Is Commercial Real Estate Crashing or Recovering?

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That's truediagnostic.com, code Jake and Gino for 20% off. Everyone right now wants to know where the commercial market is headed in real estate. Have we passed the peak?

Are we in a crash right now? Are we recovering? Well, that depends. And that's what we're going to be discussing on today's show.

Hello and welcome. This is Gino Barbaro of Barbaro360 and Jake and Gino. And today I pulled data from Yardi's site and we're going to go over five main topics or points of what's going on in the multifamily market. And I may sound like the typical attorney when I say the answer to the question that I proposed is it depends.

It depends on a lot of factors, but to me, most importantly, depends on what market you're in. And we're going to dive into that. And we're going to dive into the numbers of where you are in a certain part of the market cycle. And if you don't know what market cycles are, I did a podcast probably two months ago.

Go back to the how-tos. I talked specifically about the four cycles in a real estate market. It's really important to understand what they are because you can start diagnosing where your market is because whatever's happening right now in Kansas City, Kansas, it's not happening in Miami. They're in different market cycles, for example, or in San Francisco versus Boise, Idaho.

Understanding where you are in the market cycle will help you parse out the data and will give you an understanding of what's going to happen next. So let's get into it. The first one from Yardi, they say that national rent growth remains weak. They forecast 0.

5% nationally in 2026, just 0.5%. Do you guys remember when it was like 10% a year and we thought that would never end? Proponents of rent control were going nuts.

We have to control the rent. No, what actually had to happen was there was a lot of demand and we needed to create supply. And as we continue to discuss this in the next few minutes, you're going to see what supply has done to some of these markets. It's absolutely crushed rent growth.

There's actually rent declines in certain markets. So understanding the national grant road, what's going on right now, it's important. Recovery is happening. It's just happening a lot slower.

How many of you heard thrive to 25 or survive to 25, thrive in 26? What's the new slogan? They keep pushing it back because I don't think people really expected banks, number one, to really to continue this, I guess, extend and pretend, and they have. and every time I go online, I feel like throwing up because all I see are gurus out there saying, well, there's a big debt wall coming.

There's a big debt wall coming. The debt wall has been coming since the beginning of 25 and it seems as if it's not occurring. In some markets it is, but overall, I'm not seeing this pandemonium of selling or foreclosures that they all forecasted. Now that's important.

So grant growth nationally is challenging. The second one, low supply markets are winning. Those markets that have low supply, I'm going to read off a couple to you. Maybe you may be in one of these markets.

And if you own in one of these markets, you're happy because there's not as much competition. Whatever asset you have is going up in value because your rents are going up. Your income is going up. Therefore, your NOI is going up.

The Twin Cities, 4.6%. Chicago, 4.1%.

Detroit, 4%. Kansas City, 3.9%. 99%.

Since 2023, New York rents have grown over 18%. It seems as if I'm not going to inject politics into it. Although I'd like to talk a little bit about policy, which really connects itself to the politics. But a lot of these cities that I've been talking about appear to be more democratic leaning, much harder to build.

And when it's harder to build and it costs more, You don't get the supply. And what happens when you don't get the supply? The demand is still there and prices rise. Whenever somebody's having a debate with you and they don't want to inject politics, just say, let's not talk about politics, let's talk about policies.

And the policies of not building is what's happening in these cities. 18 in New York Can you imagine owning an asset that is free market not the one that rent frozen for the next year or two years but you have an asset in New York that able to rise and there no supply coming online? You are thrilled. And that may be a strategy.

You may say to yourself, hey, I'm in New York. Let me go out and buy an asset that is able to actually go up with the market. And if nobody's building, well, guess what happens? Your assets can appreciate over time.

It's incredible. We're talking about population growing in a lot of these markets. We're talking about jobs growing. But if supply doesn't grow and there's demand, you're in trouble.

