals coming that will need to be refined, as always gonna have that. But a lot of those deals will work in some in a few words. But on the majority, I would think a lot of those deals will find a home either with the agency’s regional banks, pref lenders, unique structures, maybe bringing in some fresh equity and diluting the previous equity. But there’s no follow up a cliff. disaster waiting for us here. It’s not it’s not all rosy, but it’s not all draconian either. Right,
J Darrin Gross 22:25
right now just sounds like there’s a little bit of a struggle ahead to kind of is it more of just the change from where we’ve been to where we are? Is the the issue and that’s really the struggle, or is it? Or is it bigger than that?
Henry Stimler 22:41
I think it’s I think it’s, I think it’s two factors, I think one people who bought very, very tight cap rates, you know, the market in the Carolinas, the market in Texas, the market in Florida deals were trading at three, three and a half caps, right, those days are gone, those days are over deals can no longer trader those cap rates, again, because interest rates went from being at 10 basis points or, or very or sofa and it’s not liable, but so low to be to where they are the seven year today is much higher than it was a year ago. So it’s the combination of rapid increases in interest rates, buying very tight cap rates and trying to find an equilibrium now where that because the cap rates mark is blown out today, the same deal that you bought a three cap is going to trade close to a five cap today. And it has to drink because you have five cups because your debt is over five.
J Darrin Gross 23:32
Right. Right. Right. Now and I think that’s really kind of the if you’re trying to make a deal pencil in your you’re using some old debt rate expectations as opposed to the new debt to world a difference.
Henry Stimler 23:48
Yeah, and it’s so it’s so fast. It’s so fast. And you know, so yeah, obviously right now the Republicans Democrats can’t agree on the debt ceiling. So if someone puts a deal under under contract, let’s say a week ago, the seven year the 10 year that says at 340, the tenure today is at 367 or 370. The swings within a few days are so extreme that your deal goes from making sense to not making sense. So it’s just a tough, it’s a tough environment get deals done because of the crazy swing in treasuries.
J Darrin Gross 24:18
Right. Let me ask you this, your firm and just kind of the kind of the outlook for the future here based on you know, this the cycle we’ve been through where the rates were just like historically low, near zero for the longest time as opposed to now and historical marketplace. Is there any reason to believe based on the demand and how strong the market is and kind of what you’ve been talking that that we should expect rates to go back to where they were or lower? Or is this kind of like the new norm What what are you guys forecasting?
Henry Stimler 24:55
I don’t think I don’t think the rates are gonna go back to where they were. I don’t think I think the Fed are trying to deal with a particular problem, which is inflation. I think once they have inflation under control, they will, they will. They will bring rates in. But I don’t think they’re going to cut rate do seven rate hikes, right? They’ve done seven continuous rate rate hikes are not going to do seven continuous cuts. So I think we’re going to kind of settle on equilibrium. We thought we had an equilibrium, the Fed spoke last time said, Then there’ll be a pause, and kind of everything hovered at the 350. And we thought, okay, so the 20 will be around 350, we can understand that if the spread on top of that 10 years. 350 is, I don’t know 150. We, this is our this is our level. But now, again, that’s been thrown out with the bathwater, because now we have the debt ceiling issue. And if the US default on their debt, God forbid, you know, that’s going to cause a tremendous spike. So there’s just so much uncertainty, that that it’s very volatile. But again, hopefully, they’ll come to an agreement, hopefully, inflation will be will be dealt with. And then I think if inflation comes down, then I think towards the end of the year, maybe you’ll see a little rate hike, maybe some some some some light in the end of the tunnel, but I think it’s gonna be a long time since you see the numbers that we saw during COVID, where interest rates were just it was so cheap to borrow.
J Darrin Gross 26:11
Right, right. No, I think those days are, yeah, something for the history books will always be able to look back to that and say, Wow, yeah,
Henry Stimler 26:19
that was great. That was wonderful. Yeah.
J Darrin Gross 26:22
So as far as the, you know, what’s affecting lending right now, we’ve talked a little little about the Fed policy, and they’re trying to attain inflation. There was a time when like supply chain was an issue is that is that still driving any of the cost or any of the issues that some of your, your your new construction clients are facing?
