Is There Enough Fear to Start Buying?


Brian D. Milovich

Managing Principal, Calvera Partners

Warren Buffett famously said in his 1986 letter to shareholders, “to be fearful when others are greedy and to be greedy only when others are fearful.” This is great advice, and an admirable goal to have, but it can be incredibly difficult to execute. Buffett wrote this at a time of “euphoria” and “little visible fear” in the stock market. That’s how we felt in 2021 as apartment properties sold for unfathomable prices with business plans that had no way of working out. Now, however, there’s plenty of fear in the real estate market, and unlike past times of distress, there are attractive risk-free options for those who are fearful. Unfortunately, there’s not enough fear to make owners capitulate and sell their properties at the market clearing price.

I discussed the potential for significant distress in the apartment market in a previous post and it still holds true. Cap rates have continued to increase as the 10-year US Treasury keeps rising, and this has the effect of decreasing values. Also, numerous major markets have experienced flat or declining rents on top of seeing property expenses rise. This reduces net operating income (NOI) and has the compounding effect, along with cap rates, of reducing property values. It’s highly likely that many apartment acquisitions made from 2020 to 2022 with high leverage, floating rate bridge debt have zero, very little, or even negative equity. Despite the trouble many owners may be in, there is yet to be a deluge of sales activity as owners find ways to hang on through capital calls to their investor base, new preferred equity, and other financial lifelines to hopefully hang on long enough for the Fed to cut rates and bring back the environment we experienced post-GFC.

What if it never goes back to the low interest rate environment and we stay higher for longer? That certainly appears to be the smart money hypothesis. Even if the Fed cuts rates a bit, the yield curve will go back to being upward sloping, like it was meant to. The 10-year US Treasury doesn’t have to go up or down in that scenario, real estate will remain significantly cheaper today, and those “rescued” deals will remain in distress. This is my general belief as we enter a new cycle for real estate investment.

Cycles and real estate go hand in hand, and fortunes are made or lost because of them. I’ve long admired those real estate investors who own for the long-term, across numerous cycles. Like Warren Buffett, these owners generally don’t get in a buying frenzy when the market is white hot, but they’re the broker’s first call when the market is bad as others don’t have the balance sheet to buy good properties. There are people like this in every market, and they usually don’t bring a lot of attention to themselves. To me, this is the time to be creating a war chest of capital to be ready to pounce on opportunities and start a portfolio, just like the smart, long-term money across the country.

The long-term investor thrives in times like this. They do this by having low portfolio leverage, numerous cash flowing properties, and concentrations in certain markets to know exactly what everything costs. This owner can make fast offers, use its balance sheet to get favorable financing or deal terms, and integrate properties into its cash flow-generating machine. Often, the long-term investor accumulates property over many years and had to start with a single property or smaller assets in order to get their system going. This is what we’re doing with the Calvera Income and Growth Fund—curating an apartment portfolio at a highly opportune time, in prime markets, and operating like the most successful long-term holders of real estate.

The strategy that works is buying assets based on current cash flow, using modest leverage on the purchase, and holding for the long-term. This strategy also allows for purchasing new properties with proceeds from refinancing owned assets or from tax-deferred 1031 exchanges. There’s safety and efficiency in this conservative, cash flow-focused strategy that is not found in investing with the guru-syndicator looking to flip properties after a budget renovation plan with high leverage. With no legacy portfolio of properties subject to any amount of distress, now is an ideal time to accumulate investment dollars to build that war chest of capital. This way, we are prepared to execute our plan for the Calvera Income and Growth Fund when generational opportunities come to bear. A long-term strategy doesn’t need to time the market, though seeding our new fund with opportunities in this market, we believe, will prove timely.


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