Ah, what an interesting time we are living through. Over the last quarter, we’ve seen the Federal Reserve continue to raise interest rates, with more rate hikes likely to come.
We’ve also seen some cracks in the banking industry, sending ripple effects through the financial landscape as a potential indicator of a larger economic downturn and looming recession.
And while the higher interest rates of late might make it more tempting to leave your money sitting idle in your savings account to collect interest, smart investors know that you can’t save your way to true wealth and freedom.
But where do you find the “right” investments in this environment? Especially given that the rising interest rates have led to tighter lending restrictions and increasing difficulty securing low fixed rate debt, thus also making it increasingly difficult to find great investments.
So what is a smart investor like you to do? Should you plan to keep your money in your savings account and watch from the sidelines until things “settle down”? Or should you continue to invest, albeit with a more scrupulous eye and extra sharpened pencil?
As we’ll discuss in a bit, we remain extremely bullish on commercial multifamily opportunities, particularly as major players like Blackstone are doubling down, closing on the largest real estate private equity fund they’ve ever raised.
As Blackstone global co-head Ken Caplan notes, some of the firm’s best investments have come in “periods characterized by the market volatility and dislocation,” which is exactly what we’re experiencing now.
Just like Blackstone and other major players in commercial real estate, we foresee tremendous opportunities to come in the latter half of 2023 and beyond, and we are putting all the pieces in place to help all of YOU take advantage of that opportunity.
That being said, this doesn’t mean that you should sit idle on the sidelines in the meantime, twiddling your thumbs while waiting for those opportunities.
While there will certainly be a greater quantity of strong opportunities in the coming months and years, that doesn’t mean the quality of current opportunities is any lower.
Great opportunities may be a bit harder to find right now, as compared to the potential onslaught of great opportunities likely to come.
But! Consider that there are always two sides to every coin.
In the coming months and years, when there are ample opportunities, there will also be ample competition. And if you take the wait-and-see approach, you might miss out on a lot of great opportunities in the meantime.
Right now, while great opportunities may be sparse, there’s also significantly less competition, which means there are fewer people looking for these hidden gems.
But here at Goodegg, gem hunting is what we excel at. Even in the face of the current uncertainty, we continue to approach acquisitions with creative outside-the-box strategies, which help us to access the best opportunities.
In this Quarterly Investor Letter, you’ll learn more about our outlook for the remainder of 2023, our acquisitions standards and strategies, the assets in our current portfolio, and more.
Q2 2023 Multifamily Outlook
With 2022 firmly in the rearview mirror, we are now focused on new expectations and predictions for Q2 2023 and beyond.
The US multifamily sector is expected to continue above average performance in 2023, despite economic turmoil and disruptions in the capital markets. We will likely not see the sub-3% vacancy rates or double-digit rent growth as in the past two years, but overall market demand is expected to remain steady.
As always, we try to put ourselves in the best possible position to find quality opportunities, no matter the current economic cycle. We are well positioned to take advantage of great opportunities that lie ahead.
Vacancies & Rental Rates
According to CBRE’s US Multifamily Q4 Report, the overall US occupancy rates are expected to remain above 95% with annual rent growth expectations of over 4%.
Although growth expectations remain strong, we are keeping a close eye on new inventory to the market. CBRE expects 450,000 units to be delivered in 2023, adding 2.6% to the total inventory. Additionally, there are another 300,000 units under construction that will be delivered in early 2024.
While we expect these new deliveries to affect short-term leasing activity, demand is expected to grow. CBRE predicts that nearly 3.5 million new market-rate multifamily units will be needed by 2035 to keep pace with overall demand throughout the US.
According to Berkadia’s 2023 Forecast, net absorption is projected to reach the second highest level in more than two decades. Berkadia forecasts the national occupancy rate to settle at 95% in the fourth quarter of 2023, only down 70 BPS (basis points) from 2022.
The year-end rate would be higher than the pre-pandemic cycle average of 94.7% during 2010 to 2019. What this means is that multifamily continues to be a strong and stable investment.
As interest rates continue to rise, renters continue to grapple with the idea of purchasing versus renting. CBRE calculates that the average house payment for newly purchased homes in late 2022 was 57% more expensive than the average monthly apartment rent, the widest cost gap on record.
Even if home values continue to fall and mortgage rates drop in the latter half of 2023, the relatively lower cost of renting will support multifamily demand going forward.
We remain bullish on multifamily acquisitions and for the multifamily rental market in general.
Maintaining A High Bar For Underwriting & Acquisitions
We remain steadfast in our conservative approach to underwriting. As cap rates have expanded and interest rates continue to increase, a critical eye on deal metrics becomes increasingly important as we look to limit risk.
According to CBRE’s 2023 multifamily report, rising interest rates have led to more multifamily purchases in which mortgage rates exceed the cap rate. While this gap is expected to narrow over the coming months, lowered rental growth expectations throughout the market have caused a slowdown in deal velocity.