Henry Stimler 26:47
I think you’ve got a perfect storm, when it comes to new construction, one got tremendous labor shortages. There’s there’s our labor market is incredibly strong, our unemployment is incredibly low. And the demand for skilled workers is incredibly high. We just don’t have enough skilled workers to do the to do the work to cost of cost of goods are sky high because of inflation. And then three costs of variable floating rate construction debt is sky high as well. And you’re talking, you’re talking to seven 8%. So it’s just everything together is making a lot of developers pause. So even Miami, which isn’t on fire market, related, one of the largest companies in the world was shovel ready on a project, they’re taking a pause on their projects, you’re seeing a lot of guys that say, It’s entitled, it’s ready, let’s put this in the back pocket, put it in the drawer. And in a year’s time, we’ll revisit when the when the debt markets are, we’re not borrowing at seven or 8%, where our cost of goods are so high, inflation is rampant, and we can’t get the labor because the labor costs are so high wages and so high. It’s just a perfect storm right now with everything. And that’s always how it happens. 2008 was the same perfect storm. It’s never it’s never comes in ones. It comes in twos and threes and fours. That’s what causes the pain and the suffering.
J Darrin Gross 28:00
Right, right. Now in you know, it’s trying to forecast demand and and to catch the demand wave and when on that when you know that there’s demand. And then you have all these additional expenses that could have their own demand and
Henry Stimler 28:18
the demands. Now I’ll give you a staggering statistic that the National Multifamily Housing Council put out that the US needs 3.7 million new apartments to be built this year. And all that’s coming online is 640,000. And again, you have to just think of the bottlenecks. You’ve got kids leaving college becoming first time renters, you typically had renters becoming first time buyers, those renters now stay as renters. So you’ve got new immigrants, new people coming in all the time. So you’ve got this bottleneck, there are people who need housing, that we’re not gonna be able to, to to give them housing. So of course, rents are going to continue to rise. So it’s there’s some difficulty on the housing side on that side because of demand.
J Darrin Gross 29:07
Yeah, I was curious, does immigration play a large part of that demand? Or is that just one of the factors in the demand?
Henry Stimler 29:16
That there’s, besides, besides what you see on the news, there’s just a ton of people coming into the us all the time, on visas on immigration on work visas, right. So besides what you have on on the border, you also have legitimate people coming in all the time to work here. So there is a huge influx of people coming there’s a huge influx of college kids finishing college or becoming first time renters. So there isn’t just a ginormous demand and just the the numbers are just polar opposite from being needing personal $4 million homes to delivering versus 700,000 homes. We can’t keep up which again, it’s good for the multifamily owners because that’s what makes that asset so desirable.
J Darrin Gross 29:55
Right now there’s there’s there’s definitely an exit opportunity in the In the future, there’s somebody’s going to want to buy what you have. And there’s demand for rent which you have. So that’s yeah, that’s, that’s definitely a good thing,
Henry Stimler 30:08
even with just one more thing in New York City, which is, I think, always the best barometer to what happens in the rest of the country, New York City has the highest rent growth. It’s 6.1%. Since 2005. So strong. Yeah,
J Darrin Gross 30:25
that’s strong. On on some of the other factors that have been affecting the market, or any of these bank failures, are they affecting show of the shoulders? Yeah,
Henry Stimler 30:38
sure. So Signature Bank was a huge player in New York real estate. The agencies are not such a huge player in that in the New York real estate market, because they can’t get that get their head around the price per unit, right that that typical highest price per unit is gonna be $350,000 a unit of value. Miami, it’s a New York that that is so much higher, you know, the units can have a value of close to a million dollars a single a single unit. So the agencies were never really a player in New York City, because they couldn’t wrap their heads around values. So the regional banks here was such huge players. So signature no longer in business was a huge player, so they’re gone. Santander was a is a very big player def pullback. So there’s been a huge pullback from the regional banks. They’re just very, very nervous. Taking a long time to get quotes out of them very hard to pull quotes out of them. They’re just very, very nervous right now. So yeah, the regional banks again, had put all the onus on Freddie Mac and Fannie Mae, making them really the kings in the multifamily space.
