WIN191. From Market Slowdown to Opportunity: Portland Multifamily Investment Update with Ben Murphy

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Chris: Welcome, Ben. I'm excited to have you on the market update today for Westside Investors Network. Ben Murphy is a commercial real estate broker and has we've done, I don't know, 10 or so deals with Ben here in the Portland Metro, and I'm excited to have him on to chat about the current market conditions and also discuss past cycles. So Ben, why don't you share a little bit more about yourself and give us your thoughts. Thanks,

Ben: Chris. Yeah, it's great to be back on. I think I'm kind of becoming a little bit of a regular here, which is pretty fun. So Ben Murphy, I've born and raised in the Portland area, grew up in Tigard, and I've been a commercial broker close to fifteen years now, multifamily investment sales, middle market, so kind of that 30 to 100 unit range is where I like to be so sub institutional, but typically not down on the Plex level or, you know, more residential side. So kind of in between those two.

And I'm also an investor, I own a little bit shy of 50 units, some duplexes, four plexes, a couple of eight plexes. So I can kind of look at the market from the lens of an investor and an owner and an operator as well as a broker. And then I also have a lot of experience, obviously, working with management companies, like Uptown Property Management, for example, and other third party management firms in the Portland MSA. So, yeah, that's a little background.

Chris: Yeah. Ben and I have had many, many conversations about this latest cycle, which kind of started towards the end of twenty twenty one and really started moving when inflation started peaking out in 2022. And so there has been some significant, I guess drops in value, NOI is compressed, expenses are up. I guess that is a part of NOI being compressed, but all in all, this has happened before. So I'm I'm most interested in hearing about what the opportunities look like and what is kind of coming down the pipeline.

We've probably spent close to four years at kind of lower sales activity. Property owners have their five year fixed or ten year fixed mortgages kind of locked up. And so they don't want to move their properties, but now that five years is up for everybody who refinanced in 2021, market environment has just changed. And so I'm interested to hear from a commercial broker side, just perspective of like, okay, well, what does it look like for sellers? And then what have you been noticing with rents?

What have you been noticing with just NOI and essentially buyers projecting and underwriting on an acquisition, like what would that look like for deals that are happening? And is sales activity picking up? That's an interesting question as well. So I'll let you go on a short monologue and then we'll start asking each other questions.

Ben: I hope it's short, Chris. So here we go. I guess speaking to the market in general and transaction volume. I won't sugarcoat it. I'm a pretty transparent guy when it comes to commercial real estate.

I like to be upfront with my clients and really realistic about the market. Why avoid the elephant in the room? My volume is probably 30% of my normal peak transaction volume. So it's down 70%, I guess, a better way of framing that. Has that picked up in the last six months?

Yes. So that's the good news. Has it picked up by much? Not really, but an increase is better than no increase. And I think we are troughing out the market, I think is, you know, peak to trough.

I think 2026 will be the lowest year on record for sales volume in the Portland MSA. I sincerely believe that. And I think

Chris: you're talking about the trough on sales activity.

Ben: Correct. I think 2020 to 2021 was kind of the peak. So we're hitting that, we're coming up on that five year mark. This has gone on a couple years longer than I think a lot of people anticipated. And I think there's winners and losers in every down market, right?

I think it's a great time to be a buyer. I think there are truly, like there's true motivation hitting the market with certain seller profiles in the Portland area. And those are, you know, that fits a buy box for a lot of people who are opportunistic buyers. If you want to peak the market, like if you want to time the market at peak pricing as a seller, right now is not a great time. I mean, you hit on it, rents have been relatively flat, although in the last six months on the rent surveys we're doing, we are seeing rents are up about 3%.

So that's the most rent positive trends like direction we've seen in three or four years. I mean, a 3% growth rate over six months, you know, 6% annual, that's nothing to write off. That's not back to the 10 to 12% annual rent growth we were seeing in 2014 through 2020. But that will be a hard market to ever replicate again, I think. So again, rent growth is positive.

