Big Reasons to Be Bullish About Multifamily Real Estate with Neal Bawa – EP 382

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In 2020, we were afraid to go anywhere. 2021 turned into the greatest year for real estate of all time. In 2022, we watched interest rates spiral out of control and dramatically shift the market, and we’re now living in the wake of these major shifts, both positive and negative.

So, what can we expect moving forward? To help answer that question, I’m talking to Neal Bawa. Neal is the founder of UGro and Grocapitus and known as the Mad Scientist of Multifamily with a $1B real estate portfolio and over 900 investors. Based in the Bay Area, he uses cutting edge analytics and tech tools to give himself–and his students–a powerful edge in the world of multifamily investing.

In today’s conversation, Neal and I talk about why we’re all better off buying properties now than we were 18 months ago, why this may be our best opportunity to buy since 2009, and what the future holds for our industry.

Key Takeaways with Neal Bawa

  • Why Neal is still extremely bullish about multifamily.
  • How to frame today’s market as a winning opportunity for your prospective investors and limited partners.
  • Why syndicators should be worried about overpaying–and why now’s a great time to invest in investor education.
  • What to expect in 2024, why so many syndicators are going to be out of business a year from now, and how to do your best to not become one of them.

Neal Bawa Tweetables

“If you're comfortable with the idea that in the future rents will be higher, then why aren't you comfortable with the idea that inflation will be lower?”

“You do not need the Federal Reserve to cut interest rates. You just need the people that set these rates for mortgage rates to believe that the Federal Reserve is going to cut interest rates. And then you start to see those rates come down.”

“It's always going to be this way. You're either going to have a money-raising problem or you're going to have an overpaying problem. There's no middle ground. There’s just one of these two things. And the question I'm asking myself is which of those two things I want?”


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Josh Cantwell: So, hey, Neal. Welcome back to Accelerated Investor. It’s been three years. Welcome back to the show. How are we doing, my friend?

Neal Bawa: Oh, we’re doing fantastic. And, yes, it’s almost exactly three years and, boy, the world has changed in those three years. So, it’s dramatic. Lots and lots to discuss.

Josh Cantwell: The world has changed, how? It hasn’t changed at all. Has it?

Neal Bawa: Well, I think COVID’s changed so many things, right? So, it’s changed the world. It’s changed how we react now and lately, it’s also changed how we think about things like financing. We think about interest rates, stuff like that. And I think pre-COVID there was this belief that the world had developed, which I think was, in my mind, an absurd belief that interest rates would forever be low. And now we know that that is simply not the case and that interest rates are something that can go up and down. There are so many people that have adapted their strategy, so many people that have changed their thinking about it, though, the fundamental belief that interest rates are going to stay low is still dominant. And I think it’s correct thinking and I’ll explain why but there’s just so many new strategies that have had to come in because of COVID, right?

So, the first year after COVID, we had this outrageous increase in disposable incomes for Americans. And because of that, 2021 was simply the greatest year in real estate and in history and then 2022, we started to see the challenges. In 2023, we’re seeing a lot more challenges. And so, like if I had to look at 2021 when we spoke last and then 2021 and then 2022 and then 2023, all I can say is the rate of change across those positive and negative has been dramatic.

Josh Cantwell: Dramatic. Every year is totally different. 2020 people were afraid to go in buildings. I mean, we were literally taking people out of our buildings in body bags because of COVID. That literally was happening. 2021, the peak of the market was probably August roughly in 2021, where the market was, I mean, just wild and there was so much liquidity. The transaction volume was the highest in history. And then 2022, again, another shift. 2023, now people are realizing that bridge loans and variable rate debt and they’re having to manage that. So, we live four years in a row with significantly different upsides, downsides, challenges. So, let’s talk about right now, though, Neal. What do you see for yourself as an investor? What do you see for the market for investments? Is there still upside? Are there still deals happening? People are getting pinched because of their variable-rate debt. So, high level, how are you managing? What are you doing today with your portfolio?

Neal Bawa: I’m going to give you an answer that surprises you. I think, to be honest, I am extremely bullish about multifamily going forward, and I’ll explain why.

Josh Cantwell: Same. I’m totally on the same page as you. So, let’s hear it from your perspective.

Neal Bawa: Very, very bullish about multifamily. If you saw a podcast, I’ve appeared in a couple hundred podcasts, 18 months ago, let’s say the beginning of 2022, if you had me on a podcast and you asked me this question about multifamily, I would give you a very bearish answer. I’d give you an answer saying, “I don’t think multifamily is in a good place. I think prices are too high. I think that we’re simply not factoring in the fact that that debt is about to get much more expensive.” And cap rates were crazy. So, let me share with you what has happened in the last 18 months because it’s been so dramatic and I don’t think people are putting this in the right way. I listen to podcasts and I don’t see people saying what has happened in the last 18 months. So, here we are, we’re in July of 2023. So, let’s look at the last six quarters because they’ve been very dramatic. So, the first quarter of 2022 was the lowest cap rates for multifamily in history, and that number had fallen to a ridiculously low, unsustainable 3.36 cap. That’s numbers from CBRE, by the way. 3.36 cap at the end of Q1 last year.

