The Reality of Market Timing
Understanding market cycles is important, but trying to time them perfectly is almost impossible. Many investors look back and realize they missed the exact high or low points. Instead of stressing over perfect timing, the real key to long-term success is staying flexible and consistently focusing on three essential activities:
1. Deal Flow
Keeping a steady stream of investment opportunities is key to long-term success. Whether through brokers, direct outreach, or networking, having a strong pipeline ensures you always have deals to assess and the flexibility to act when the right opportunity comes along.
2. Networking
Building strong relationships with lenders, partners, and industry professionals is key to securing the financial support needed to close deals. Whether through traditional financing or private investors, having reliable access to capital ensures you can move quickly when the right opportunity comes along.
3. Evaluating Deals
Knowing how to evaluate a deal at any point in the market cycle is essential. To confidently assess opportunities, investors must understand and apply four key pillars:
- The Market: Analyze the local economy, major employers, industry trends, and hiring projections to gauge demand. These factors help predict occupancy rates and future rent growth.
- Landlord-Tenant Laws: Understand regulations around rent increases, evictions, and tenant protections. These laws directly impact operational flexibility and long-term profitability.
- Threats to Value: Be aware of risks that can significantly impact property values, such as rising interest rates, unexpected tax hikes, or insurance cost surges. Failing to account for these threats can quickly turn a promising investment upside down.
- Underwriting Method: For income-producing properties, the Income Approach is the gold standard. Mastering this valuation method ensures you can integrate market insights, legal factors, and risk assessments to accurately determine a property’s worth.
By applying these four pillars, investors can make informed, strategic decisions and safeguard their investments.
What to Buy When
1. Recovery
The recovery phase marks a rebound in demand and property values. Occupancy rates improve, and rental growth resumes. Investment strategies include:
- Strategic Purchases: Identifying undervalued properties with strong fundamentals, such as prime location or quality construction, offers growth potential as the market strengthens.
- Value-Add: You can start purchasing properties that, through improvements, can enhance value and attract higher-quality tenants. However, wait until the market shows signs of expansion before investing in renovations.
2. Expansion
During this phase, the market experiences steady growth in demand and property values. Occupancy rates are high, rents are rising, and new construction is active. Investors often focus on:
- Development: Acquiring properties for development can be highly profitable, as demand is strong and rents are increasing.
- Value-Add Opportunities: Purchasing properties with operational inefficiencies, renovating them, and repositioning them to meet market demand can yield substantial returns.
3. Hypersupply
Hypersupply occurs when supply exceeds demand, leading to rising vacancy rates and slowing rent growth. In this phase, investors should:
- Do Nothing: It is best to sit on the sidelines, hunker down, and focus on retaining existing tenants through incentives and improved property management to maintain stable cash flow. Enhancing property operations to reduce costs can help mitigate the impact of declining rents and higher vacancies.
- If You Must: Invest in stabilized properties with a long-term hold strategy—at least 8 years or more. Focus on properties with strong potential for tenant retention and rent growth, typically found in Core and Core-Plus assets in supply-constrained markets.
4. Recession
In the recession phase, demand drops, leading to a slow market and possible declines in property values. Investors might consider:
- Acquiring Distressed Assets: Purchasing undervalued properties at discounted prices due to financial distress can lead to significant gains when the market recovers.
- Focusing on Essential Services: Investing in properties that cater to essential services, like senior housing and affordable housing, can provide more stability during economic downturns.
Aligning investment strategies with the current phase of the real estate cycle enables investors to navigate market fluctuations effectively and optimize returns.
Conclusion
The idea that ‘value-add’ is always the go-to strategy is a major misconception. Many investors who focused on value-add deals during the recent Hypersupply phase have seen their investments lose significant value. In fact, unless these investors can hold on until the next expansion phase—likely 3 to 4 years away—they may never recover their capital. At best, they will fail to meet the returns they promised; at worst, they’ve lost their investors’ money.
Mastering multifamily market cycles isn’t about predicting the future—it’s about adapting to shifting conditions. By following this generally accepted theory, we believe, you can avoid costly pitfalls and set yourself up for success. With consistent deal analysis, a solid network, and the ability to adjust strategies when needed, we believe investors can succeed in any market phase.
