A year ago we purchased a piece of land we felt would make a great investment for a mixed-use development inside of our real estate fund. This deal not only passed our underwriting but all of my years of experience told me this was a unique opportunity. We acted quickly. A year later this piece of land is entitled and ready for development. Yesterday, we got the appraisal back and once again it reminded me of how important it is to have the right team. We purchased the piece of land for $11.3 MM and it appraised for $17 MM. 2023 is already looking bright.
Deepening Housing Recession
The last two years have been frustrating for investors and home buyers alike trying to purchase residential homes. Too many buyers and not enough inventory caused an explosion in home price appreciation. Along with that, high inflation. The Federal Reserve’s answer to high inflation was executing the highest and fastest rate hikes in history. This crippled the capital markets and caused a major fall-out of contracts that had not yet been funded.
With the capital supply being cut off, investors could not purchase new assets. In addition, many homebuyers could no longer afford to buy homes. The result is a deepening housing recession. This creates opportunity for investors with cash or non-institutional investment capital. Within a matter of months, we went from a sellers market to a buyers market in record speed. With fewer buyers in the market, investors have a much larger selection of potential investments at lower prices. This is a natural benefit of a market shifting in the buyers favor.
Affordable Housing is Now for Rent, Not for Sale
I believe single family rentals, in particular, will see a surge of demand due to nearly one half of all home buyers being pushed back into the rental market by rising interest rates.
Prior to the 2008 recession, “starter homes” were purchased, not rented. As a bi-product of the ‘08 recession the land development industry was decimated, sending land developers into retirement or bankruptcy. Even the banks that funded them had some of the biggest losses. Naturally, when the construction industry started to revive six years later, lenders were hesitant to lend money for land development. Terms like “builder groups” were no longer part of the new face of home building. The short story is that it became unaffordable in most markets to build “entry level” for-sale housing. This is how build-to-rent communities came to life.
Adding insult to homebuyer injury, the “American Dream” of home ownership looked more like a nightmare to millennials who watched their parents suffer through the recession. They have chosen the freedom and flexibility that comes from renting. Affordable housing now is for rent, not for sale. This trend is what has driven us to invest so heavily in the build-to-rent model.
Your Next Investment
In June of last year, we felt a sense of urgency to take the 15 individual projects we had entitled & ready to develop and consolidate those into a fund. Like many others, we were anticipating a change in market cycle and we wanted to be ready. In November of 2022, we launched the Arabella Real Estate Fund. We knew that coming out of 2022 and into 2023, investors would remain skittish. We wanted to provide an opportunity for investors to invest in real estate with a reduced amount of risk. This is why we decided to include these 15 projects as well as share the majority of development fees with investors of the fund.
Sitting here today, we know that these market conditions will provide opportunities we may never see again. The Arabella Real Estate Fund will give investors the security of a fund backed by millions of dollars of equity in projects acquired pre-covid. It will give us the buying power to take advantage of the deals we’ll see this year.
So will 2023 be a good year for real estate investors? We think so.