And I remember you said August 2021 was the peak. Yes. But, Josh, you and I both know it takes 5 to 6 months to close multi-family, right? So, the properties that were being sold in August were actually closing in Q1 of 2022, hence it had the lowest cap rate ever. So, then we start to raise interest rates and that 3.36 cap goes up by 36 basis points the next quarter to 3.72 cap. And then it continues in a very straightforward way for cap rates to increase and increase and increase. So, now we’ve gone from 3.36 cap to 4.72 cap, which is a 136-basis-point increase in cap rates. And it’s been very smooth. All of those quarters, Q1 didn’t obviously see an increase in cap rate. It was Q2 because that’s when rates start rising. So, look at Q2 last year, Q3, Q4, Q1 this year, I don’t have Q2 numbers yet because we’re still in July but I expect the same, very smooth increase in cap rates as there was a smooth increase in interest rates. So, those two things really matched well. And so, today we sit in an environment where cap rates for multifamily are at 4.72 cap. Now, a lot of people might still say this is still really expensive multifamily because interest rates are so high.

So, if you say it that way, what you just said makes sense. So, you can tell me, “Yes, multifamily is really too expensive because interest rates are too high.” My point, though, is no one including the Federal Reserve, which is the most conservative monetary institution in the United States, expects them to stay that way. So, today, multifamily may be expensive at 4.72 cap, but it is 29% cheaper than it was 18 months ago. So, for the same net operating income and I’m going to basically do a quick math for you. If you have a property with a $1 million net operating income, NOI, in Q1 last year, you were paying 29 million and change. Today, you’re paying 21 million and change, right? So, that’s a 29% difference, right? So, $29 million property in 2021. Now, has that property itself changed? No. Its net operating income is the same.

Josh Cantwell: That’s the underlying debt coverage. Yep.

Neal Bawa: Right. It’s just the underlying debt coverage. It’s just the fact that you now have, you know, your DSCRs have changed and your LTVs have changed. And anyone, absolutely anyone that believes that this is the new normal, the new normal is lenders are giving you 55%, 60%, the bridge market is pretty much closed off because of the interest rates being so high that this is the new norm, that this is how our world would look like in two years. If you’re thinking that you are going to beat yourself to death two years from now, because…

Josh Cantwell: Absolutely.

Neal Bawa: Because you would have missed the same opportunity that you missed in 2009. So, when an asset’s income doesn’t change and its value goes down 29% or up to 29%, I must point out that many markets, the decline has really been closer to 16% or 17%. There are markets where the decline has been over 30%. You know, Phoenix, this is the market that’s declined the most in the U.S. because it had a very large amount of new inventory coming up. But there’s many markets where the decline is 17% or 18%, realistically speaking. But you’re also getting better terms. You have more time now to close properties. There’s a lot of flexibility that’s not just dollars. So, you just got more room to play in the most part.

Josh Cantwell: Less hard to earn this money. Longer term to close.

Neal Bawa: Exactly. Less hard. I mean, I’m putting in less than half of the earnest money that I was putting in 18 months ago when I was making offers and not winning. Thank God I didn’t win those offers. So, bottom line is that we are in a much better environment today because if we are to simply state that we are buying this property based just on today’s environment, then why were we buying properties 18 months ago? Because 18 months ago they were 3 cap, right? So, all of those investors that today say we shouldn’t be buying multifamily, what were you thinking 18 months ago when people were buying their properties at 3.3 cap and you were the one putting $100,000 on a 3.3 cap property? What were you thinking then? The truth is today’s market is significantly more rational because the assumptions of the market are based on worst-case interest rates, right? Where 18 months ago the market was completely irrational because it was based on best-case interest rates. So, we’ve gone from best case to worst case. The real truth of the marketplace is somewhere in the middle. I don’t know where in the middle it is. I don’t know when we get there. I think we’re going to get there in 18 to 24 months.

But if you buy a property based on worst-case scenarios, then you’re paying based on worst-case scenarios. And then 24 months from now, you have some middle-case scenario that comes up, you’re in an incredible position. In my mind, you will never go back to that $29 million price. That was crazy. That was COVID. But I think we’ll go back from the 21 million today to a $24 million or a $25 million price. Well, then over your hold, you’ve gained $2 million or $3 million, $3 million just in cap rate changes. So, I don’t expect cap rates to go from 4.72 cap aggregate to 3.36 but I expect them to drop to 4.1 or 4.2 at some point when situations get better. And if you don’t believe in this, then you actually don’t believe in the monetary system at all. Nothing to do with multifamily. But the way the monetary system works is over the last 60 or 70 years we’ve had ever lower interest rates and there’s very specific reasons for that that have nothing to do with real estate.