It's not stagnant, like it was six to twelve months ago. Transaction volume is up slightly. And I think the big concern right now is operations. Owners are really, really having to focus on their expenses, specifically turnover, R and M, insurance. And if you're in a revolving door of turnover, vacancy, you know, loss to lease due to lots of move outs, and then re renting, taking time and turnover really being over budget, it's gonna grind away your NOI, like you already touched on, Chris.

I think rents are at the end of the day, if your property's well managed, the rents are the rents. I don't even look at that often as a variable you can really control, right? If a tenant likes the unit and it's comparable to the neighboring unit, they're going to rent it if it's a fair price. But expenses to a certain extent you can control if you're really diligent about it. So I think this phase of the market over the next year, that's where owners and operators and management companies should be focusing their attention.

I think that's where more of the upside is as far as growing NOI. I think I answered most of your question.

Chris: Yep. So you're seeing positive rent growth. I mean, last summer we saw like decent decline in rents, which was really tough because we were having the same conversation last year, okay, it's been three and a half years. This one can't be as bad as the Great Recession. And essentially we got hit with decent looking at some of the rent data, if you look at year over year, I mean, we're basically flat from 2021.

We got huge rent growth from 2021 to 2022, and then essentially we're flat. And nobody predicted that. All of the deals that I underwrote, I underwrote steady rent growths. In some areas of town, we've seen deals that maybe the rent roll got inflated by government subsidies or essentially free rent being paid by the government, but a couple of properties that we bought, they were averaging $1,516,100 dollars a month in rent, and then now we're $12.50 or 1,300, and occupancy is low at those properties. And so I agree, I don't think that we're ever going to see essentially that period from 2016 to 2021 again, where interest rates were low, rents were off the charts, and essentially it was gold rush here in Portland, where, I mean, how many apartment units are in Portland?

Is it something like forty, fifty thousand, 60,000?

Ben: I was going to say 50,000, yeah. Yeah,

Chris: I mean, when all of those units go from averaging maybe like 100,000 a door, maybe 120,000 a door ten years ago to now averaging 200 or two twenty five, like that is a massive increase, and likely to overshoot, And so we did overshoot a little bit, I would say.

Ben: The market's being reset, right? And I don't think that's necessarily a bad thing. There's a new baseline that has been established, And I think we will incrementally claw back values, I really do. I think the big question that if I knew the answer to, would be doing very well. But is when will we get back to peak values that we saw in 2020 and 2021?

And I don't think anybody really knows the answer to that. They will claim they do. They'll shoot you data on this, vacancy rents, cap rates, interest rates, what have you. But I wouldn't be surprised if it takes three to five years to get back to the peak that we saw. And I think you hit the nail on the head, like Chris, the pandemic era stimulus we saw and the like, COVID area, like rent guarantees, along with relatively flat expenses, and generationally low mortgage rates.

You know, was this trifecta of like,

Chris: low inflation too.

Ben: Can make mistakes and still do well on a deal. So this market is weeding out the bad operators and the people who don't have, really well thought out thorough value add plans. And that's not necessarily a bad thing. And, you know, ten years ago, a lot of syndicators and sponsor type buyers could go into a deal and kind of just do anything and look like a genius. And really, they're just riding the market.

They should be. I mean, there was a lot of money made in that market by brokers, owners, management companies, lenders, everybody. So I think now it's just, it's baseline reset. And it's compelling. I mean, there are deals at 50% of replacement cost on the market that are still not they don't have, like, a stack of offers on them.

Like, that is I mean, it's mind blowing. And that's mainly in reference to newer product in the city of Portland, core, core plus adjacent to downtown. And that's probably the worst tranche to be in right now as far as multifamily in Portland.

Chris: Honestly though, I feel like that's going to come back first. Condos, I feel like in downtown are going to trade at well below what they were purchased for, And there's gonna be a revitalization, but at a much lower cost. Portland is always like there's always a reemergence of the artist, the starving artist community that is essentially looking for the lowest possible rents on the West Coast. And Portland was not that during the 2016 to 2021 run up. Now that I would say San Francisco is recovering, Seattle I would say has recovered, and Portland always kind of lagged behind, and so I feel like there's that kind of going for it, is that Portland is always the cheapest West Coast city with ton of beautiful natural resources, just kind of like looking at it from a macro level, and then when you look at it in terms of, I guess from an investment perspective, prices are significantly lower for anybody who has to trade a deal.

