As the multifamily real estate sector faces escalating challenges, industry experts like David Lynd, CEO of the Lynd Group, are sounding the alarm. In a recent interview with GlobeSt, Lynd described the current state of the multifamily market as being on the brink of "real estate armageddon," underscoring the severity of the issues at hand.
The Perfect Storm
Lynd attributes this dire forecast to a confluence of factors. He notes that the simultaneous decline in property values and stagnation of rents are failing to keep pace with rising expenses. Compounding the problem are high interest rates, which are exacerbating financial pressures on property owners.
"The problem is values are down and now rents are starting to decline to go flat," Lynd explained. "So they're not keeping pace with the expenses. And then you have interest rates on top of it. So it's a perfect storm. That's just destroying values out there. So if you have a loan coming due anywhere, the value of the asset is just not what it was yesterday."
Markets Hit Hardest
The markets most affected by this distress are those that experienced overbuilding based on anticipated demand. Lynd pointed specifically to Austin, Texas, which is expected to see 40,000 new units delivered over the next few years. The influx of new units is outpacing population growth, leading to falling occupancies and rents.
"They have occupancies falling, rents are falling, because all those new units are coming online," Lynd said. "And on top of it, population growth didn't keep up with what they thought it would be. So in Sunbelt markets, where a lot of units were delivered, and because they were winners during the pandemic, those margins built off the expected growth, and then the growth slowed down."
Strategic Partnerships and Capital Infusion
In response to these turbulent conditions, Lynd Group is leveraging strategic partnerships to navigate the distressed market. Most notably, the company has teamed up with Declaration Partners to inject capital into multifamily assets facing financial difficulties. Together, they are advising on 23,000 units across several portfolios nationwide.
"As we enter a phase of significant change in the real estate landscape, where adaptability and agility will likely be essential, we saw the importance of aligning ourselves with experienced partners who share our vision and are well-positioned to capitalize on emerging opportunities," Lynd said.
Ron Dalal, a partner at Declaration Partners, emphasized Lynd's extensive experience in handling complex situations, including the acquisition and turnaround of distressed assets, as a key reason for their collaboration.
This partnership is part of a broader strategy for Lynd Group, which recently formed a joint venture with an undisclosed Houston-based apartment investment company to manage a 2,600-unit portfolio. Additionally, Lynd Group has been retained to advise on a 10,000-unit portfolio in the Northeast and a combined 2,000 units in South Central and Central Louisiana.
Outlook and Future Prospects
Despite the current challenges, David Lynd remains cautiously optimistic about the future of the multifamily sector. He predicts a rough couple of years but sees potential opportunities in the market. Lynd emphasizes the need to be selective in pursuing these opportunities, focusing on sustainable, long-term investments.
Lynd is particularly bullish on the rental market, noting that high housing costs are making homeownership increasingly unattainable, reinforcing the U.S. as a "renter nation." He anticipates a future bull market for rents and occupancies once the current supply of new units is absorbed and interest rates stabilize.
"I think we're gonna go through rents, or you're gonna be in another bull market, again, where rents are going up, (and) occupancies are going up," Lynd said. "Because once all this new supply is delivered, there's going to be a gap in there where there's no supply delivered. It takes two to three years of execution to deliver an apartment building."
One of Lynd's primary goals is to avoid foreclosures while minimizing lender losses. By facilitating communication and collaboration between buyers and lenders, the company aims to resolve financial issues and maintain property values. Since the last recession, Lynd Group has acquired over $1 billion in distressed notes, involving 40 properties that required foreclosures, bankruptcies, and restructuring.
As the multifamily sector navigates through unprecedented challenges, the insights and strategies of industry leaders like David Lynd will be crucial. While the road ahead may be fraught with difficulties, the potential for recovery and growth remains, provided that investors and developers adapt to the changing landscape with caution and foresight.
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