So, you look at the last 50 years, you see lower interest rates. And even if you captured the last time we had high-interest rates, which was 1974 to 1984, those ten years, even then, factoring that in we see a lot of downward decline. We see a continuous downward decline. So, you’re going to have these times when we’re going to do something, it’ll trigger inflation but our baseline is ever lower and we can talk about that. And that’s the way that the monetary system of the world functions independent of real estate because real estate is just a booger on the nose of the international monetary system. We’re not even the nose. We’re like booger, right? So, bottom line is nobody is making decisions for the world based on how commercial real estate works. They don’t give a f*ck really about commercial real estate. The Federal Reserve doesn’t care at all about commercial real estate. They do care about single-family housing, by the way, because it’s large enough to upset our economy. And so, when I am looking at things today and I’m seeing bearishness, I just don’t understand how people think. The way that they apply logic is bizarre.

Josh Cantwell: Neal, so much about what you said that I totally agree with. I don’t have and look at all the metrics to the depth that you do, but I look at them a lot. There’s a few things there that support and prove what you said. One is we still are not building enough supply of any housing, whether it’s apartments, whether it’s single-family homes. And so, the prices for rent has to go up long term. The price of single-family homes are going to go up because there’s not enough supply. It’s just supply and demand. That’s number one. Number two, if the Federal Reserve raised rates to the point where they’re at now in order to combat inflation when inflation was at 9.1 last June, and now it’s down to four as of the last reading, which was I think a week ago.

Neal Bawa: Well, actually, yesterday. Yesterday’s CPI came out. And I’m dazzled and delighted to tell you it’s 3.1. Core CPI declined from 4% to 3.1% from May to June.

Josh Cantwell: That’s incredible.

Neal Bawa: This is the best reading we have had in the last 18 months. Core CPI is at 3.1 today in July.

Josh Cantwell: That’s fantastic news, right?

Neal Bawa: That doesn’t mean that the Fed’s going to cut rates tomorrow. That means that the slope that the Fed wants is exactly what they’re looking for. They’re getting what they want.

Josh Cantwell: So, the forward idea, if you’re an investor, is can you theorize that in two years from now, three years from now, that interest rates are going to be lower than they are today? The forward curve, they’re all lower. So, if you’re going to buy today at a discount, this is now let’s get down to sixth-grade math, real basic thought process. If you were going to buy two years ago when caps were at 3.2, why wouldn’t you buy today when prices are down 17%, 18%, 29%, depending on the market, when your forward cost of money, whether it’s a refi, the forward value of that money is going to be cheaper, which means cap rates are going to come back down. Why wouldn’t you buy today? The challenge is, is that most people, they’re afraid of the market today. But you have to, as an entrepreneur, as a leader of any business, of any type of investments, you have to buy when the market is down in order to see the future, to see the value of that, to see it go up.

Neal Bawa: You don’t have an option. You don’t have a choice.

Josh Cantwell: You’ve got to be buying now.

Neal Bawa: You don’t have a choice because everyone in the world loves multifamily. Institutionals love multifamily. Money from outside the United States like Canada or Saudi, they love multifamily. So, when everyone loves multifamily, your only real way of making money today, when prices are up 3X from ten years ago, multifamily on a per dollar basis costs roughly 3X, 3.5X what it did ten years ago so today you need every tailwind you can get to make your investors to double their money or close to double their money. You need every tailwind. So, you have to make these decisions. You have to make forward-looking decisions. If you make decisions based on today, then the truth is, over the last five years, at no point should you have purchased a single multifamily property, none over the last five years. So, if you bought one, you made a forward-curve decision. You made a decision based on higher rents and prices in the future. If you’re comfortable with the idea that in the future rents will be higher, then why aren’t you comfortable with the idea that inflation will be lower?

I read from today this is today’s article. This is CNBC. This is the headline, “Inflation rose just 0.2% in June, less than expected as consumers get a break from price increases.” Now, here’s the really cool news. Core CPI, which is what has been the Fed’s hesitancy, right? When you exclude food and you exclude energy, which are volatile items, core CPI is what the Fed was looking at and they were like, “It’s still too high.” In June, core CPI increased by 0.2%. On an annual basis, it’s 4.8. But isn’t the Fed looking at today? Because what happened a year ago is not the Fed’s concern. The Fed’s looking at it today and core CPI for the first time since we’ve started this campaign was in line with what the Fed wants on an annual basis.

Josh Cantwell: Because you multiply that times 12, you get 2.4.

Neal Bawa: On an annual basis, you should be happy with 2.5%. Exactly. So, 0.2 multiplied by 12 is 2.4. And keep in mind, because this core CPI was 0.3 a month ago, it’s slowing. So, not only is it now within the Fed’s typical band that they like, which is 2-ish percent, it’s still slowing and the Fed knows that it will continue to slow. Does this mean that they’re going to cut interest rates next month or even next quarter? No. My point is the Fed’s getting what they want. Inflation’s coming down 0.2% core CPI. Find me another country in the world that is there. Canada is at three times that level. The UK is at four times that level. The Eurozone is at three times that level. New Zealand is at five times that level. The United States was the only country in the world that raised interest rates this fast. At one point in five months, we raised them by 3% or 300 basis points, 75, 75, 75, and 75. Four meetings in five months. No one else in the world did that. Why can we do it? Because we’re the reserve currency of the world. Anyone else tries it, it crashes their currency. We happen to be the reserve currency. We can do it.