You're looking at cap rates much, much higher on the acquisition than you were three or four years ago. I mean, we're talking like the difference between four and a half and six and a half. And I mean, that's, know, and it's tough to, I don't know if we'll ever see 4.5% cap rates again, except for distressed deals, when you look at it, acquisitions are great.

Ben: Portland is affordable. We can hang our hat on that, especially compared to the other metros on the West Coast. I think the other supply side argument is just the barriers to entry we have, That like the inclusionary zoning product that was people sat on permits forever and a lot of that delivered over the last two years and it's completely dried up. So you look at new units in the pipeline and it's 5% of what like Portland historically had 8,000 to 12,000 units delivered to the MSA every year for like a decade running. And I think currently there's 1,500 roughly.

The

Chris: MSA or are you talking city of

Ben: The Tri County area. So that's not just Multnomah County or city of Portland. That is, yeah, five to 10% of what we've normally seen come online every year over the past decade. So rents have to rebound purely from a supply side stance.

Chris: But the supply side argument is like, that's really long dated, you know, there's so much vacancy that needs to be absorbed.

Ben: This is true. We overbuilt like nuts because of what they've imposed on developers. And these guys are smart. They got in and grandfathered in their permits prior to a lot of this red tape being passed by the city of Portland. But if people tend to get tunnel vision when they're investors in the Northwest, and they think the Northwest is like everywhere else in the country.

But if you go to Austin, or you go to Raleigh, or you go to Nashville, and some of these other areas of the Sunbelt, their rents are down 10%, 20% year over year. And we're complaining about flat or slightly positive rent growth. So it's all relative. Not to say our market isn't struggling. It definitely is.

But it's not to the level of some of the other regions that have had even more severe overbuilding happen in the recent term. And that's one thing I've always really thought is such a selling point to investing in Oregon and the Portland area, and the Pacific Northwest in general is it's a very consistent market as far as rents when you compare it to other regions of The US. It doesn't have the boom and bust cycles like a Phoenix or a Nashville or an Austin. Yes, we have ebbs and flows in the market, but not nearly to the level of some of those other markets.

Chris: That's so interesting to hear. And I mean, I guess, I feel like the boom and bust cycle for us as multifamily operators, really was significantly felt in Portland. Yes, I totally hear you know, like Phoenix, like we're two bedroom rents, close to like $23 or $24 a month, and then now they're like down to 1,800 I mean, it's, you know, I could imagine getting into that market at the wrong time and you know, that your capital is gone. Like it's a little more dangerous.

Ben: It is, and that in a market like Phoenix, that's market wide. You will see that generally in all vintages and asset types. In Portland, the urban mid rise luxury style product is hurting. I will not get, you know, we won't sugarcoat it. There's two to three months of concessions in some of those buildings.

So if you actually annualize out those concessions, you know, and then factor in, the rents really aren't flat. The face rents are flat, but the effective rents are down maybe 10%, right? When you annualize out concessions or more.

Chris: Concessions and, I mean, so we're in contract buying a Home Forward, like a legacy asset, you know, units that's getting removed from the income restricted portfolio, And their take is that it's too expensive to run that type of property anymore. And so they're buying up this cheaper product, well cheaper relative like new construction versus building it. And essentially, I think that if you look at how much vacancy there is, in the Home Forward portfolio, income restricted, the new construction units, they're offering the same concessions that market rate developers are offering. And so if you look like on a Home Forward website, you're seeing income restricted rents plus three months of concessions. And when you're trying to compete against something like that, you know, market rate, it's extremely difficult because, you know, their rents are lower and they're offering plenty of months free.

So it's tough to compete to win tenants to occupy units, like it's a battle right now. It's really tough to get units filled up.

Ben: And I think it's tough to qualify too, because a lot of those tenants' income qualifications, they make too much. So they, you know, you have a very finite, you only have so many renters to go around in those home for buildings that actually qualify. And let's be honest, would you rather rent in a market rate building or an income restricted building if the rents are equal? Right? So I think that's what people are looking at right now.