You have to be careful with the supply. If supply exceeds the demand of housing, and that's what's happening in a lot of these markets, this brings me to my third point. High supply markets are still paying the price. And this is important because this is where a lot of investors flocked.

They flocked these markets that we were taught, they were the paths to progress. That's where all the jobs were going. That's where all the infrastructure was being built. And they were accurate.

Look at these. I'm going to read off a few of these cities. And it's not to say they're good or bad to invest in right now. You just need to understand that rents may continue to drop in the foreseeable future, and possibly in the next 12 to 18 months, they may continue to drop.

So if you underwrite conservatively and you underwrite for that, I know, Gino, I'm not going to find a deal. That's okay. If you don't find a deal, I'm happy for you for one reason, because no deal is better than a bad deal. A lot of these operators that bought with the assumption that rents were going to continue to rise, they're having problems right now because it's really hard.

You bought at a certain basis at a certain price per unit and now your rents are falling. Let's flip that with also expenses rising. So you've got income that's dropping and expenses that are going up. That's a double whammy.

But I promise you some of these numbers for some of these cities. Phoenix is down 6.2%. Denver's down almost 6%.

Austin minus 5.2. Dallas minus 4.3.

And Orlando is down 4%. Austin has experienced nearly 15% rent decline since 2023. Now, on the flip side, A lot of these cities seem to be more red-leaning. Although Austin or Orlando still are a little bit more Democratic, but they do have policies that are more leaning towards more building, more infrastructure, more growth, pro-business.

That's great. In the long run, these cities will be okay. Because as we see in the next few minutes, what's going on with construction, but right now, there is short-term pain. The short-term gain that's going on up in the Northeast in these cities that's not growing, It's great in the short run, but in the long run, it's going to lead to crazy policies by politicians that are trying to fix by putting rent control in.

No, politicians, please just fix the policy. Allow these builders to be able to build at an affordable price. Cut the red tape. Cut the time it takes to build.

Make it easier to build and quicker. We need more units to come online so we can combat this just supply that's not there in these Northeast states, cities, and have this demand come online. It's crazy. In the short run, as it says, supply beats demand.

And that's what's going on right now. To me, if you're trying to invest in commercial real estate right now, you need to understand what's going on in the market. Now, in these markets, I'm not touching on self-storage and I'm not touching on industrial and I haven't spoken about retail, but it's very interesting. I'd love to hear from you.

Are those assets going to do better, quicker? Because if you have retail, especially we're here in Florida, people are moving here like crazy. Now they've built a ton of multifamily, but they built the retail to keep up with it. That's something that you need to actually go out and do some research on because that would be interesting.

They haven't built as much retail office. Who's building office right now? So whatever office is there is going to go up in value because people still coming out of their houses, need a place to go and actually work. And lastly, self-storage, very interesting.

You still have that population growth and job growth. Has self-storage overextended itself as well? That's something you need to look at if you're in that space. So we're talking about right now, before we go to the break, we have a lot of markets that rents are rising.

The supply isn't there, but the demand is. We have a lot of markets that the demand is still high, but the supply is exceeding the demand. And we're saying another 12 to 24 months. I want you to stop and think where your market is, how your market's being affected and what does deliveries, the delivery of units coming on board versus the absorption of them versus those that are actually being rented out.

Two numbers that I want you to focus on in your market. What is the occupancy? And I would say economic versus physical. Heads and beds versus those that are paying.

Heads and beds are physical. You want to have both of those numbers. What is that? You need to underwrite to that number.

That's really important for you to understand that. What's the occupancy? In Dallas right now, I was reading a report that occupancy is in the low 90s, maybe high 80s. If you're trying to underwrite a deal and you're saying you're going to get to 95% in 6 to 12 months, that's probably not going to happen.

You are going to overshoot your income by a lot. That's why it's important to understand where you are. The second component that I would really look at is I would look at concessions. How much are you having to give for quote unquote free as a concession to get somebody to rent your apartment?

