Goodegg Investor Letter – Q1 2024

Here we are, at the dawn of another year. 🌄 And while it may seem like “business as usual” as you get back into the flow of things, especially now that the eggnog daze has subsided, the year ahead may be anything but “usual.” 

For one, 2024 is a Dragon year 🐲 and according to the Chinese zodiac, Dragon years tend to be fiery years full of change and new beginnings.

On top of that, this is a Wood Dragon year (the element of wood adds even more fuel to the fire 🔥🔥🔥), meaning we’ll likely see evolution, improvement, and abundance – a perfect time for rejuvenated beginnings and setting the foundation for long-term success. 

Now, even if you’re not big into zodiacs or astrology, you’ve likely seen the writing on the wall (including some indicators we’ll point out below) that 2024 is likely going to be a banner year – a year in which we’ll see a lot of aftershocks, shifts, and opportunities. 🚀

At Goodegg, given that our HQ is based in San Francisco, we’re no stranger to earthquakes and aftershocks. When tectonic plates shift, the main shock is then followed by aftershocks in outlying areas. 

In 2022 and 2023, the major tectonic shift was interest rates, which have been the talk of the town over the last couple of years and have played a significant role in curbing inflation, which is the primary purpose of increasing rates.

The Federal Reserve has raised interest rates 11 times since March 2022 – the fastest pace of tightening since the early 1980s – back when people still carried Walkmans, shoulder pads were all the rage, and Cabbage Patch Kids were on every child’s Christmas list. 🤓 

We’ve already seen a fair bit of impact from this main shock, which – good news – may be at or nearing its end, as the Fed recently announced that they intend to keep rates steady and may even begin to lower rates as early as Q1 2024. 🙏

The aftershocks will likely continue to ripple out, both in the residential real estate market as well as on the commercial side, and we’ve been working hard to make sure that we’re ready for both the challenges and the opportunities that lie ahead. 💪

So, we hope you’ll join us in the dragon’s den as we get fired up and prepare to slay the year ahead. 🔥🐲⚔️

Looking for the quick summary? Jump ahead to the key takeaways for each section below:

 

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 2023 Multifamily Review

Throughout 2023, the multifamily market maintained relatively solid performance, albeit with growth below historical long-run averages. Demand turned positive in the first quarter and reached healthy levels by the third quarter, driven by a resilient labor market

However, the influx of new supply surpassed demand, resulting in subdued rent growth and declining occupancy rates in certain markets. In other words, because a number of newly developed apartment communities came online in 2023, there were more available apartment units to rent, particularly in select markets, which means that the rent growth and occupancy for existing apartments in those markets stayed flat or went down.

On top of that, volatility in interest rates, which increased sharply for most of 2023, contributed to a slowdown in the multifamily investment market. While cap rates experienced a gradual increase since mid-2022, that increase was slower than the pace of interest rate increases, thus adding further downward pressure on property prices.

Because of these shifts, we’ve been particularly cautious as we analyze and consider new acquisitions during this time, particularly within the multifamily market. Gems like Encore Metro at Millenia in Orlando, Florida, which we acquired in Q4 2023, continue to be few and far between, but that doesn’t mean we haven’t stopped looking.

Our criteria for new acquisitions remain as robust as ever, and we continue to seek out and analyze potential new opportunities, particularly within the realms of preferred equity, multifamily, and select-service hotels.

The economy demonstrated continued growth in 2023, with real Gross Domestic Product (GDP) growing at an annualized rate of 4.9% in the third quarter, compared to just over 2% in the first half of the year. Moody’s Analytics projects the annual GDP growth to end the year at 2.5%, representing a reasonably healthy rate. 

While the GDP growth is projected to cool off a bit, that gives the Federal Reserve more leverage in backing off interest rate hikes as the economy normalizes. This should in turn lead to lowered interest rates for real estate investors which is a positive development for the 2024 outlook.

Economy In General Poised For Soft Landing

The economy appears to be on track for a soft landing, although it may be bumpy throughout [2024],” said Sara Hoffmann, director of Multifamily Research at Freddie Mac. “In 2024, the multifamily market may see additional strain from high levels of new supply and continued high-interest rates but remains a favorable asset class given the state of the for-sale market and long-term demographic trends.”

We tend to agree – that multifamily remains a very strong asset class with a bright future, though immediate new acquisition multifamily opportunities might require some digging to find. In this market, both patience and resourcefulness are key.