And it's good to hear Home Forward is buying existing product and not developing it because, they can buy that at a discount and that's a better use of our tax dollars in my opinion is buying existing. I think the last one they built was $457,000 a unit.

Chris: Yeah, that's pretty expensive.

Ben: Yeah, and some of that you can buy for, you know, dollars 200,000 to $250,000 a unit today. So you get, you know, two units for the price of one. But we're, you know, we're trying to sell a multi deal, which is an inclusionary housing, 100% inclusionary housing deal at 60% median family income. And the studio rents for an equivalent unit are about $50 higher than the income restricted building. So you're right, Chris, the rents are almost the same.

So the occupancy at this affordable deal is like, it can't get like, they're struggling to push past 85% and they're offering a month free.

Chris: Yeah. And so I guess I'm interested when when did you get started in commercial brokerage? When

Ben: 2011.

Chris: 2011. And so when you look back then, we were coming out of a pretty difficult period of time, like 2009, twenty ten, twenty eleven, sales activity is probably what it is about right now. And so what do you remember about that time? And just looking back, do you sense any similarities? Like is there the same amount of, I guess, motivation for sellers to sell?

Is there like the same difficulty when it comes to operations?

Ben: Capitalization rates were higher coming out of the great financial crisis than they are today. And they had to be to get buyers to move off and then sign a deal and do an acquisition and actually commit, you know, to applying for a loan and financing. What's interesting right now is, like, the basis has become compelling in a lot of cases over the cap rate. Price per unit, price per square foot, that's kind of like a basis buyer versus a cash flow buyer. And I don't necessarily know why that is the case now more than it was in 2011 or so coming out of the tail end of the financial crisis.

It feels to me like there's definitely still pretend and extend and loan modifications happening in this market where the can is getting kicked down the road a little bit farther, but I think that can only hold up for so long. And I really do think there's second, third, fourth extensions or loan mods or whatever that these borrowers and sponsors are trying to negotiate with lenders. They're just gonna finally throw up their arms and say no, because we haven't seen the distress that we saw, you know, fifteen years ago, not anywhere close. I think there's a handful of like class A apartment buildings that maybe had like a short sail ish type situation go on, you know, but not the level of intrinsic, full on distress that we saw 'eight-'nine, in the next year or so. Chris, I still think some of that is coming.

And I just think lenders are really reluctant to step into the borrower's shoes just yet. And our memories are short. I think they're in denial. They are not in tune with operations. They probably think they're listening to what they're being told.

Oh, we'll turn this property around, rents are going to rebound, we'll get them back in the positive. And, you know, we'll get expenses under control, concessions will burn off, but concessions are way more entrenched than anybody will admit either. So, yeah, I think if you're not operating through this with really a fine tooth comb, and experienced in operating, you're gonna have an issue with your loan. It's unavoidable. If you can't handle a rate reset to 6.5% in the next couple of years, I don't know what to say.

Think there's gonna be buying opportunities. I sincerely believe throughout 2027 that we'll have more distress involved than we've seen to date.

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Chris: So I wonder if there's going to be distress in foreclosure. I honestly I feel like there are groups that are connected with lenders who pick up properties, and they just kind of get them in the bank. It's like, okay, we're taking the property back, and then they give it to somebody. Or their sponsors that are like, okay, we just can't do this anymore. So we gotta, we're just gonna let this other team take it over at the like lending basis and they work it out with the seller and it never hits the market.

Ben: Or they raise pref equity, right, and they kind of recap the deal and live to fight another day. And I think you're right, Chris. I think lenders are more accepting and creative than they've ever been in the past with.

Chris: Uh-oh. Ben, you there? I lost you there for a second. It froze for a minute. So you think our lenders are more creative?

Ben: Yeah. And I've heard of a couple of instances where the sponsor, the borrower has actually bought their own deal back.

Chris: Yeah, from their investors. Yeah. That is, know, there's interesting stuff that goes on. And so like I would say a lot of that distressed product, especially if it's something worth buying, it probably never sees the market. Or maybe just a fraction of it sees the market because there are plenty of people who want to get in on the reset, and I agree that there's a reset happening.