And what the Fed did there, those painful four months where we increased rates by 300 basis points, that happened last year because they actually slowed down, start December onwards. But the way federal policy works, the way monetary policy works, it takes 7 to 8 months for a rate cut to wind its way into the real economy. And so, while those super aggressive 75 basis points multiplied by four, those hits, we took them in the last quarter of last year, but now we’re getting the benefit of those because now we’re seeing core CPI 0.2% in July.

Josh Cantwell: Fantastic. So, from an execution perspective, for those investors that are still active buying, raising capital, a lot of investors have said, well, raising capital from private investors, limited partners is harder. Maybe I was paying a 6 pref and they could get 5.5 in a freaking CD at the bank and there is no risk in that or a 5% on a government bond. There’s no risk in that. And they’re having trouble recruiting capital. What I’m hearing you say is this really comes back to painting a picture for investors that if they’re investing today and they’re able to get a 15%, 18% discount on the purchase price, you’re still painting a picture of what that investors investment is going to look like over the next 3 to 4 to 5 to 7 years. And you can paint an opportunity for investors to double their money. You can paint an opportunity because the forward curve goes down, which means cap rates go down, which means values go up, rents are going up.

We still have a supply-demand problem, which we’re probably never going to fix because we’re so far behind on supply versus demand. All of that becomes a story or a presentation or a pitch to investors that really an investor can get behind. Because many people are like, “Well, my LTVs for my lender is 55%, 65%. I got to recruit more capital but there’s less investors out there.” That’s not really true. Investors still want a great return on their money. They’re just not hearing the story that you’re telling.

Neal Bawa: Absolutely. So, right now, it’s all about telling the investors, “You missed 2009. Don’t miss this one.” It’s not as big of a discount but it is a very substantial discount and people are going to miss it because of fear. And I often hear syndicators, people like us, Josh, they say this is a very common statement. You’ve heard it a thousand times. I wish I was in multifamily back in 2009, 2010. My question is, do you know how hard it was to raise money in 2009?

Josh Cantwell: Oh, my God. No liquidity at all.

Neal Bawa: Today is a piece of cake. Back in 2009-2010, people felt like the real estate industry, the housing industry would simply collapse. There were a thousand articles and a thousand videos on YouTube about complete and utter collapse and prices going down 80%. I don’t see any of those kinds of things on YouTube today. So, the fear back then was a lot more. So, be careful what you wish for. The truth is you don’t want to be back in 2010 trying to raise syndication money because nobody’s going to give you that money. So, what really, at any given point of time, you’re in one of two conditions. One, you’re overpaying and you have all the investors in the world which is what we saw in 2021 and a half for 2022. The other one is you’re paying the right amount but now you have to fight for investors. So, my feedback is this, you should be whatever number of webinars that you are doing for your investors to tell them about multifamily and the conditions. Take that number and triple it. That’s all you have to do. Nothing else is needed.

Take that number, triple it, and you will have the money that you need because investors want to make investments. They want somebody to talk them out of their fear because, clearly, this fear of today’s market is irrational. Prices are lower. NOI is up but you don’t want to invest, right? It’s an irrational fear. So, when people have irrational fears, they want to be talked out of it and you have access to data. You have access. Hell, copy my presentations. I do a whole bunch of them. Copy mine. I’m not going to come after you. Bottom line is the data is out there. We have access to it today. We’re not paying CoStar $100,000 for this data. Just go to YouTube and take your messaging and triple it, and that’s what you need to do. So, that’s my first advice. Take that messaging and triple it, right? That’s my first advice.

Second piece of advice, which is absolutely critical, is this: Today is actually the best time since 2009-2010 to go into contract. And I’ve been saying this for about six months. I’ve been saying this. You want to be in contract in Q3 and Q4 but you want to close in Q1 because Q1 so, today, core CPI is already at 0.2%. So, when do you get the benefit of this core CPI when it comes to interest rates, right? The answer is, unfortunately, it takes time. You’re not going to get the benefit next month. You’re not going to get it next quarter. But in Q1 of next year, if you were still in contract on your property, okay, that’s when you get the benefit because what happens is at mortgage rates, a lot of people think are set by the Federal Reserve. The Federal Reserve doesn’t set mortgage rates. They set the overnight funds rate, which is what the banks lend to each other and that’s what you hear the Fed is raising rates. They’re raising that overnight rate.

Now, that overnight rate then impacts the prices of bonds. So, the world’s largest asset classes, bonds, not real estate, not stocks, but bonds. And so, the price of bonds changes and it takes about three or four months. Now, the price of bonds changing is what changes the price of mortgages. So, when Fannie Mae and Freddie Mac are studying single-family mortgages or multifamily bridge lending prices or all those kinds of things, it’s really based on the bond market and how it’s reacting.

Josh Cantwell: Five-year or ten-year Treasury all day.

