CRITICAL: Large Multi Family Trends in 2022. Will Rents Continue to Explode? Cap Rates up or Down?

Video Closed Captioning:

good morning good afternoon good evening

folks michael’s uber one rental at a

time it is thursday you know what that

means we bring back on the man the myth

the legend mr jonathan tuonley how you

doing sir i’m doing great how are you

michael i’m doing very very well man so

uh first topic of the day is something

that i am not great at talking about

because i don’t really play here but

that’s why i have experts like you so

let’s talk about multi-family trends for

2022 and just to be clear we’re talking

multi-family we’re talking big units i

don’t know 50 100 right the big stuff

not a four-plex

so jonathan when i talk about 2022 which

is you know only 50 weeks long we’ve

already blown through the first two

weeks

uh isn’t that crazy it just blew two

weeks i mean yeah it’s gone

the year’s over never get it back again

yeah never get it back so when you think

about 2022 and large multifamily what

are they what are some of the trends you

think about and

about we’ll play ping ping-pong and

bounce around a little bit

well listen i mean i

i see 2022 as being more of the same

from 2021 right in 2021

we saw

a lot of money flowing into the asset

class and we saw

a lot and we saw really a massive amount

of rent growth

as

people kind of was we emerged from kobed

and

um

people felt confident about in rent

apartments again and

you know as we’ve seen wages have been

going up you know

workers have a lot more power they’re

switching clobs they’re getting raises

and so that’s making its way into rents

and so

uh i don’t think that we will see the

kind of spectacular rent growth

that we saw last year because that was a

function of a couple of things i mean

that was a function of pent-up demand

and also a function of the fact that

rents had actually declined the previous

year

so you know had a big bounce back right

we’re not going to see like you know 17

to 20

rent growth again this year but god

we will see strong rent growth again so

when you say just so everybody realize

strong rent growth what what is normal

rent growth three percent i mean you

underwrite to three percent okay

we’ve had stronger rent growth than that

over the last few years and i think some

people have gotten more aggressive with

that assumption of rank right

i personally wouldn’t do that but i know

that there are people who have been on

the writing because of

uh you know i mean it’s not like a

complete like ridiculous they’re not

pulling the number out of thin air there

has been strong growth in the last 10

years

um but

you’re not going to see like if you

underwrite 17 rent growth

you’re you’re an idiot like i mean

unless unless you’re forcing it right if

you know

like this the rent on this unit is 17

below what everybody else is getting for

the same unit you can write that in your

first year rent growth because you know

you’re going to get it because you’re

going to raise rents that’s not what i’m

talking about i’m talking about natural

rent appreciation

which i think will still be strong this

year because there’s still just a lot of

pent up demand and you know as we’re

talking about i think in another session

today

you know

home sales are down and that a lot of

that’s a function of not being able to

buy homes the inventory is very low so

people are going into you know

apartments now and and who knows this is

just speculation on my part but if if if

they kind of had their home their heart

set on a home

right

then

they may be willing to spend more on an

apartment than they otherwise would have

because they like kind of like already

mentally made this switch like i’m gonna

go live someplace nice i really like i’m

gonna buy it and then they can’t and

they’re like okay well i’m gonna spend

another 100 bucks

200 bucks a month on rent to get a nicer

place

you know i think you might be seeing

some of that too um

but there’s definitely just a huge

amount of demand so i see i see

uh

cap rates continuing to be compressed in

the asset class

i see

rent growth continuing to be strong i

see a lot of attention continuing to be

put into the sector by investors of all

stripes

i i don’t really see any of that

changing

unless

the fed raises rates enough

that it starts to change the calculation

either by pushing up

uh you know

pushing up interest rates to the end

user which will have an effect or

uh in terms of making other things more

attractive

right if you’ve got if your risk-free

rate of return goes up

then some money is going to get sucked

out into

the risk-free you know assets i.e bonds

right so

that will have some effect but i don’t

think it will have a

major effect i think you might see

some softening

around the edges yeah but i don’t see i

don’t see

i don’t i mean of course no one ever

sees the columnist thing coming right so

i don’t see the calamitous thing coming

uh

but i i don’t see there’s nothing really

on the horizon that to me

that says that the sector is in danger

in a way of a correction

as much as i would like to see a

correction because to buy

you’d like to buy lower right

lower and really make money but um yeah