New Construction Completions To Pull Back In 2024 & Stabilized Occupancy

Following a peak of completed units in 2023, reaching a 40-year high, the U.S. multifamily market is anticipated to experience a 25% reduction in 2024, contributing to market equilibrium. 

The anticipated decline in completions comes at a crucial time, considering the previous two years saw construction outpacing demand by 607,000 units, resulting in a national vacancy rate increase from 4.8% to 7.6%. 

If absorption – the net difference between move-ins and move-outs – continues its upward trend from 2023 and complements the slowdown in the 2024 delivery schedule, the multifamily supply/demand imbalance could gradually move toward equilibrium.

CBRE believes this decline in starts means that new deliveries will be reduced to less than half the current level by 2026, paving the way for a strong recovery in both occupancy and rent growth. What this means is that the future for multifamily is bright.

Despite near-term economic weakness and vacancy rates that will rise further above their pre-pandemic averages in 2024, enough demand should keep the average occupancy rate above 94%. Developers have correctly anticipated where demand will support new supply based on job growth figures.

Renting To Continue To Be More Attractive Than Buying

Multifamily real estate is playing an important role in alleviating a severe shortage (at least 3.1 million) of single-family homes that is contributing to homeownership challenges, particularly in a high-interest-rate environment. 

The premium for an average monthly mortgage payment for a newly purchased home vs. average monthly rent is expected to remain above 35% in 2024 versus 52% in 2023 according to CBRE. 

This bodes well for multifamily investments, as the challenges of buying a home mean that many will continue to rent, thus maintaining strong rental demand.

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Key Takeaways For Multifamily in 2023:

  • Multifamily Market Performance: In 2023, the multifamily market showed steady performance. While it didn’t match historical growth rates, it saw positive demand thanks to a strong job market. However, an excess of newly constructed apartments caused rent growth to slow and occupancy rates to dip in some areas.
  • Interest Rate Volatility: 2023 saw sharp increases in interest rates, affecting the multifamily investment market. While cap rates gradually rose, they didn’t keep pace with interest rates, putting pressure on property prices.
  • Caution in Acquisitions: Due to these market shifts, we’ve been cautious about new acquisitions, especially in the multifamily sector. We’re still on the lookout for promising opportunities, with a focus on preferred equity, multifamily, and select-service hotels.
  • Economic Growth: The broader economy showed continued growth in 2023, with a healthy GDP growth rate. This growth, while expected to cool somewhat, will likely lead to lower interest rates in 2024, which can benefit real estate investors.
  • Multifamily Market Outlook: Despite potential challenges like increased supply, multifamily remains a strong asset class. The anticipation of fewer new construction completions in 2024 should bring supply and demand closer to equilibrium, potentially leading to higher occupancy and rent growth. Renting is expected to remain attractive compared to buying homes due to high mortgage premiums.

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2024 Multifamily Outlook

As we go forth in 2024, economic conditions seem to be improving, with expectations of achieving a soft landing. Anticipated outcomes include a slowdown in job, wage, and GDP growth, while inflation follows a downward trajectory

Rent growth is anticipated to fall below the long-term average, and vacancy rates are expected to be higher than average as the markets absorb the last deliveries from the COVID boom. The good news is that these shifts are expected to be temporary. However, because of these adjustments in the market, the margin of error is narrower than in previous years, making strong asset management more important than ever. More on this in a bit.

The impact of heightened supply levels varies across the country, with the Sun Belt and Mountain West regions expected to experience the highest influx of new supply, putting additional pressure on rent growth. Conversely, slower-moving secondary or tertiary markets are generally anticipated to outperform. 

Some stability in interest rates could stimulate multifamily lending volume for the year. This stability in interest rates is expected to result in stabilized cap rates and property values, facilitating agreement between buyers and sellers on asset value and potentially increasing transaction volume.

What this means is that we are on the precipice of a potential onslaught of incredible opportunities on the horizon, likely by the end of the year and in 2025. In the meantime, this also means that multifamily remains strong, which is why preferred equity is a great opportunity to invest in multifamily while the market continues to settle and move toward equilibrium.

Despite the short-term challenges posed by increased supply, the multifamily market is poised for long-term support due to an overall housing shortage, a costly for-sale housing market, and the emergence of the next generation of renters entering their prime renting age.