Neal Bawa: Exactly. So, now that you see the 0.2%, you’re going to see changes in the Treasury market, the one-year to five-year, the two-year Treasury market is going to change. And that change cascades and takes 3 to 4 or five months. It is my belief and I’m saying this on record in July 2023, that if you manage to stay in contract on your property until 2023, you’re going to see significantly lower interest rates. Why? Because I’ve seen it proven again and again and again. We do not need the Federal Reserve to cut interest rates for interest rates to go down because interest rates, mortgage rates are predictive in nature. They are like the stock market, right? So, the stock market usually will come out of a risk. It will go into a bull market during a recession because they’re predicting the end of that recession. March 2009 was the bottom of the stock market. Most people would think it was 2010 or 2011 or 2012. No. The bottom of the stock market was March 2009. The stock market is predictive. Mortgage rates are equally predictive. They try and predict the future.

So, you do not need the Federal Reserve to cut interest rates. You just need the people that set these rates for mortgage rates to believe that the Federal Reserve is going to cut interest rates. And then you start to see those rates come down.

Josh Cantwell: So, you saw last week, Neal, the jobs report came out and the amount of jobs created were two times what they expected. They thought 250, it came out at 500. And the five-year Treasury and the ten-year Treasury jumped about 30 basis points. Why? Because the market was predicting that the Fed would keep rates higher, thinking because the economy was so strong because there are so many jobs. But now, as we look at what actually is going to happen with CPI, this is a different factor. So, jobs is one, CPI is the other one. What the Federal Reserve really doesn’t care about, they don’t really care as much about the jobs. They care about inflation. They know that their primary objective is to be at, I believe, it’s 2%, 3% of regular inflation every single year. Now, that you said we’re at 0.2 on an annualized basis, 2.4, they’ve hit that goal really for one month. Now, if you start to see that trend continue, you know that the market’s going to react and say, “Now, we’re going to expect the Federal Reserve to drop rates,” which means bonds will drop, which means interest rates will drop. It has nothing to do with the actual Fed funds overnight rate. It’s about perception of what the Fed will do in the future.

And so, everything that Neal has said, we’re tracking it, following back to the degree that he does. That’s why I brought him on the show because I can learn from him. But we believe the same thing. We believe that getting in the contract now, we believe that buying real estate now interest rates will be down because primarily inflation is down because of that and also because of the fact that supply and demand people are still going to need real estate to live in single-family homes, multi-family homes. It’s an asset class that we believe in for the long term. So, if you were going to buy before, still a great time to buy now, but ultimately close your loan the very end of this year or early next year because you’re going to see a decrease in those interest rates. Whether it’s a bank loan, whether it’s permanent financing, Fannie, Freddie, your rates, I don’t think the bridge market’s coming back any time soon. I really hope it doesn’t because a lot of the new guys, the new operators, the speculators use a lot of bridge stuff. I’d rather than be out of the market, less competition, prices will stay down for a while. So, I’m fine with Fannie, Freddie, and bank for now. And we’re going to really focus on closing a lot of deals in Q1 and Q2 of next year.

Neal Bawa: I think that’s really the key point.

Josh Cantwell: Fantastic stuff, Neal. You said this is your first podcast in a month. You’re on fire today, my friend.

Neal Bawa: Well, hey, I traveled around ten cities in Europe. It cleared up my mind. I had a chance to really get away from work and think. As you know, when you’re doing these things, you still have time to think, right? I’m on a two-hour ferry to the top of Mount Titlis. I’m just sitting there and thinking about things, and it starts to become more clear. When you’re working every day, 12 hours a day, you’re in that fog of war and that fog of war sometimes will lift when you go away for a month to Europe. And I looked at this and I said, “Why am I worried about the fact that it’s harder to raise money?” It’s always going to be this way. You’re either going to have a money-raising problem or you’re going to have an overpaying problem. There’s no middle ground. There’s just one of these two things. And the question I’m asking myself is which of those two things I want? And the answer is clear. If I overpay, I can’t actually make money. I am an indentured servant for free for five years and I still don’t make money because I overpaid by $3 million or $4 million and that $3 million or $4 million was really the money that was going to come to me. My investors have pref, so they’ll make money anyway.

But for me as a syndicator to make money, what I’m most afraid of is overpaying. So, bottom line is all that I need to do right now is invest more of my time in investor education. I am not talking about calling every investors and convincing them. I’m talking about if you are doing webinars every three months, do them every month. If you’re doing them every month, do them every two weeks, every one week. This is a great story to tell investors. They are not blind, they are not dumb, but they are fearful.

Josh Cantwell: Yeah. They’re fearful. They got to overcome that. And they don’t want to miss it either. They don’t want to miss the next 2009. They want to be buying at the bottom and they want to be involved, but they need someone to hold their hand. Like, who would have told them, like a stockbroker to say, “Buy at the end of 2009. You’re never going to regret it.” Nobody would come off their money. Everybody was afraid of liquidity. They wanted their cash. So, it’s about education and all these fundamentals, Neal, that you’re talking about is going to help them. They need to make good decisions.