I wouldn't give a free month's rent. What I would do is I would literally just say to them, hey, here, well, let's put it this way. If you've got a market, a rent that's renting for $1,000 and you want to give them, you $100 off the rent and make it $900. At the end of 12 months that rent is at And then all of a sudden market rent goes to You can go from to I think you probably be better off by giving them a month for free and saying here a free month Your rent's gonna be $1,000.

At the end of 12 months, it's still $1,000. But you sacrificed a whole $1,000 on the front end. Remember, short-term pain for long-term gain. And that's what a lot of operators are doing.

And you need to know what concessions are. So write this down. Occupancy, economic and physical, and concessions. Let's take a quick time out to hear from our sponsor.

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If you've been thinking about how to go from consuming content to actually building a portfolio, go to wheelbarrowprofits.com and take a look at what they've put together. And we're back. Point number four, construction starts are falling fast.

This is where things get really interesting because all of a sudden our deliveries are starting to fall and you need to track that because in certain markets, they've had so many deliveries, but now it's gotten to be too expensive. Land costs have gone up. All of a sudden deals aren't penciling out. Interest rates were rising over the last couple of years.

So builders are stopping to actually get permits and to starting to put shovel ground ready buildings right now. But they're finishing off what they have. So there's a really, really fine line between the two. You need to understand where that is.

Now, the good news is for long-term investors. Why? Because today's lack of starts becomes tomorrow's lack of competition. Once again, if all of a sudden in Austin, you finally get caught up where the demand is still there because people are still moving.

And yet the Supply of new apartments isn't there. Wow, there's the breakthrough. Supply is still in the pipeline right now, but not as much as it was a year ago, and it's burning off. This is the important part where you really need to drill down into your specific market.

Point five, transaction volume remains muted. Sales volume from May through May is down more than 10% from last year. Last year sucked. This year sounds like it sucks even more.

And I know in our market right now, it is so difficult to find a good deal. What is a good deal to you? Do you know what a good deal to you is? We know what we're looking for.

We have our buy right criteria. We're looking for newer assets. We're looking for assets that are more on the two beds, one and a half bath townhome styles. We're looking for a certain median income.

We're looking for certain amenities. Washer and dryers are really important right now, especially if you have these older assets, these 70s and 80s, because these newer buildings have those amenities. And if yours doesn't, don't market to comp yours to theirs and say, well, I can get this. You're lacking a really important amenity.

So right now, what you need to understand is a lot of the assets that are coming on, at least in our market of East Tennessee, are just older assets. They're tired. They're overpriced. I'm not going to pay a five cap for a 1960s asset when interest rates are 6%.

I have negative leverage going in and I've got to put hundreds, if not millions of dollars into these deals. Spare me by saying that rents are 800 and you can bring them to 1200. If that's the case, you do the work and then I'll buy them my actual numbers. That's where we are in this part of the market cycle.

Buyers are not overpaying right now. They can't because debt is not going to allow them to overpay. And sellers, if they don't have to sell, they know right now that buyers aren't overpaying. So they're going to say to themselves, well, I can hold on until the market rebounds or until rates drop to make my property a little bit more affordable for these buyers.

Now, there's sellers out there that have fixed term debt. I'm sorry, bridge debt. That's coming due. What do those sellers do?

Well, those are the ones where you need to be wary of and you need to see that there's the opportunity. Let's look at this transaction volume, right? Sellers don't want to accept lower values. We talked about that.

Lending activity remains healthy. Fannie Mae originations were up 45% over a year ago. Now, that may not be a lot because Fannie Mae and I have done a lot last year, but there are a lot of refis going on. There's a lot of that transaction volume going on, but not as much as there was in 22 and 23.

So what I'm seeing right now, I'm seeing there's like a lull in the market. And I'm seeing people flee the market. You know, one thing I've learned over the years is that your chronological age and your biological age can be two very different things. We've all met people in their 60s who have incredible energy, sleep great, recover quickly, and just seem to be thriving.