And when you first mentioned that, I guess an idea popped into my head is that there's going to be winners and then there's going to be losers in the reset, especially all around the Portland Metro. So it'll be interesting to see kind of like how that shakes out. And I wonder if you have any idea of what areas you think are gonna come out stronger versus some areas that are gonna come out weaker.

Ben: Yeah, as far as sub markets or Yeah. Yeah, I would say Right,

Chris: and

Ben: I would say, you know, the strongest markets, I think, in the long run, I try to avoid like one to two year sort of time horizons because it's just, there's a lot of unknowns and it just puts me on the spot. But, you know, I think Clackamas and Washington And Clark Counties are really kind of three general, generally really strong areas to be so Beaverton Hillsboro, Tiger Lake Oswego, Oregon City and then up to Vancouver Southwest Washington. I think anything downtown or downtown adjacent Gresham, Troutdale, East County, East Multnomah County is really going to struggle, in the long term. And Portland will always be a cool place to live. It will recover, but it won't become what it was prior to the pandemic.

I think there's damage that has been done that is irreversible. I think it will come out of this better than it has been the last few years. But there's a stigma there and we're seeing a flight to these suburban nodes. I think, you know, there's food cart pods in Beaverton and Cedar Hills and Downtown Oregon City and the Vancouver Waterfront, and they've become their own little enclaves, you know, outside of Portland. Not to say there's also amazing nodes in Portland, like Division in Alberta and Belmont and Hawthorne.

So again, I think the unique cool neighborhoods have become more concentrated and more exclusive and you have to find those areas and that's those are the good areas to invest in the long run. And I think the East Side Of the MSA will struggle in addition to downtown.

Chris: So, you know, in around what 2014, 1516, like I being in the beer industry a little bit, there are a lot of interesting breweries that went in downtown. Ten Barrel went in around that time, Von Ebert had a pretty huge tap room, and those are all like, I guess Ten Barrel's still there, but there's many breweries, restaurants that have kind of come and gone during this time period, and I feel like for that to come back, it just takes time. You speak about the permanent damage, are you talking about people working downtown and working remotely, and just structural change of what are our inner cities going to look like.

Ben: Exactly, I think that to really solve the Downtown CBD core business district, crime and homelessness and businesses struggling is we just need more bodies down there and it will snowball from there. Chases away a lot of those issues. So until we

Chris: It won't stand for crazy people disrupting life when it's one or two people for thousands and thousands. And so it does need more bodies, but the question is, nobody's working downtown anymore.

Ben: Yeah, and I think people are hesitant to dip their toe and be the first one to really lead by that. I mean, what should happen is the city of Portland and Multnomah County who can require that should lead by example. Because there's tens of thousands of employees for the city and the county that used to work downtown that are either fully remote or mostly hybrid. And I think that would be a logical first step. If the city council or the mayor can get involved and, you know, have some input and say, Hey, like, you know, start there, right?

And I think, you know, hopefully private businesses and, you know, adjacent businesses to those locations will kind of see that example and also follow suit. But again, you're right, it takes time. It's not, you know, a year or two out, I don't think we're gonna nearly be back to anywhere where office occupancy levels were at the peak. And I would say if you factor in shadow vacancy and sublease space downtown, it's over 50%. I think CoStar says it's like 38 or 40, but that doesn't I mean, if you drive around it, everything's dark.

Chris: Yeah.

Ben: Yeah, I think it just has to be long term and we have to do our best to sort of navigate and incentivize traffic.

Chris: Okay, so downtown's gonna struggle, East Side's gonna struggle. You think the winners are gonna be I mean, to me it seems like Clackamas in general is really a big winner. And then, you know, we're seeing a lot of activity in Vancouver and Clark County. I kind of look at Clark County and I'm a little hesitant to have that trend confirmed. I mean, if you look at rents in Vancouver, they have gone up significantly.

And so that's a harder one for me to just like, oh, you know, this this market's taking off, we better jump in.