J Darrin Gross 31:42
With the change in the marketplace, are you seeing that? Your your investors are having any difficulty raising capital? Yep. For the down payment?
Henry Stimler 31:53
Yep, of course. So a year ago, you could have a deal, throw it out there on an email chain to a bunch of guys and you have 20 Guys handing you money to do the deal. The syndicate says what kings today the Syndicate is kind of sitting in the darkness in a corner huddled up because it’s very hard to raise equity. The equity markets are very frozen. The Far East, the Koreans were big players, the Japanese were big players, those guys are kind of sitting on the sidelines, because they did some very bad deals on Office and hotel and condo that they shouldn’t have done. So those guys are off the off. And then the big institutional equity guys are really picking their spots, they really want to find where they can really hit higher returns. So they’re being very selective. So yeah, the syndicators are are not active right now. Again, that’s explains why you’ve got a 75% drop in transactions. So a lot of those guys have been sidelines, I would say the main players, the main players that are still very, very active today are the big institutional funds that buy on behalf of their clients, because they’re selling a lot of dry powder. They’ve struggled in recent years to buy because they’ve been priced out because we’re over aggressive syndicators. They now have the pick of the litter, and they can go out and pick up some really, really good deals. And we’re seeing that our guys are our clients are picking up some really excellent deals, and not having to fight like they had to fight a year ago to win a deal.
J Darrin Gross 33:15
It was kind of curious, with the volume of deals that were syndicator driven. In 22, do you have any sense of the percentage of of the the market that was syndicated driven?
Henry Stimler 33:31
Yeah, I would say it was 30 40% of the market was syndicated driven deals, and that those guys are are gone. Very, very few syndicated deals are getting done. Especially because a lot of the guys are not giving returns on previous deals they did because again, they had floating rate bridge debt. Now they bought it when silver was at 10 bits 10. Now Sofer is at five, right, so all they’re doing is using all the cash flow to keep current on the debt. So not really giving returns to the equity. So how can you go back to that equity and most investors say, hey, pony up another million, 2 million for me to buy another deal. They said, Well, look at the deal we bought last year, I’m getting no returns on that.
J Darrin Gross 34:06
Right. Right. It is. It’s interesting, how the, you know how how volatile the market can be, and actually just how quickly the market changed with the Fed changing the interest rates.
Henry Stimler 34:22
And a lot of people blame the Fed foot for reacting way too slowly, way too slowly. They should have started raising interest rates way before they did they didn’t they waited they held they held and that’s caused them to keep on aggressively raising over and over again, which is really spooked the market. I would say the the Fed have been rather Cavalier and caused a lot of this issues by not reacting faster.
J Darrin Gross 34:46
Let me ask you, the LIBOR to sofr. changed is that do you see that having any effect on this?
Henry Stimler 34:55
No, I don’t think I don’t think it makes a difference what we change to the 30 day sofa it’s a lie but that’s that’s not made a difference. What makes a difference is having show for go from 10 bips to close to five. That’s a massive, massive Delta. That’s a crazy delta. So think about it. Think about a guy that bought a deal sofa was 10 bips get a 300 spread over, he was paying 310. That was his interest rate rate. Now he’s three under 300 over five, right? 8% he’s 8.8% of interest, right? That’s gone from 350 or 310 to eight that’s a huge, huge Delta.
J Darrin Gross 35:33
Ya know, you’re gonna you’re gonna struggle with those numbers. I don’t care how how, you know, how good you are you were able to push around. I mean, that’s that’s just that’s the numbers don’t work. At least the same deal doesn’t work on the same printer. You know, same. Same starting point. Yeah. That’s tough. So what about you talked about the demand, can you mention the number that goes up 3.7 million units. That’s what the multifamily housing projection demand is as far as markets that you’re seeing that are that are still red hot. Are these the primary the markets or you know, with with pre COVID It seemed like urban core was like the Darling and then when COVID hit seemed like kind of Sunbelt. Yeah, a lot. There’s a lot of movement away from some of the downtown’s to, you know, where your lifestyle kind of Sunbelt stuff is the Sunbelt still kind of the driver right now.