Neal Bawa: There’s one more. Any time anyone says to you, “I’m making 5%,” the answer should be, “Good for you. You’re not going to make it in Q4 this year.” Because what happens essentially is these 5% money market rates that you’re getting or bank rates, they are predictive in nature. So, when the market realizes core inflation is down to 0.2%, all of a sudden that bank is going to say, “Okay. Well, that 5% is now at 4.” So, in Q1 next year, you would be lucky to make 3%. In Q3 next year you’d be lucky to make 2%. That’s your investment decision that you want to make 5% for the next two quarters? You’re not an investor, right? You’re a speculator. Investors invest with a three, five, seven, ten-year timeframe, time horizon. So, on the one side, you’re getting these ridiculous discounts which are only available because of this temporary spike in interest rates. On the other side, you’re saying, “I want 5%,” for how many months? Three months, six months? What happens in Q1? What is your business plan to make money in Q1? Oh, I’ll make 3%. What’s your business plan to make money in Q3 next year? Well, I’ll make 2%. And then what’s your business plan to make money in 2025? I won’t make any money. That’s your plan?

Josh Cantwell: Right. That’s so good, Neal. That’s so good. Listen, last question, Neal, and I’m going to turn you loose. You’re on fire today, man. You haven’t missed a beat, even though you’ve been out of the country for the last two or three weeks. How many? Now, you don’t know the number but just talk to me about this high level. How much of our competition in 2021 and 2022 has been dequeued out of the market because they bought at the peak, they bought with bridge financing? Their rates have now adjusted. Hopefully, they bought a recap but it still hasn’t adjusted and because of the mortgage rates being so high, they’re not making any money. And now they’re basically like, “Why the hell did I do that? I’m never going to do that again.” And their investors are pissed off because the deal’s not flushing out and they’re going to kind of get just dequeued out of the market. Do you have any sense or just even a guesstimate philosophy of how much of our competition is now going to be out of the market as the market rebounds? Because they’re dequeued because of the decisions they made last year and the year before?

Neal Bawa: I do because I have a rescue fund. So, at the industry’s largest conference which is called the Best Ever Conference. This year, it was in Salt Lake City, and it’s actually co-located with two other conferences so it’s really like a three-pack of conferences. I presented, I opened the conference, the Best Ever Conference with a presentation called Crisis Bootcamp: How to Save Your Property. So, for all of these people that you’re talking about that have never ever even, they don’t know how to spell the words cash call. They don’t understand how difficult cash calls are, what are the best steps. So, I basically spend half an hour explaining the best practices of cash calls and how to do them, how to succeed, and things like that. And since then, I’ve had an incredible amount of feedback from the syndicators. So, I can tell you so far dequeue is not even 10%, but I think by mid-next year, mid-2024, a third of the syndication industry should be gone. One-third of these people will simply not be able to pay their bills and will go back to their IT jobs because really a lot of us indicators came from IT jobs, right?

Josh Cantwell: ITs, doctor. Sure.

Neal Bawa: So, the IT, doctor. So, a number of them will basically go back to their day job because they have to run an organization. They have expenses to pay. And for the last two or three years, I mean, investors have been so easy and it’s been so easy to get properties that they’ve been able to pay their expenses. And so many of them in the last two years have switched from part-timers to full-timers. I mean, the last time I had a day job was 2014, right? So, there’s so many of us that are full time and so that the portion of the industry you’re talking about are the people that went from part-time to full-time the last two or three years. And I think one-third of the entire syndication industry will be gone in the next year. Now, in terms of whether it’s 50% or 60%, maybe that could happen, but that would require the interest rates to stay high into 2025 because what’s really going to save some of these people is that just as they get to the point where they can’t raise money, rates will start to go down and that will create positivity with investors and I think that will happen a year from now. But over the next year, a third of the industry goes down. That is good news because a lot of these people didn’t really deserve to be there. They just sort of rode a wave as it went up.

Josh Cantwell: Yep. And what I take away from that, what our audience should be taking away from that is that as interest rates start to soften and come down in the middle of 2024, as Neal said, like interest rates are down, bond rates are down, CD rates are down, which means mortgage rates will be down for commercial loans because it’s based off the bond. At that same time, roughly a third of these syndicators will be really struggling with their deals. They’ve been fighting the good fight for a year, maybe 18 months, two years. They’re not making any money. They might get bailed out a little bit by lower interest rates but my guess is they’re not going to be able to refi. Their bailout is going to be someone like Neal or someone like me or someone like our audience who now can recruit money from investors, qualify for a new loan, and then buy that property at some sort of distressed price.

Neal Bawa: Right. And there is going to be distress. So, I really loved the latest webinar from Yardi Matrix because what they did was they broke down the distress in the United States, the coming distress in multifamily. They broke it down into numbers. That made a lot of sense for me. So, my first takeaway from that was there is not going to be distress in the multifamily market in the United States. There is going to be distress in the syndications segment of the multifamily market. The multifamily market is massive in the United States. When you look at larger properties, so ignore all the small ones that are 10 units, 20 units. Looking at the larger properties, there’s over 100,000 units, 100,000 properties. The total number of properties that are likely to be subject to distress and I’ll explain what that means is 3,000. So, Yardi Matrix has studied those properties. Why? And you think about like 3,000 sounds really small. There’s 100,000 properties. What happens to the remaining 97,000?

