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2022 was quite a year for those of us investing in multifamily real estate.
The year started, essentially, as a continuation of 2021, which was a very strong sellers market. Sellers got almost any price that they wanted along with very high, nonrefundable, hard money deposits.
Then it switched almost overnight.
Now, interest rates have been going up, cap rates are going up and prices are slowly going down.
Even though it’s been a market in flux, there are a lot of lessons we can take from 2022 and apply them to 2023.
Lesson #1: Real Estate is a Cyclical Business
I know this sounds like something that’s a given. Everyone knows that there's cyclicality to real estate, right?
You always experience multiple cycles in real estate where you go through expansions and then contractions and everything in between. But, for some investors, it seems like when we are in a middle of difficult part of the cycle, it there’s a kind of doom and gloom where some investors stop investing.
I would say there’s a relation between the amount of money and the net worth of investors and their appetite for risk. Investors that are usually writing smaller checks tend to shy away with things and pull back when things are not so steady. For instance if someone has $100,000 to invest and it’s a major percentage of their net worth, they’ll being very careful with every dollar that they're allocating. That’s understandable.
For those that initially got in the market in in 2019 or 2020, it was an ideal time. That was the heyday and, after the initial shock from Covid, everything was great. Returns were unbelievable, and that created an element where everybody may have became a little spoiled for a while.
Wealthier investors, more seasoned investors, are not phased by the cycles, and they stay active.
Even now, we still get, phone calls and emails asking when the next deal is coming, looking to invest with us.
That's part of where being agile and having the experience throughout different cycles comes into play and I think that's why we see some of the larger check writers and long-term investors in the game coming in and doubling down. They've been through these cycles before.
The good days are going to come back, but one of the main lessons for me from 2022 was from being able to push rents up to 60% in some cases, which is unsustainable, and we’re seeing that now.
The Fed, of course have made sure that this bubble was going to burst. But the same way that the boom cycle wasn’t permanent, neither is the current situation, which has been a continuation from the last quarter of 2022. Rising rates and pressures on pricing won’t be here forever.
And so, when things shift, you have to ask yourself if you’re in the right investments. If you’re not investing your money and just sitting on money to wait and see how things play out, you're actually losing money because of inflation. That’s not a very good position to be in because you're actually losing while inflation is moving along at 7-8%, even if you’re getting a "good return" in a high yield savings account or money market.
I'm not saying invest in something if you're not completely confident in it, but at least identify those investment vehicles that are best for the time period.
For us, we really believe the best investment is real estate, specifically multifamily, It's really good when it comes to constitute as a hedge against inflation for that reason and the volatility in the market will provide good operators the chance to get involved in some great deals.
Nothing lasts forever and things can change rapidly. That's the cyclicality of real estate.
Lesson #2: Look For Opportunities Where Others See Challenges
One way of looking at 2022 and specifically the last two quarters is to focus on the higher interest rates and higher cap rates. It's a tough market and you convince yourself that it doesn't make sense to invest.
The way that I look at it is exactly the opposite. If the majority of sponsors are looking at things the same way, that means when an opportunity presents itself there will be fewer competing buyers that are interested in the deal That means we don't have to necessarily meet the same lingering price expectations from the seller when we make an offer.
Up until six or seven months ago, the market was such that, if you had a whisper price of, let's say $90 million, sometimes the deal would close at close to even over $100 million. It was that competitive, and I've spoken with many leading brokers that said they never thought they would see those types of prices.
Today, the conversations are very different. Now, if the seller wants $90 million, we can talk to them. If you can hit $84 million, you might have a deal. This is the opportunity. We're still conservative in our underwriting, so if the deal makes sense on paper we're not afraid to move forward and make the decision to buy assets. This is where opportunities lie, when you're not in such a crowded pool anymore.
The other part of it is looking for buying opportunities from other sponsors, assets that are under market value, which is another a huge opportunity. Assets that aren’t struggling, per se, but perhaps the sponsor has to refinance and the property no longer fits their business model from 2 or 3 years ago.