Here at Goodegg, we’ve heard from many of you regarding the importance of cash flow, and our acquisitions strategy for 2024 aims to focus on opportunities – largely via preferred equity multifamily and select-service hotels – that will produce in-place cash flow while mitigating risk and delivering solid results to our investors.

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Key Takeaways for Looking At 2024:

  • Economic Conditions and Market Expectations: In 2024, economic conditions appear to be improving, with the goal of achieving a soft landing. This means we anticipate a slowdown in job, wage, and GDP growth, along with a decline in inflation. While these adjustments might affect the rental market, they are expected to be temporary.
  • Regional Variations in Supply and Demand: Supply and demand dynamics vary across regions. The Sun Belt and Mountain West regions are expected to see a higher influx of new supply, which could put pressure on rent growth. In contrast, slower-moving secondary or tertiary markets are anticipated to perform better.
  • Stability in Interest Rates and Investment Opportunities: Some stability in interest rates is predicted, which could boost multifamily lending volume. This stability is likely to stabilize cap rates and property values, making it easier for buyers and sellers to agree on asset value and potentially increasing transaction volume. This situation presents the potential for significant investment opportunities in the near future.

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The Goodegg Portfolio

In March 2024, it will have been two years since the FOMC (Federal Open Market Committee) began increasing interest rates. During that period, clarity has been in short supply, and there’s been a good amount of uncertainty. That is no longer the case.

Most prognosticators are mostly certain the FED will keep interest rates steady in 2024 with a convincing majority thinking rates will ease by as much as 2%. In reality, interest rates have already begun easing as the 10-year treasury rate has regressed in the last quarter of 2023 in anticipation of lower inflation.

The average residential mortgage rate reached a high of 7.79% in October 2023 but recently settled to an average of 6.61% as of year end. Quite a precipitous drop with no FED easing. Again, all signs point to ‘mission accomplished’ with respect to inflation.

2023 Goodegg Portfolio Review

We began 2023 showing signs of a slowdown with market rents up 6% year over year, down from 9.7% in 2022 and 12.7% in 2021. Demand was still strong, with absorption outpacing new apartments coming online.  

Fast forward to the end of the year, which saw more new multifamily project completions in Q3-Q4 than in three decades. This trend has led to an increase in vacancies and concessions and a regression, albeit small, in market rents. Further, operating expenses saw a considerable increase of almost 10% with the average insurance cost increasing just below 20%.

The Goodegg multifamily portfolio mirrored the greater market with rent growth in a relatively tight loop of regression, flat and slight increases depending on each asset’s geographic location

Further, we no longer experienced a blanket rent increase percentage amount on resident lease renewals. Each property became micro focused on occupancy percentage of each unit type, using this analytic to determine how much to increase rents, with the intent on keeping the existing residents in-place. This has become a key metric since the softening of markets.

The Goodegg Portfolio in 2024

New construction will continue to be an unyielding foe, as new apartment communities are in a time sensitive battle to lease-up their properties. To accomplish this, they will continue offering aggressive incentives, armed with as much as two months free rent.

On a positive note, the Sun Belt continues to have higher than normal migration of new residents who will continue to seek out rental housing. Per a 12/19/23 US Census Bureau press release, Texas, Florida, North Carolina and Georgia accounted for 93% of the nation’s population growth in 2022, and 67% in 2023. 

This bodes well for the long-term for Goodegg properties, the majority of which are located in these key Sun Belt markets.

As we head into a challenging 2024, we will continue to ask our operating and property management partners to focus on the minutiae, dig deep into the numbers, and listen to what the market and its customers are saying. 

Listen and make adjustments, be better than your competitors, be better than you were the day before, be better and provide superior housing with superior service day in and day out. These simple yet impactful principles form the foundation of our asset management strategy – providing a great place to live for our residents, which in turn provides great returns to our investors.

Goodegg Portfolio Asset Overview

Below are some key insights on select assets within the Goodegg Portfolio.

Waterleigh at Leland

– 248 Units | Wilmington, North Carolina –

  • 94.6% occupied and 94% leased
  • Minimal concessions have been needed, as overall performance remains strong.
  • The market is absorbing newly constructed units at a reasonable pace thus far, meaning that our occupancy has remained strong.

Mission Antigua

– 248 Units | Tucson, Arizona –

  • 91.9% occupied and 93.1% leased
  • The market is holding steady, with minor adjustments made to specific unit types to lease excess inventory.