The short answer is a massive number of those properties were held by people that are not syndicators. Either they had their own money or they had some investors but they’re holding for the long term or they have long-term loans, so they don’t have bridge loans. They’re not floating. They have long-term loans. Or these are properties that may have a short-term loan. Maybe they have a bridge loan, but they were purchased in 2017 or 2018. They weren’t purchased in 2021. And because they were purchased in 2016, 2017, the value of that property has increased so much that at worst, they can sell it if they want. If they can’t refinance, they’ll just sell it in the market. It’s not distressed. The asset is still profitable for its investors. It’s just a lot less profitable than it was 18 months ago. So, maybe they just held on too long and instead of making 4X, they’re now making 2X or 1X or whatever but it’s not distress. Distress is what brings prices down. If you’re just saying, “I’m selling my property,” there’s no distress. You have no pressure because what’s the worst that can happen? Somebody gives you a little bit less and you’re okay with that.

Distress forces people that are sellers to make bad decisions, like giving multimillion-dollar discounts. The properties in the United States that were purchased in the last three years with the bridge loans that are coming due are 3,000. There are 3,000 such properties in the United States. So, the total ecosystem of high risk is 3,000 properties out of let’s call it 100,000 or 50,000. So, this isn’t a multifamily distressed scenario that we’re going to see over the next nine months. It is a syndication industry, multifamily distressed scenario, and I expect that half of those 3,000 properties will be sold. Now, the remaining half, what happens to them? The answer is the banks will let you kick the can down the road.

Josh Cantwell: Loan modification. They push it down the road.

Neal Bawa: Exactly, right? Because where is the bigger risk for the banks? So, the bigger risk is non-multifamily commercial real estate, right? Non-multifamily commercial real estate, because you have to understand this, of all of the real estate classes, multifamily is special. Multifamily is the only commercial real estate asset class where there is a government body whose job it is to give you loans. Actually, there are two, Fannie Mae and Freddie Mac. Their job is to take $70 billion or $80 billion a year and inject it so that liquidity is maintained. Now, neither one of those two bodies has any kind of mandate for hotels, for self-storage, for office, for any of these other asset classes. There’s no mandate. There’s no government or Congress mandate to maintain stability in any of these other asset classes. So, the exposure that midsize banks in the United States and midsize is sort of defined as 250 billion in assets or less, right? Those kinds of banks like First Republic Bank. The midsize banks have low exposure, 19% to multifamily, but high exposure to office as much as 45% and retail and hotels. So, office, retail, and hotels.

Yesterday, a firm in Dallas returned 19 hotels back to the bank. So, this is a big deal, right? 19 hotels at the same time. It was a group called Ashford, not the group that’s in multifamily. There’s a different group called Ashford. And this Ashford group basically returned to 19 hotels in one day back to the bank. So, the hotel distress which we haven’t heard anything about so far is starting and that distress is starting later. Why? Because hotels recovered six months later from COVID than multifamily did. We had access to all this free money from the government for our tenants. So, they started paying but the hotels didn’t have access to that, so they just had to wait until travel return and that happened in the second half of 2021. So, hotel distress is nine months behind multifamily distress.

Josh Cantwell: And there’s no mandate for the banks to lend on that stuff.

Neal Bawa: Nothing at all.

Josh Cantwell: So, banks would just say, “I’m not touching hotels. I’m out.”

Neal Bawa: Exactly. Exactly. So, here’s what’s going to happen. What is likely to happen is with the banks, with those hotel lenders having less options, if you’re a midsize bank, you’re already going to get a lot of assets of two kinds, office and hotels. Less hotels, more office back in the coming year. So, if you’re going to get a huge number of keys back and you’re a lender and you absolutely hate that because you’re the worst party in the world to be managing a hotel or managing an office complex, especially with the office having fundamental demand issues, which obviously we don’t have in the U.S. Hotels don’t have any fundamental demand issue either. It’s just they can’t refinance. So, office, though, is different. It has very fundamental structural demand issues that may not go away for 10 years or 20 years or ever. And so, if you’re a bank and you know you’re going to get a lot of keys back from offices and a bit smaller portion of your portfolio is lending to multifamily, it makes perfect sense to kick the can down the road on the multifamily because you can’t kick the can down the road on the office. They don’t have tenants.

Josh Cantwell: That’s powerful. Yeah.

Neal Bawa: So, what is going to happen is that as we start seeing more of this distress in Q3, Q4, and Q1 of next year, you’re going to see banks basically cutting deals and they’re not going to cut like sweetheart deals. So, don’t expect that. But they might cut back that deals. And the sort of deal that I’m expecting is, “Fine. What we will do is we’ll allow you to pay 70% of your mortgage and we will add the remaining 30% to your loan so that a year or two years from now, when cap rates adjust, you can sell your property at cost.” None of these deals are sweetheart deals. None of them are going to result in anyone making any money but they could result in the distress being spread out over two years, two-and-a-half years, which is what the banks are after instead of it all being focused in the four quarters that are coming up, Q2, Q4 of this year. Q3, Q4 of this year, Q1, Q2 of next year, that’s where the distress is really focused. And so, you take that one year and you spread it out over two-and-a-half years, and some of those properties at the end of those two-and-a-half years are saved. Why? Because cap rates adjust, LTVs adjust, and they’re able to refinance.