Ben: Vancouver, you should have been there four years ago. Yeah. It is, the secret is out. Rents are very soft, Concessions are way up. I think of all the submarkets in the Portland MSA, Vancouver is in the top three for highest vacancy.

I want to say it was 8.5% or 9%. So they've had a ton of units delivered in the last eight quarters as well. Not only in the downtown waterfront area, but Market wide, East And West Vancouver, up to Hazel Dell, over to KMS even. So I think what people love about Vancouver is it's not Portland. And

Chris: I

Ben: know that sounds crazy, but Washington State has its own set of rent control and landlord tenant law that's not and maybe you can shed a little more light on this, Chris, but I don't think it's that much easier to navigate than Oregon's laws Yeah, at this

Chris: and I would not call myself an expert on Washington rules. So like when I'm having to send a rent increase or implement rubs or send out a notice, I'm having to look up the rules.

Ben: Well, I can tell you six increase, months or six months notice for a rent increase over 3% is, I believe, a Washington state law.

Chris: Wow.

Ben: Which that is much more anti ownership.

Chris: That's not that big of a deal. Like, yes, it makes it harder to move something quickly if it's under market rent, but I mean, all in all, you can just send out large rent increases and give tenants six months notice. I mean, in Portland or sorry, in Oregon, the statewide rent control law like is getting ratcheted down, like, and it's worse. It used to be 10% plus CPI, now it's 7% plus CPI, but now you can only raise rents 10% and then you can kind of see the trend line on the rent control here. We're gonna be like capped at 5% here pretty soon.

It'll probably be capped at 7% next time rents start moving up significantly. Like next time people see 10% rent increases, it's gonna be capped at seven. And next time people see 7% rent increases, it's gonna be capped at five. Like, that's essentially where we're at. Like, it's a renter's date.

But the thing is, is that, then that is just gonna be market wide, everybody's gonna be issuing full rent increases while we can.

Ben: Yeah, you can't afford to fall behind market because you won't be able to catch up. So everybody will be more proactive about their rent increases. And then when units do turn over, the new tenant who unfortunately had to move for work or medical reasons or to be near family is going to be subsidizing the existing tenant who's locked in lower increases over the last few years. So it's an interesting approach to regulating rents and cost of living, but the West Coast is doing it to a larger extent, you know, in lockstep. Each market has their own form of it.

And that's likely not going away anytime soon, right? Let's not kid ourselves.

Chris: I mean, if you look at a market like New York right now, I mean, New York is on fire, and rent is not low there.

Ben: It's not low and they are having a resurgence, far as quality of life, employment, you know, restaurant scenes, I think, I guess that is a beacon of hope in a way to say like, this city of Manhattan, city of New York, whatever you want to call it, one of the highest tax districts in front of Portland in the country is, you know, I think we're number two, but is still a great place to live. So take that for what it is, but I think people find ways to navigate around it. And usually what it ends up doing is it hurts the person who is moving in more recently than the person who's been in the building for a long time. And I don't see how that's fair, but

Chris: Yeah. All right, let's chat about rents real quick, and then let's end with our four questions. So I guess looking at rents from say 2,000, what, 14 or 15 until now, I mean, the way that I see the chart is, rents were probably averaging around 1,400, 1,500 for a two bedroom up until say 2020. And like honestly during COVID rents actually went down a little bit. And then it shot up to like 1,700.

And so, you know, like we go through this period where rents are completely flat or maybe tipped down a little bit and then it spikes up. Like if you And honestly, feel like the spike up was probably around 2014 or 2015. I don't have the data that early, but like we were probably hanging out at like 1,200, all of 2011, '12, '13, '14, and then poof, poof, and then we shot up. And then we hung out at that level, and something happens, COVID happened and then rents shot up. And I think in 2014 or 2015, there was just no supply and that's what caused the eventual rent spike across the MSA.