Henry Stimler 36:36
So so this is how I would answer this. So so there’s the only red hot market left today is South Florida, because the demand for South Florida is just so big. So that is just a hot market. Miami is on fire. And because Miami can’t house all these people, it’s moved everything over. She got homestead, Boca Delray, those markets are just doing so great Fort Lauderdale. Tampa. So Florida is red hot. But Florida has its own headwinds, which is insurance. I would say COVID caused the biggest the biggest winners of COVID were Texas, Carolinas and Florida the biggest losers were New York and California. I think in a way New York has come back very, very strong. The demand in New York is sky high, you put a deal, you put an apartment on Airbnb, you have 150 people outside going to see that little unit. The cost of a single one bedroom is I believe over $5,000. So New York has just gone through the roof, California less so. But the bet I in my opinion, I think the best market when the markets that I love the most and is often overlooked is the Midwest, I think places like Columbus, that have a huge university population, Intel building their $3.1 billion facility. Great right in the middle. Great, great central location. Columbus is a fantastic market. And the reason why it’s about US market is because the cap rates are where they need to be to get deals done. Florida because of the demand, the cap rates are still so low, it’s tough, put that with insurance, tough to get deals done, really have to pick your spots, we’re seeing a lot of transactional volume happening in the Midwest, Columbus, Kentucky, those are the places we’re seeing a lot of lot of deals happening because you’re buying six and a half cap, six caps. And if you’re buying a six cap, you can get 80% agency financing very tight spreads, so 131 40 with by downs. So we’re seeing a lot of activity in I would say between the Midwest number one, followed by Texas and Florida two and three. But then you’ve seen a huge drop off everywhere else because the Carolinas was red hot for a while but sellers don’t want to capitulate. So you’re not seeing a lot of trades. So those markets are kind of just suffering, not badly, just not seeing a lot of a lot of deals getting done because the cap rates haven’t come to where deals need to be to make sense. While in Florida, the rental growth is still so strong that you can buy a four four and a half cap and bet that the rental growth is going to push you to a five five and a quarter cap.
J Darrin Gross 39:23
So on the Midwest cap rates what was the the low that the cap rates go up to the markets that you’re talking about?
Henry Stimler 39:33
Again, that’s nothing the cap rates never got that crazy low in those markets. They never got to where the Texas markets got to to threes, Austin you had deals in Austin trading at the low three cap rates. Austin was so much so on fire. So that’s going to be a time till the sellers understand where the new the new paradigm is. But the Midwest never really got that tight and never got down. It was always for four and a half. It never got down into the threes. So to push that cap rate from a four and a half to Five and a half is not such a huge jump, and oxygen has a bitter pill to swallow. So that’s where the volume is being done. That’s where the activity is being done. And I think we’re going to talk about Phoenix. Phoenix is just also having its moment in the sun, a lot of people coming out of California going to Phoenix. So Phoenix is also having its word and also the cap rates are are getting pretty good in in Phoenix as well. So there are there are certain light spots where deals can get down to where it makes sense to do deals. And again, that’s going to be number one, the Midwest, for me, where Cap rates are where they need to be. It’s, it’s always slow and steady wins the race, the Midwest has never boom and bust. It’s not going up like Tampa 19% rental growth, it’s always ticking along three 4% rental growth. That’s a super strong market, lot of transactions happening there. Florida, a lot of transactions happening there. Because again, rental growth is showing credibly strong in certain markets. And then Texas to a lesser degree, again, because the rental growth is so good. And again, the cap rates have kind of moved to where they need to move.
