I didn't write this article. I found it on LinkedIn, and I am reposting it here, with the author's permission.
It took me a really long time to truly understand liquidity when it comes to investments. It's not just about cash balances in the bank, but about the ability and willingness to transact.
According to MSCI, apartment/multifamily sales volume fell to $119 billion last year, a 61% drop from 2022. That shows a lack of liquidity in a market which recently saw as much as $300B of volume in 2021/22.
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To put that into perspective, the coming maturity wall (which has gotten worse with extensions, by the way) is up to over $900B. Let's assume that multifamily makes up the same % of this volume as it does CMBS, which is about 35% (this would be a hypothetical assumption in an appraisal). That would mean ~$315B of multifamily loans are to mature in 2024, and assuming a 65% LTV, that's about $450B in estimated value of multifamily assets maturing.
Right now, cap rates AND interest rates are significantly higher than they were for nearly all of these maturing loans at origination, and many do not qualify for a new loan at "market" terms. If only 50% of that maturing loan volume needs to trade via sale, that would mean that transaction volumes would need to double in 2024 to work through the backlog, without even accounting for everyday sales like those caused by 1031, death, divorce, or disaster.
When you have a rush of inventory and folks looking for the exit, that's when prices really drop due to lack of liquidity. I think that this is the single biggest risk in CRE today, especially given the new data on 2024 maturities increasing nearly 50%. I am not personally confident that cap rates and interest rates can or will drop in time to avoid this type of outcome.
How can an asset owner avoid being burned by this? Buy cash flowing assets from day 1 (hard in this environment), don't take on maximum leverage, and build or maintain cash reserves that would enable you to refinance at current market interest rates and leverage. It may not be the most efficient way to run a business, but being in real estate investing is not a finite game.
Written by Dillon Freeman, LBC Capital - 818-648-9470
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Russia may have placed nuclear EMP devices in space over the U.S. If exploded 75 miles above, almost every electric device in the country would be fried. Most of us would die in 18 months from starvation, disease, and crime. Our National Security Advisor is... "quite concerned." (Folks, he is freaking out.)