Then we've met people who are much younger who just don't feel healthy. The difference is often what's happening beneath the surface. That's why I'm excited to share the True Age test from True Diagnostic. It's a simple at-home test that uses the epigenetics to measure your biological age and how quickly you're aging.

But what I really like is that it goes much deeper than a single number. You get insights into how 11 key organ systems are aging plus more than 75 longevity biomarkers that help you better understand your overall health And the best part they don just hand you data They provide personalized recommendations around sleep nutrition exercise supplements and lifestyle changes so you can actually take action and improve your health over time The process is simple. A quick finger prick at home, send the kit back, and you'll receive your results online in just a few weeks.

So if you're serious about longevity or just curious whether your body's aging faster or slower than your actual age, this is one of the easiest ways for you to find out. Right now, go to truediagnostic.com and use code Jake and Gino for 20% off your entire order. that's truediagnostic.

com code Jake and Gino for 20% off. I'm seeing it in our part of the market. There's not a lot of deal flow. There just isn't.

The only way you get a deal in this market right now is if you have a motivated seller and if you are talking to brokers every day. I want to give you an exercise and this is this exercise is just really for you to reflect on what's going on in your market. I want to ask yourself this question. How much of my investment thesis relies on future rent growth?

If you're buying deals and it's based just on future rent growth, not possibly on adding amenities or adding extra units or possibly adding extra fees or possibly having it more operationally more efficient. If it's just on future rent growth, how does that thesis hold up in your market? In New York, it may be okay, but I know in our market, future rent growth, I'm hoping by next year, by the end of 27, I'm hoping by then we'll start getting back to some significant rent growth.

Until then, my thesis says that no, I can't buy a deal and expect future rent growth. Now, that's not to say that if I have an asset and the rents are at $800 for a two-bedroom and I know they can go to $1,200, Well, that's a $400 delta. I can increase them by 400. There's pain involved in that.

We're going to have a lot of non-renewals, but I can get them up. That's not rent growth. That's just actually capturing loss to lease. That's actually capturing where the market should be.

Now, when you get to 1,200, what's the rent growth? Once I'm at 1,200, I'm not going to 1,225 or 1,250, maybe till the end of 2027. So you have to understand that. I think this second question I want you also to reflect upon, am I investing in a market because everyone talks about it or is it because supply and demand support it?

There are some markets out there. I like Omaha. I like Wichita. I like these markets that are under the radar.

Some of these really cool markets, possibly Tulsa. Not everyone's talking about those markets, but they have some good fundamentals. They may not have that oversupply, but they may have enough demand and enough job growth and affordability and just a nice place to live. So maybe start focusing on markets that aren't these primary shiny object markets, but maybe have secondary or tertiary markets.

That's important. I want to summarize this real quick for you. Multifamily markets still working through supply-driven correction. That's right.

We're working through the supply. And I know, and I promise, if you come back to this recording a year from now, you're going to be like, wow, my market rebounded. Concessions are burned off. There's not as much supply coming on.

Right now, I can't see the forest through the trees because it's really challenging. Rents aren't going anywhere. I can't find a deal. But 12 months from now, when that supplier or whatever your market is, 24 months from now, once that supply is burned off, it's going to be like jet fuel.

Lower supply markets are outperforming. High supply markets continue to struggle. Because in multifamily, patience is often the greatest competitive advantage. It can be really challenging to wait out there.

I'm going to end with my famous quote, one of my favorite quotes. It's kept me out of trouble since I would say 2008, since I bought my very last bad deal. And I understood about the market cycles and I understood about market timing and strategy and exit and how to buy and operate and exit a deal, our three-step framework. I want you to constantly think about this.

no deal is better than a bad deal. Understand where occupancy, concessions, and deliveries are on your market, and that will help you avoid buying a bad deal. Thanks for tuning in. This is Gino Barbaro of Jake and Gino and of Barbaro360, and I'll see you on next week's show.

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