Sale transactions for multifamily assets are still closing, but they are focused primarily in high-growth markets throughout the South and Southeast. Individual markets with population and job growth expectations that beat the national averages are still in great demand. Some of the standout stars are Dallas, Orlando, and Jacksonville.
As in the previous quarter, we have updated our underwriting standards and investment thesis with the expectation of lowered projected rental growth in year one and two for any new acquisition.
We have also underwritten higher exit cap rates in an effort to compensate for continued interest rate expansion. We firmly believe that taking this conservative viewpoint is the appropriate step for protecting cash flow and limiting risk for all of our investors.
Acquisitions Strategy & Outlook
In Q1, our acquisitions focused on a few key strategies to optimize returns and mitigate potential risks.
One such strategy was the acquisition of properties with long-term, in-place, fixed-rate, debt. This approach allows investors to reduce exposure to rising interest rates, which can have a significant impact on real estate investments.
The Federal Reserve’s interest rate increases have created challenges for navigating the real estate market. Higher capital costs, rising rents, and expensive cap rates are impacting both multifamily investment and development in various ways.
Despite these challenges, the demand for rental housing remains strong, driven by the supply-demand imbalance. The interest rate hikes are making it difficult for potential homebuyers to enter the housing market, which is driving demand for rentals and keeping top-line income steady.
Due to the higher required return from risk assets, cap rates for apartment assets have generally increased, depending on market and investment profile. The financing environment today is different from previous years, resulting in lower leverage and higher costs.
Some borrowers who have relied on low interest rates since 2020 and borrowed up to 80% or 85% of cost without buying rate caps may face challenges as their loans mature and refinancing becomes necessary.
This could lead to capital calls, underwater refinancings, and other issues that require deeper pockets. We anticipate seeing more of these types of investment options in 2023 as investors with near-term debt or investment vehicle maturities seek an exit, or open-ended funds seek to raise liquidity to accommodate redemption requests.
Despite these challenges, we see opportunities in this unique market situation by taking advantage of the opportunities from distressed debt sellers. We plan to invest in deals with lower basis than previous buyers, using lower leverage debt and fixed rate options to lower the risk profile of the investments.
We are optimistic about the longer-term prospects for multifamily, and we see potential in investing in “rescue capital” in the form of preferred equity to owners of distressed properties who are still trying to keep them. There is huge potential to purchase these deals or provide rescue equity at a great basis with relatively higher interest rates.
We anticipate interest rates cooling off in the next 2-3 years, which should create opportunities to refinance and return significant capital back to investors or sell properties as cap rates should compress with lower interest rates, resulting in higher sales prices.
We have been able to leverage this strategy with both of the active acquisitions currently in the pipeline:
- With Encore Metro at Millenia in Orlando (Asset #1 in Goodegg Wealth Fund II), we are assuming a long-term HUD loan with a low fixed interest rate of 3.80%.
- With the acquisition of the hotels in Goodegg Diversification Fund III, we are assuming a fixed-rate debt at 3.87%.
By locking in favorable rates on all acquisitions currently in the pipeline, we have been able to protect your investments against current and potential future rate hikes, thus providing stability and predictability for your investments.
Market Spotlight: Orlando
Another critical element of the Goodegg’s acquisitions strategy has been its focus on strong investment markets, such as Orlando, Florida.
Orlando has a rapidly growing population, driven in part by a thriving tourism industry that attracts millions of visitors each year. This growth has led to increased demand for housing and rental properties, creating opportunities for investors to capitalize on a robust market.
Orlando’s economy is diverse and growing, with a strong job market and a range of industries, including healthcare, technology, and finance. This economic stability helps to support the real estate market and creates opportunities for long-term investments.
Orlando’s real estate market has historically shown resilience during economic downturns, making it a relatively stable and predictable investment. The city’s growing population and strong economy also help to support property values and rental rates, providing investors with reliable income streams.
Through continuing to pursue strong assets in growing markets like Orlando, we are able to provide recession resilient investments to help you grow your wealth and diversify your portfolio.
Acquisitions In Progress
Encore Metro at Millenia
Asset #1 in Goodegg Wealth Fund II
Our acquisition of Encore Metro in Orlando, Florida, is on track and progressing well. Encore Metro is a 215-unit class A multifamily asset built in 2021, and we are purchasing this asset directly from the developer.
We have successfully completed our due diligence on this asset, with green lights all the way. In addition, the appraisal on this asset came in at nearly $5 million above the purchase price, meaning we are buying this asset at a significant discount.
We are assuming the existing loan on this asset, which is a fixed rate HUD loan at an astoundingly low 3.8% fixed interest rate. This is a huge advantage for this deal and a big part of why it’s such a great investment, particularly in the current economic climate.
The ongoing performance of the asset is strong, and we project that the property will close in mid-May.
If you’re interested in investing alongside us in this asset, we still have spots open, and you can invest in this deal via Goodegg Wealth Fund II.
Goodegg Diversification Fund III
Indiana Hotel Portfolio
All of the hotel assets in this portfolio continue to perform exceptionally well under the continued management of our partner, GHC (General Hotels Corporation).