And so are we gonna see that again? Is, I mean, are we gonna hit a supply, like just a lack of supply due to the permits, not lack of deliveries or is there gonna be like a little steady tranche of deliveries to keep us from getting down to that two or 3% vacancy that we saw in 2014, 2015? Like, or I mean, I guess from the way that I see it is, it's so expensive to build something for the return on investment, the rents, like it just doesn't make any sense. Like how can you expect to make money on a unit that costs $400,000 and only receive 23 or $2,400 a month in rent when the debt on that product is gonna be 6.5% or 7%. Like, it's just really tough to kind of figure out how that's gonna pencil, and it doesn't look like interest rates are going down.

Ben: Renovated product in the suburban Portland area for like 60s and 70s and 80s vintage apartment buildings was getting close to $2,000 a unit on a two bedroom up through twenty twenty, twenty twenty one.

Chris: And,

Ben: yeah, eight, nine years prior to that, it was probably 1,000. So, you saw rents double, right, in the span of, let's say, eight years. I don't think if you were to tell me 2026 to 2034, and rents are 1,500 now, and you're telling me rents are going to be $3 in 2034? No. I don't feel confident.

Again, I hope I'm wrong. Again, I'm a multi family broker, and that would be great to see truly

Chris: There would be other things that are broken if that is, you probably wouldn't be able to get a loan because inflation is literally, we would hit hyperinflation, I feel like at that point.

Ben: So my point in making that statement is, pare that back then, is it half of that growth rate? So, maybe we see rents go from 1,500 to

Chris: I think you're highlighting

Ben: $102.50.

Chris: The edges of the bubble there. We were buying stuff in, I don't know, 2014, and they were literally units being rented at like $1,100 a month. And these were two bedroom, one and a half bath townhomes. Like we bought an eight plex, I think in 2014 and we renovated the unit and now they rent for like 1,700 or 1,800.

Ben: At the peak they were renting for maybe 2,000 or 2,100.

Chris: We never got that high. Guess we never got aggressive with it. I think they were down to like $16.95 now. But the entire MSA did not get rented out. Like the entire renovated MSA did not get rented out at $2,000 per unit.

Ben: No, that's a good point. I was looking at the severe extremes. Yeah. Know, somebody coming in fully gutting, remodeling something and pushing market like rent really aggressively. And it was typically like an out of state syndicator who was kind of a shorter term hold that was really pushing the envelope.

But I think to answer your question high level, I think we will see kind of 3% to 5% rent growth the next couple of years. Unless you have a property that's very far below market that has some kind of special story that was mismanaged or not operated

Chris: efficiently. Maybe $2,000 rents in the next ten years for that. I would say average two bedroom rent is probably like $15.50, maybe 1,600 right now. I would say we never really got to the $2,000 rents, and that's basically just below where Seattle or 2,000 would be right below where Seattle or San Francisco are at right now. And I mean, I honestly think that yeah, we are gonna get there probably closer to five years than 10.

I mean, you just pencil out 3% rent growth, four or five years in a row, then that's

Ben: That tracks. I mean, you said 25%, five years, so that's 5% a year. I said 3% to 5%. So I could see rents growing $1,500 to $2,000 on average over a five year span. Yeah, I think that's realistic.

Chris: Yeah, and I guess the question is, what is the cap rate environment going to be in five years? What's the interest rate environment gonna be? And you get these like little selling windows, I swear every time around February or October, the interest rates dip, and good deals can be bad, if you get a application in, but you gotta be poised and ready to sell.

Ben: Yeah, interest rates are a big, I hate the forward guidance of the Fed because a lot of it's baked in depending on like a simple Fed meeting or what a few sentences somebody says often. And it'll be interesting to see what the new Fed governor who really wants to pare back forward guidance and kind of how that manipulator, I don't want to say manipulates markets, but, you know, the global order could be shifting too, right? We have a lot of geopolitical shocks and risks going on right now that are making the market super volatile. And if The US really does turn inward and become a little bit more protectionist, and the global order changes, you know, and free trade is kind of at risk, and, you know, The US as a reserve currency in the long run is being questioned. I mean, I think we could see elevated interest rates.

I'm not saying we're going to see 10% rates, but think the days of us seeing three to 4% rates are behind us, and those might have been generationally low borrowing costs. I do believe that.

