Well, 2023 has been another wild year in commercial real estate. The headlines continue to scream trouble for CRE. Many are getting increasingly fantastic.
Some friends are asking me, “So…I hear it’s pretty tough in commercial real estate right now. How are you doing?” You may have wondered the same thing.
Musical Chairs
Have you ever played the game musical chairs? I already knew a lot of syndicators were playing musical chairs with their investors’ capital. I’ve been writing and speaking about that since 2018.
In this update, I didn’t really want to focus on negativity. But when I saw news of yet another multifamily syndicator pausing distributions this week, I was frustrated.
My initial frustration was not necessarily with the operators. Many of them weren’t in the business during the 2008 Great Financial Crisis downturn, so they didn’t know any better.
But that’s not right. Shouldn’t they have known better before accepting tens of millions (or more) of investors’ hard-earned capital?
It seemed clear that overpaying, overleveraging, and liberally using floating-rate debt was like playing musical chairs. And while I love optimism, believing trees (rents) would grow to the sky while operating costs would remain stable amidst inflation and a tight job market was not optimism. I’ll let you decide how to label that behavior.
The bottom line: The music had to stop and leave someone chairless.
I legitimately feel sorry for tens of thousands who invested in deals that have now paused distributions, are calling capital, or are in the process of foreclosure. Though I warned BiggerPockets readers and podcast listeners for several years, there was one big issue I admit I didn’t see coming: increased lender-mandated reserves for rate cap replacements.
Here’s what I’m talking about: A lot of syndicators used floating-rate debt to acquire (often overpriced) properties and bought rate caps to…