Hindsight is always 20/20, but that’s why I try and look for opportunities, not obstacles. I believe that if you know what you're doing, if you know the market inside out, if you understand the demographics and the asset class, there are a lot of opportunities out there right now.
Lesson #3: The Power of Focus
What this comes down to is getting back to fundamentals because of the volatility that we've had in the economy.
It’s about knowing what you're good at and staying very focused on those things. For us, sometimes our investments might not sound so exciting, for a lot of people multifamily may sound kind of boring, but we really like boring deals.
We tend to stay in our lane and remain hyper-focused on Class B assets in the Sun Belt, target a tenant base that we know and understand. A tenant base that is resilient and able to handle reasonable rent increases. We know how to do it, we do it well and we stayed focused and that's the power of focus rather than having shiny object syndrome.
It comes down to identifying the right assets, in the right markets, areas and property types that we already have experience with. In 2023, it’s really going to be all about operations and managing those assets correctly.
If you want expand, that's great, but you need time and dedication to build those other avenues rather than chase capital. If you’ve never done it and don’t have the focus, now is probably not the time to try it.
Focus also applies as an investor. People get a little bit nervous with the economy and they wonder if they should pivot my financial strategy and start some things that they haven't invested in before. When you don't have the background to do the due diligence on different types of investments, there. can be very costly mistakes.
That’s why, especially given where we are in the economy, it's just as important for investors as it is for owners and operators. Remain focused on what has brought you to where you are today and use that to get to where you want go tomorrow.
Finally, from the perspective of Blue Lake Capital, there’s one area of focus where we never waver, and that’s when it comes to our investors.
We are bold, but we're very strict when it comes to being conservative and staying focused on investors. They are our number one priority. While we’re doubling down on our deal flow, we're also doubling down on our focus, dedication and obsession with our investors.
Key Takeaways
2022 helped reinforce the cyclicality of real estate in a big way.
Look for opportunities where others see obstacles.
The power of focus - focus on your strengths, focus on the fundamentals and, especially, focus on investors.
Take time to reflect on lessons learned, it's one of the best paths to future success.
Despite the challenges, 2022 was a tremendous year for Blue Lake Capital, and we have our investors to thank for another incredible year.
Our repeat rate for investors re-investing with us in 2022 was 78%, which is phenomenal. Because of their loyalty and dedication we were able to raise just shy of $67 million in 2022, and we've been able to achieve a net IRR for our investors of 30.9%, which is incredible.
The goal is to make sure that we can beat those results in 2023.
If you’d like to talk to our Investor Relations team and find out more, just send an email to info@bluelake-capital.com or click here and complete the form for potential new investors. We'd love to connect with you.
As always, Be Bold, Be Great, and Keep Pushing Forward.
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Invest with Blue Lake Capital
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About Ellie Perlman
Ellie Perlman is the founder of Blue Lake Capital, a commercial real estate investment firm specializing in multifamily investing throughout the United States. At Blue Lake Capital, Ellie partners with both institutional and individual investors to grow their wealth by achieving double-digit returns by investing alongside her in exclusive multifamily deals they usually don't have access to.
A defining factor of Blue Lake Capital’s strategy is founded in utilizing machine learning/artificial intelligence throughout the course of all acquisitions and asset management. This advanced technology enables the company to produce accurate and data-driven forecasting for all assets on a market, property, and even tenant basis. In doing so, Blue Lake is able to lead commercial investments with the full capabilities of today’s technology.
Ellie is the host of REady2Scale, a podcast that highlights the assets, processes, and strategies for the multiple approaches to successful real estate investing.
She started her career as a commercial real estate lawyer, leading real estate transactions for one of Israel’s leading development companies. Later, as a property manager for Israel’s largest energy company, she oversaw properties worth over $100MM. Additionally, Ellie is an experienced entrepreneur who helped build and scale companies by improving their business operations.
Ellie holds a Masters in Law from Bar-Ilan University in Israel and an MBA from MIT Sloan School of Management.
You can read more about Blue Lake Capital and Ellie Perlman at www.bluelake-capital.com.
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