Chris: I don't disagree there. And so, you're gonna get a lot of people anchored towards those low rates. Oh, maybe thinking that it's gonna come back eventually, oh, we're see 4% interest rates, you know, one of these days. And I just, yeah, I think we're gonna be lucky if we see five little windows where there's 5% rates available. So yeah, all right, well then we are getting on towards yeah, towards the the hour mark, chatting about the market.

I guess, you can you summarize your your sentiment about like essentially having started in 2011 and experiencing that huge run up and then going through kind of this reset, and maybe anything else that you've learned from mentors or others, do you think the keys to, I guess, surviving this cycle and poisoning yourself for success forward would be?

Ben: I think to the extent you are really in tune with operations, and I'm gonna sound like I'm beating a dead horse here, but watching the costs that you can control on the expense side, specifically R and M turnover, and doing whatever you can to retain tenants, good tenants who are paying rent on time, and avoiding, you know, the revolving door of move out chasing tenants vacancy loss to lease potential concessions. And, if people can incentivize good tenants to stay in their buildings longer, they will get through this in much better position, especially with the pending refinance or a capital call on the books from low interest rate debt to higher interest rate debt in the near term, which a lot of people know what I'm talking about in your audience, I'm sure. So operations, managing expenses, think treating your tenants well and your residents in a way that is unique and genuine is something that isn't talked about enough in our market. There's a lot in the news cycle out there and that owners and operators are out there just to jack up rent and rehab a unit or relocate tenants. Very few of the people I talked to and the investors I talked to ever want that.

I think they want to provide safe, affordable, well maintained housing at a fair price. And they're not out there to make a quick buck and get of a deal at the expense of somebody else, right? And sell it quickly. And so I think the service element in the rental market we're in currently is a good way to delineate yourself compared to other property managers and operators. And I think it goes a long way.

And it doesn't take a lot of extra capital to provide that. I think you just have to have the right, methodologies or I guess the right training in place for your staff, the policies and procedures to show that you do care. Just have that dialogue with the residents. I think, you know, having that dialogue more often than not, so they don't feel like they're being taken advantage of, or something's coming out of right field can really help in the rental market, where people do have more choices than they've had in a long time as far as options to rent elsewhere.

Chris: Yeah. And so what about for buyers and sellers? What about for the person who maybe hasn't bought their first deal yet, who's trying to get into this market, but is struggling trying to find the right deal. Then what about the property owner who has completed their value add on a particular property and it's time to move that capital to another project where they can add value.

Ben: It's funny when I talk to buyers because a nine out of 10 are seeking a value add reposition, there's an inefficiency that needs to be solved. And I get it. I mean, I think if you're raising equity investor dollars, you have to have a story, there has to be a pitch. I would say listing for sale like a value add stabilized deal today is challenging because I need to show a buyer maybe if a lot of the upside's already priced out and the property's been repositioned at market rents, I usually need to show a buyer who I'm pitching to buy that deal 50 to 75 basis points of positive leverage. And if borrowing costs are six to six and a quarter, that means my cap rate is six and a half to seven, right?

I think most owners aren't sellers at that cap rate today. And they may need to wait it out a year or two till we get to a market where there is a little bit more cap rate compression.

Chris: And so that cap rate compression is going to come when rents increase. You know, before that hits the NOI. So yeah, I think that that'll be a good signal to kind of see essentially when the market starts to pick up. Well, Ben, it's been a lot of fun having you on. Thank you for chatting, and yeah.

It's it's always good to to hear your perspective.

Ben: Thanks, Chris. Yeah. It's always a pleasure. It it doesn't even feel like we're we're talking shop, because we've done so many deals together. So I appreciate the opportunity, and hope to see you again soon.

Chris: Cool. All right. Well, that's a wrap.

AJ: Thank you for listening to this episode of the Real Estate Professionals Investing Podcast on WIN, your community of investing knowledge for growth. Hope that this episode has increased your knowledge and added value to your path to freedom. If you would, please take a second to rate us so that we can get more great investors to interview. If you or someone that you know wants to be on, please visit westsideinvestors.com and fill out our form to be on the show. Thank you again, and enjoy your day.