Today they might need $6 million or $7 million for a property to refinance but 18 months from now, they might need 1 million or 2 million and they might be able to raise 2 million, right, especially if it’s a good property. A lot of these properties are doing well. There’s nothing wrong with the property. It’s just your mortgage payment is the problem. So, if you can stretch it out and we saw this happen in 2009. The banks are still stretching all the way to 2013 and 2014. So, it happened. The banks know that their exposure on the office side is a debacle. I mean, it’s just an unbelievable debacle that’s going to happen because if you look at midsize banks and their balance sheets, they have a lot more office than they do multifamily. They have a lot more retail than they do multifamily. They have a lot more hotel than they do multifamily. In fact, multifamily on the balance sheets of midsize banks is the smallest of all the chunks in terms of percentages. Why? Because Fannie Mae and Freddie Mac are competitors to midsize banks where there is no competitor of that kind for either retail, hotel, or office. So, you are going to see this distress get stretched out because the banks don’t want too many keys back at once.

So, that is extremely likely to happen. I’ve studied this before. I’ve talked to banks, and the banks are like they are kicking the can down the road. They’re like, “Whatever we can do, maybe,” but what they don’t want to do is take losses. They’re like, “Okay. So, what we’ll do is you have a $1 million mortgage in a year or a $2 million mortgage, and you can pay me 75% of that, and then 25% I’ll escrow it into your bank balance. If you sign that to me, fine.” Some of their loans, they’ll turn from non-recourse into recourse. Those kinds of things. The banks will play tricks. But when I am looking at the overall situation, about half of the properties of those maybe 40%, 50% of those 3,000 properties can be saved by simply kicking the can down the road. The remaining half, they’re in the Jesus can’t save you category. All of those are going to come to market in a distress sale in the next five quarters.

Josh Cantwell: Yeah. Are there specific markets that you think are more at risk for those 1,500?

Neal Bawa: Sure. The same markets that we all loved.

Josh Cantwell: Yeah. The gateway markets, Phoenix, Dallas, Fort Worth.

Neal Bawa: So, a year ago or two years ago the big gateway markets, right? So, all three of the Texan markets have exposure, right? So, the Big Three, Austin, Dallas, and Houston have exposure. Nashville has exposure. Phoenix has the largest exposure because Phoenix has the distinct bad luck, even though its demographics are incredible. It has a distinct bad luck of also having the largest amount of new apartment inventory anywhere in the United States coming in in the next 12 months. So, that’s going to put downward pressure on rents. And downward pressure on rents means it’s hard for your bank to cut you a deal. So, I think we’ll see Phoenix challenges, a few other metros, but definitely Texas metros, we’re going to see some. So, that’s really where it comes down to. This is going to be a city-by-city distress that is going to get sorted out over the next five quarters. But anyone who says multifamily is in distress has not watched the Yardi Matrix webinar. They simply don’t know how to do math.

Josh Cantwell: Love it. Neal, listen, this is unbelievable information. I appreciate you coming on the show today refreshed, recharged, rocking and rolling. For those people in our audience that want to follow you, want to get more information, the first thing you can do is go back to the first episode that we recorded. Now, that episode was three years ago, but take a listen to it because it’s phenomenal information. It was Accelerated Investor Episode #121. You can catch it on iTunes, catch it on Spotify, catch it on YouTube. But, Neal, people are going to want to follow you and what happens with you and the advice that you give and the metrics that you’re sharing with us today? They’re going to want to follow it on a deeper level over the next 18 months or so with you. Where can they do that? How can they follow along?

Neal Bawa: The best way to follow me is either to just look me up by name. I am lucky enough to be the only Neal Bawa on the world wide web. So, N-E-A-L B-A-W-A and you’ll see several thousand hits. They’re all me. So, all the good news is me and the bad news is me. And the second way, which I prefer, is that you go to That’s Multifamily University. That’s, and that’s where we talk about and we do 20 plus webinars a year. They’re data-driven. They’re very fun. They’re very interesting. We typically get about 30,000 people that register for these webinars every year. This year I might get more because of the distress and we talk about lots of things. My next webinar, by the way, is the impact of artificial intelligence on our world. So, I do lots of interesting things. I did one last year on climate change, both the pros and cons and the fallacies and what’s real and what’s not. But every 60% of the webinars are in some way about real estate, either single-family or multifamily. And every once in a while, we’ll throw in other asset classes. I love doing those webinars. I love engaging with large audiences, so it’s a lot of fun for me. That’s the best way to connect with me.

If you’re interested in being an equity partner, please come on in. Just send me an email at neal@mycompanyname which is And we can talk about that. If you want to invest, go to but if you really just looking to learn and feel more comfortable about where multifamily is going, go to

Josh Cantwell: Awesome stuff, Neal. Listen, thanks so much for coming out sometime today. So glad you showed up with fire today. Thanks for being here and we’ll see you next time on Accelerated Investor.

Neal Bawa: Sounds good.

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