East Village Industrial Building

July 18, 2023

By Wen Shiau 

Warren Buffett famously said that in investing, we don’t have to swing at every pitch; we can patiently wait for the “fat pitch.”

We have patiently waited for the fat pitch.  Since March 2022, we haven’t made any new real estate investments. 

However, we believe the opportunity has arrived following last week’s turning point on CPI at 3%.

Review of H1 2023:

The markets began 2023 with 3 consensus views:

  1. Equity markets would continue to struggle; however, Nasdaq had its best performance in the last 40 years; Notably, the S&P500 closed higher during the weeks when SVB Bank and First Republic Bank failed.
  2. Fed would continue to tighten; it has become apparent that last week’s cpi at 3% shows that inflation may indeed be transitory.  Fed easing may be 12 months away.
  3. Commercial (“CRE”) and Residential real estate would collapse given higher rates;  Cypress Capital believed in more nuanced outlook.  While CRE prices would collapse, we believe Residential prices would hold up due to supply and demand constraints.  Indeed, national residential prices are back to its historical highs.  The public markets reflect this view:

a. Toll Brothers, the luxury residential developer YTD (July 18, 2023) is +66%

b .BXP Boston Properties, one of the largest office REITs, YTD is -9%, but in the last 3 months is +17%

Distressed Investment Opportunities in H2 2023 and 2024:

We believe the fat pitch for investment is here now.

Multifamily valuations have declined by 20-30%, wiping out the original equity in the deal.  Prior to 2022, investors bought a multifamily property yielding 4.5%, value added improvements to yield 6% and then sold it at 4.5%;  Today, one can only sell at most for 6% but the borrowing cost has increased to 7-9%, if one can even get a loan.

With equity typically representing 30% of the deal, a 30% decline in valuation wipes out 100% of the equity holders.  Today, many distressed properties require “rescue capital,” creating investment opportunities.

Prominent value investor , Seth Klarman, has spoken recently about real estate as a value play, further emphasizing the potential.

As real estate investors, we look to take advantage of these distressed properties that require fresh equity.  The next 6 to 18 months may offer the best real estate investment environment since 2008.

-Cypress Capital Group.