Calvera Insights

Today, real estate investing is wrapped up in Excel spreadsheets. Investors become economists and believe they can predict interest rates and rent growth. They also think the more complex the model, the easier it is to justify an improbable assumption. Many investors have forgone common sense, cash flow-based models, and opted to rely on appreciation.

1. What differentiates Calvera Partners from other private equity firms in the multifamily real estate space?

It’s no secret some of the biggest real estate companies also have evergreen investment funds. However, our boutique size allows us to have tailored business plans for each asset. We can devote the time necessary to ensure our vision is implemented. This approach, we believe, will translate to better investment returns for our investors. Click here to see the rest.

Having a positive and deep Calvera investor relationship is our primary goal. Strong multifamily real estate returns are only one part of the relationship. Through transparency, accessibility, and thought leadership, we seek to enhance the bond with our investors. The annual Calvera investor letters are an important part of this. You can access it here.

Urban investing has always been challenging. Usually, it involves investing in an up-and-coming city pocket. Developers work in tandem to create new neighborhoods. Restaurants, bars, and retail shops open as new amenities. Adventurous people move into apartments and condos to give the neighborhood a soul. Everything feeds off of one another to generate a palpable energy. This is what makes urban areas great.

Thousands of real estate professionals descended upon San Diego to attend the NMHC Apartment Strategies Conference and Annual Meeting. There, a distinguished lineup of multifamily experts provided insight. Here are four main takeaways from the conference.

Non-traded REITs calculate NAV (Net Asset Value) in many ways. Some perform third-party appraisals on every property. This can be a true arms-length analysis. Often, though, it’s influenced by the one ordering the appraisal. Additionally, appraisals are backwards-looking and may not reflect current values. Our preferred way to calculate NAV uses inputs from both the broker and appraiser communities. For extra scrutiny, an independent auditor reviews our NAV models. This is to ensure the result conforms to market standards.

It’s one of the few major asset classes that hasn’t recovered yet. The stock market was up 24% in 2023. Bond yields fell significantly from highs earlier in the year, meaning that prices soared to end 2023. Even Bitcoin rallied and returned 150% for the year. Apartments are attractive as they remain 20-30% off their highs from early 2022. Between improved cash flow and appreciation potential, multifamily real estate is set to outperform in 2024.

1. Phenomenal buying opportunity as time runs out for many owners.
2. Considerable new apartment supply creates tepid rent growth.
3. Insurance and other expenses will remain elevated, causing NOI (net operating income) to be flat or down from 2023.
4. We’ll get clarity on the 10-year US Treasury by Q3…either 3.5% or 5.5%.
5. Cash will be trash again.

Since 1978, apartment investments have produced a 9.3% annual return over rolling 10-year periods. There is not one 10-year period where apartments lost money. This is without using leverage and based on institutional properties and ownership. Apartments have been resilient and are known for stability, not excess risk-taking. Now that values are down from the peak by a wide margin, we must recalibrate expectations. Should they be even higher because of the great buying opportunity? Should returns be lower with more uncertainty and higher debt costs? It depends on the strategy and appetite for risk.

1) What are the top three danger signs you see in deal prospectuses you are reviewing?

1) Negative leverage. Some is ok if the business plan warrants it, but in today’s environment, the focus should be on positive cash flow. 2) Short-term rent growth. Most markets have an influx of new apartment supply which will push down rents and keep them flat. Prudent underwriting has below-average rent growth in the short term. Click here to see the rest