J Darrin Gross 41:01
No, no, they the Midwest isn’t sexy, but it seems like it’s pretty steady,
Henry Stimler 41:08
steady, steady, which obviously steady wins the race and, and I live, it’s not sexy, it doesn’t have the weather and the pizzazz and the flair that some of these other places do. But it’s just a very solid market just I’ve been doing deals in the Columbus market with a colleague of mine called George Scaff, who has a staggering number there. He has 96% market share in Columbus as a broker. So we’ve been doing the deals every year, which is crazy. He really dominates that market. So we’ve been doing their deals there for the last seven years. And everybody that’s bought there has bought well being able to sell well bought, again been able to sell well rents been growth has been good collections have been good. It’s just a great market.
J Darrin Gross 41:48
For the cost of living in the Midwest, as you know, it’s it’s doable. And it gives people there’s a little bit of extra money leftover where they can do things as opposed to would you say one bedroom in New York School for 5000? a month? Yeah.
Henry Stimler 42:05
And also the university is a big driver, because all the kids that go to the universities that want to end up staying there.
J Darrin Gross 42:11
Yeah. Nope, good to have demand. That’s good. Hey, Henry, if we could like to shift gears here for a second, by damn an insurance broker. And as such, I work with my clients to assess risk and determine what to do with the risk. And there’s three strategies we typically consider, we first look to see if there’s a way we can avoid the risk. When that’s not an option, we look to see if there’s a way we can minimize the risk. And if we cannot avoid nor minimize the risk, then we look to see if we can transfer the risk. And that’s what an insurance policy is. It’s a real risk transfer vehicle. And as such, I like to ask my guests if they can look at their own situation, could be your clients investors, the Fed political interest rates, however you would like to frame the question and identify what you consider to be the biggest risk. And again, for clarification, while I’m an insurance broker, I’m not necessarily looking for an insurance related answer. And so if you’re willing, I like to ask you, Henry Stimler, what is the BIGGEST RISK?
Henry Stimler 43:20
I think the biggest risk is not doing, I think more is lost by inactivity than activity. The biggest killer of deals is time, time and dalliance and not getting it done. So I’m a very big believer in that you have to jump in. Right, you have to be all the way in you can’t be you can’t be partially pregnant. And you have to have conviction in your decisions. And if you don’t have conviction, that’s the biggest risk. If you are Wofully. If you don’t, if you want to buy it, if you don’t know how you’re going to run it. That’s the biggest risk to me. So when I see clients who are unsure, who are not confident their decision, I see that as a red flag, I think you’ve got to make moves move quickly. That’s the best way to mitigate risk. If you see a deal that you like them make sense. You got to move quickly, one to wrap it up to to get the right debt in place, rate, lock your debt, take that risk off the table and move quickly. So that’s what I see as the biggest risk is not having conviction in your decisions and not having the gumption to go forward and get it done.
J Darrin Gross 44:30
Now that’s awesome. The inaction yeah, there’s a lot of time just spent, you know, grinding your teeth and working the pencil and all that. But actually, you have to kind of fish or cut bait as they say.
Henry Stimler 44:43
Yeah, you got to start by making sure the numbers work. Numbers never lie. My dad always says that. Do the numbers, do the math. Make sure it makes sense. But once you know it makes sense. Then just go and time is the biggest promise as I mentioned earlier, you could be at a place where the treasure is 350 and in five days time that Treasury’s at 367 and because you’ve kind of wasted time and waffled around, you’ve lost 17 basis points and that’s materially hurt your return. So if you made a decision, you want to go for it, go for it. Be quick.
J Darrin Gross 45:15
Right right now on the flip side can be true to you find the three, seven, and then the rate goes down to three, six, and you you know, because you’re locked in your head, so, yeah, it’s good stuff. Hey, Henry, where can listeners go if they’d like to learn more connect with you?
Henry Stimler 45:31
Sure. So I’m on LinkedIn, Henry Stimler STI M L er, I’m on Instagram, Henry Stimilar again. So you can find me on those two social media platforms and I’m always happy to respond and connect.
J Darrin Gross 45:43
All right. Well, Henry Stimler I can’t say thanks enough for taking the time to talk today. I’ve enjoyed it. Learned a lot. And I look forward to doing it again soon.
Henry Stimler 45:53
Thank you very much, Darrin. Enjoy.
J Darrin Gross 45:55
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