Royal Spring

– 351 Units | Houston, Texas –

  • 90.9% occupied and 92.1% leased
  • The market is steadily absorbing an aggressive amount of new construction.
  • We are making rental rate adjustments on a day-to-day basis to remain competitive in the market and to ensure occupancy remains strong.

The Sarah at Lake Houston

– 350 Units | Houston, Texas –

  • 95.7% occupied and 96.3% leased
  • Leasing activity has remained steady amid absorption of new construction.

Congaree Villas

– 106 Units | Columbia, South Carolina –

  • 92.45% occupied and 90.57% leased
  • The four apartments that were off-line due to damage from lightning are complete and available to lease. 
  • The market is holding steady, and we are still getting incremental increases on renewals and new leases.

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Investor Sentiment 

Although 2023 was a year of cautious activity, we were overwhelmed with the continued trust and optimism shown by our long-time investors. Our investment volume for 2023 was at almost the exact level as in 2022. 

The process of finding solid cash-flowing properties in this financial environment has proven to be difficult, but the properties that were added to our portfolio in 2023 are a testament to the strength and ingenuity of the Goodegg Investments team. 

As we structured new projects, investors were quick to make commitments. We successfully closed nearly $150 million in assets during the year and placed nearly $40 million in equity. This was a huge success for everyone involved.

As we look ahead to 2024, investor sentiment is continuing to show caution. Although the market seems to be creating new velocity, most investors are still somewhat slow to act. 

There is a general feeling that capital markets will be loosening up in the coming months, but most investors want to see positive momentum before once again making large financial commitments. 

There is an understanding that hesitation may cause some investors to miss out on opportunities, but the financial wounds some may have experienced in 2023 will take time to heal. The general investor sentiment is one of cautious optimism. There is a growing desire to invest, but with a more paced and deliberate process.

It is clear that there is a large amount of investment capital waiting to be deployed across the country. Most investors are drawn to conservative investments with near-term cash flow. 

There is a reluctance to invest in any speculative or development projects. In-place assets (regardless of product type) are the favored path. Coupled with conservative underwriting and low debt leverage, investors are ready to bring new capital to the market. This is especially true for the second half of 2024 when investors are predicting that new deals will hit the market based on debt expirations.

There is still a sense in the market that distress (mainly from debt expirations) will create new and exciting investment opportunities. The hope from many investors is that there will be a number of heavily discounted properties hitting the market in 2024 based on floating debt terms that were simply too much to withstand by previous owners. 

Although there is a great amount of data that would corroborate this belief, we have yet to see it actually be a market reality. Cap rates have definitely increased, but sellers have been slow to capitulate and allow their properties to go back to the market. 

In many cases, we have seen lenders being willing to work with owners and modify current loan terms. As this trend continues, many investors will likely wait on the sidelines in anticipation of stronger deals. 

No matter the current state of the market, we know that deals exist. We firmly believe that 2024 will bring in a long list of strong deals to consider, but we may not see many deals hit the market in “fire sale” scenarios. 

We will continue underwriting with our conservative metrics and will acquire projects with strong fundamentals and true prospects for growth and profitability. We will continue focusing on quality assets in the markets that we know to be primed for population and job growth.

Check Out Our Track Record Of Success

Curious whether we can actually do what we say we're going to do? Compare projected versus actual returns in all the deals we've exited to date.

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As We Move Forward…

As we continue to face a volatile economy, we stay focused on sourcing strong investments opportunities in both multifamily and hotels.  

We are bullish on the overall market and have an incredibly strong pipeline of projects that we are considering. 

As we kick off Q1 2024, we are excited about the opportunities ahead. The current economic climate has dared us to step up and get creative, and we are rising to the challenge. As we continue to navigate the seas of uncertainty ahead, we are incredibly grateful for the opportunity to help you strategically and intentionally grow your wealth.

If you’d like to invest with us and haven’t already, be sure to join the register on the Goodegg Investor Portal so you can stay in the loop on all future investment opportunities.

And, remember that we have four investment opportunities for you to explore:

And of course, if you know anyone who wants to build their wealth, we would love it if you would forward this email to them

Remember – we are never too busy for your introductions and referrals.

Here’s to a very sunny-side-up remainder of Q1 ahead!

Julie, Annie, and The Goodegg Investments Team

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