you know but i don’t see that happening

uh anytime soon so um i think if you are

buying

assets um

you know

you have to be thinking about the down

to the downside i mean that’s i think

the the market is too

cap rates are too compressed it’s too

hot to be thinking

really sort of in terms of upside how

much upside you’re going to make i think

you need to be thinking about protecting

yourself about when that

correction does happen i mean it is

going to happen at some point when

uh maybe not the next 12 months but

i think if you’re buying an asset and

intending to hold it for five years you

have a very good chance of

seeing

some correction

so you have to make sure that your

asset’s going to survive it and that’s

how you should be underwriting so

thinking a lot about

how how bad do things have to get before

i should need to be worried about the

asset and if you feel comfortable with

that answer then go ahead and buy right

uh but if you if you feel a little bit

like

you know then maybe you’re over you’re

contemplating overpaying so yeah so let

me let me kind of summarize what i heard

you say um you know of course correct me

if i mis misspeak so first off rent

growth above trend again

not the exorbitant 17 which was reported

by apartments.com but

certainly above three probably above six

so another rent growth and that that

makes sense to me my 30 years of doing

this or 25 years or whatever it’s been

now

rents follow values and we’ve seen

values run ahead and rents are always

nine to 12 months behind so i think just

naturally speaking i think rents go up

more from here yeah and look i mean

unemployment is down to where it was

before oh yeah right so the economy is

is cranking in spite of

the

you know

the fear-mongering around

everything around you know

chronovirus around inflation around all

these other things that there’s all this

fear-mongering about the facts on the

ground are that the economy is cranking

right so

that leads to rent growth and that leads

to demand for apartments right so

absolutely the other thing on demand

that i think a lot of people are missing

i actually got this in an article about

manhattan but what i’m about to say i

think plays in a lot of rich areas so a

lot of people uh that lived in manhattan

uh left and they bought places in

florida

but what i what this article was talking

about one of the reasons that

manhattan’s vacancy now is 1.7

where last year it was 11

is yes some people left they sold their

pad they left but now

they’re coming back and they’re wanting

to rent a unit because they don’t want

to leave new york forever right they

still have offices there relationships

there all of that so now you’re this

millionaire down in you know on the

water in florida but your increased

demand in rentals because you’re going

to want a pad that you’re at i don’t

know a month a year and again if you’re

the one percent you know you can do that

but still that’s still more demand and i

think that plays in california i live in

the bay area a lot of you moved to tahoe

reno vegas you know what maybe instead

of having a big house in palo alto

you know you’re going to rent some place

in mountain view and i think there’s

just increased demand coming from people

who left as renters yeah and listen i

think a lot of the people who quote

unquote left right

didn’t actually leave they actually

already had a second home somewhere and

went there and wrote it out or they

bought one and i mean this is just

anecdotal so you can’t this is not like

data but it is evidence right that i

over the past few months i guess before

that you know got cold out

every time i went to like a barbecue or

something

in in our neighborhood literally the

every single person there had bought a

coped house

outside the food right they didn’t move

out of the city but they had all

everyone had bought like

something

upstate

as like a place you know and probably

they’d yeah everyone been thinking about

it for a while but they never wanted to

pull the trigger and then finally

they’re like you know what

we need to buy something upstate and so

it’s just remarkable like how many more

people now have second homes and of

course that’s obviously people can

afford second homes but that puts

pressure on everything else i mean one

of the you know puts pressure on

affordability puts pressure on you know

supply puts pressure on everything so

and but then a lot of those people i

think would probably have a number of

renters too who did just that who who

they were renting yeah and then they

right and they they bought some place

outside or they rented some plate a lot

of people long-term like really

long-term rentals too

they went you know they did their remote

schooling with their kids from

you know

farmland upstate someplace and then

they

now they came back schools reopened and

they’re like okay we’ve got to rent

again now and now they’re back they’re

all back in renting so

right so the next thing again cap rates

are going to stay compressed for the

year i think that makes sense yeah um

you know you can’t they can’t i mean

when you when you push on a spring right

there is this level that can’t go much

lower i think we’ve we’re really at or

near that so i like your idea don’t

assume you’re going to go from three and

a half to two and a half i’ve actually

heard people say that cap rates are

going to go to like two and a half i’m

like

well someone said that in my facebook

group but it doesn’t make any sense if

you have if you have cap rates

going below the interest rate you will

have negative leverage

and

uh and that means you’re actually making

for every dollar that you borrow you’re

making less money on your equity rather

than more yeah so um now if you had a

true hyper-inflative environment maybe

that would make sense because the idea

you’re losing less money that way than

you would be just by sitting on money

but uh but of course like if you had you

know

you’re also going to talk about if you

had hyperinflation you’re probably

talking about 15 20 interest rates yes

right so that’s going to have a whole

different different impact

yeah

forecast but yeah i don’t i just don’t

see cap rates going below interest rates

yeah the interest rates are going down

right so that is already said we’re

pulling back

you know

we’re we’re raising rates so

um

yeah i agree through there and then the

last thing we talked about are you you

highlighted is the one kind of uh risk

factor out there and that’s the for me

it’s the fed creating or inducing a

market accident

uh which they have done right they’ve

historically been late and or late yeah

they’ve historically been late and went

too far i think 2018 is an interesting

example of that right q4 of 2018 big

impact in residential uh i i was in the

game i knew lots of flippers who i mean

like the market seized up for like 60

days

so the fed can’t do it and i think if

the fed for me jonathan

the fed’s been very clear stopping the

taper i think people knew that yeah

starting interest rate rises they were

ready for that but i think caught people

off by surprise i don’t know that

we know what’s coming is they’re gonna

start reducing their eight and probably

soon to be nine trillion dollar balance

sheet right they’re no longer going to

be buyers of bonds they’re not going to

sit on the sideline either they’re going

to sell

yeah there’s not an appetite for that

the bond goes down and rates go up

yeah

that has me somewhat nervous

yeah i mean well listen i i

we’ve talked about this before

i really think the fed blew it in 2018

in the sense that

when wall street screamed and the and

the real estate markets screamed

they

lost their nerve and didn’t continue

interest rate hikes which they in my

view should have continued to take some

air out of the bubble

they the fed has been unwilling to

really

have us suffer any pain right and

we and and the fact of the matter is

we’ve been living on sugar water for a

long time and

that you know you’re going to have to

get off the addiction to sugar water’s

got to end and that was all we’re going

to have to suffer that sugar withdrawal

and and frankly in a couple of months

the market would readjust it’s not like

you know like the market always

readjusts these things no great

for some people who get you know some

people get gone they get caught right

yeah

and

and it’s so

um

and it’s just like that’s just life but

i think i think the you know the fed is

like

the fed has become like that indulgent

parent that doesn’t want to say no to

any

any children and yeah

and then when they when they when they

start getting a little bit of backbone

with the children and the children’s

screen they’re like oh no i’m sorry i’m

sorry don’t have a tantrum

here’s the candy yeah here’s the candy

yeah um that’s kind of what the fat has

become unfortunately so

um

yeah i totally agree it happens yeah so

again i think uh for me i guess what i’m

summarizing is uh keep looking at

multifamily i’d love to buy something

bigger let’s be very clear i’d love i’d

love to get i i’ve told myself i want to

try to buy two million bucks in good or

great deals if that comes in one deal

great if that comes in houses great uh

that’s one i want to deploy this year or

try to try to make happen so i’d love it

to be a multi-family um

we’ll see uh but yeah any uh any other

closing thoughts and let’s make sure to

highlight your group because this was a

post that you had in the group that

really turned a lot of conversations so

let’s make sure to highlight the group

so people join yeah absolutely i mean

it’s called the multi-family investment

community come you know swing by search

for it on facebook

please the first time you go please do

it on a computer

and because there are questions you need

to answer

uh to get in and i just reject everybody

who doesn’t answer the questions but

facebook don’t doesn’t show the

questions on the phone

this is this is what it looks like folks

yeah so go there

multicultural investment community and

you can take part in the conversation

and you know just have some fun and

learn some stuff maybe even who knows

yeah no i i go to it almost daily uh

just because you put out hey you put out

some thought provoking stuff and and you

have was it 11 12 000 members i mean

just the the amount of communication is

amazing almost 12 000. yeah

thanks jonathan thank you

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