Though the acquisition is taking longer than expected due in part to the loan assumption, we continue to work closely with the lender to move this deal toward a successful close.
As a reminder for any investors who have invested in this deal, you are already accruing your preferred return, even before the deal officially closes. If you have any questions, please reply to this email.
Once we get the green light from the lender, we will move forward and close the deal as soon as possible.
Please note that we are no longer accepting investments for this offering. However, if you are interested in investing in hotels, read on for more info about our upcoming hotel fund.
Open Investment Opportunities
Goodegg Wealth Fund II
– Open & Accepting Investments –
In Q1, we officially launched our latest offering – Goodegg Wealth Fund II – a diversified multifamily equity fund, which is currently open for investment.
As mentioned above, Goodegg Wealth Fund II is off to a fantastic start with the upcoming acquisition of Encore Metro in Orlando, Florida.
By focusing on a mix of class A and B assets in key Sun Belt growth markets, Goodegg Wealth Fund II is poised to take advantage of both the hidden gems in the market right now, as well as the tremendous multifamily opportunities to come.
Goodegg Growth Fund I
– Coming Soon –
Calling all not-yet-accredited investors! If you’ve been patiently waiting to invest in one of Goodegg’s offerings, the time has come. We are putting the finishing touches on a crowdfunding offering and platform just for you.
Goodegg Growth Fund I will offer all investors – accredited or not – the opportunity to invest in a diversified multifamily fund, with as little as $10,000.
If you are reading this email, you’ll be on our list to get more info about this platform as soon as it launches. More details to come soon!
Goodegg Hotel Fund I
– Coming Soon –
Given the high level of success we’ve seen with our hotel acquisitions to date, we are working to put together a diversified hotel fund, which will give accredited investors the opportunity to invest in multiple strategically chosen hotel assets in key markets.
More details to come on this opportunity. If you are an accredited investor and haven’t yet done so, we invite you to join the Goodegg Investor Club so you’ll be first in line to hear about this fund when it launches.
The Goodegg Portfolio – Steadfast & Resilient
When considering whether and whom to invest with, it’s of the utmost importance that you get a good sense of track record, so you can see whether a team can actually deliver on their projections.
As you’ll see with the Goodegg Portfolio, even in the face of rising interest rates and economic uncertainty, the assets remain steadfast and resilient, and we continue to beat nearly all pro forma metrics in our current portfolio.
While we are not immune to the rising interest rate environment, we are working hard behind the scenes to explore and exhaust all potential options that we believe will minimize the impact and provide long-term stability to all assets.
It’s important to note that the performance of all assets in the portfolio remains strong. In fact, all our properties have exceeded market occupancy averages when compared to their peers for Q1 2023.
Here are a few select examples from the Goodegg Portfolio showing actual occupancy vs. market averages:
- Mission Antigua – Tucson, Arizona
- Average occupancy 94.8% vs. Tucson market and asset submarket averages of 91.7% and 93.6%, respectively
- Waterleigh – Wilmington, North Carolina
- Average occupancy 94.2% vs. Myrtle Beach market and asset submarket averages of 88% and 84%, respectively
- Congaree Villas – Columbia, South Carolina
- Average occupancy 91% vs. Columbia market and submarket averages of 90.5% and 89.6%, respectively
- Royal Spring – Houston, Texas
- Average occupancy 93.3% vs. Houston market and submarket averages of 90.4% and 90.8%, respectively
- The Sarah at Lake Houston – Houston, Texas
- Average occupancy of 94.8% vs. Houston market and asset submarket of 90.4% and 90.9% respectively
Overall, the Goodegg Portfolio continues to outperform their respective markets in terms of occupancy and leased positions.
Note: For any current investors, you can find the latest occupancy metrics for your investments in the Goodegg Investor Portal.
Strong Reserves Bolster The Health Of Each Asset
Even with the strong performance of the assets within the portfolio, we continue to keep our finger on the pulse of the shifting market and continue to monitor the debt and cap markets for opportunities to secure and enhance the assets and debt positions.
As part of this, we are continuing to build up the reserves on each asset, to further bolster the health of each property and thereby further protect your investment. Nearly all of the assets in the Goodegg Portfolio have reserves above and beyond $1 million, to provide ample buffer and cushion to protect your investment.
Here are a few select examples from the Goodegg Portfolio showing current reserves in the bank:
- Royal Spring – 351 Units – Houston, Texas
- Current reserves: $2 million
- The Sarah at Lake Houston – 350 Units – Houston, Texas
- Current reserves: $1.8 million
- Congaree Villas – 106 Units – Columbia, South Carolina
- Current reserves: $1.1 million
- Waterleigh – 248 Units – Wilmington, North Carolina
- Current reserves: $1.75 million
Multifamily Opportunities Ahead
Multifamily investment activity significantly lessened in the second half of 2022. Higher commercial mortgage rates have sent many investors to the sidelines. Due to their willingness to accept higher risk, private buyers have helped to keep overall activity fairly consistent. Institutional investors have been slow to act, but predictions are for stronger market activity in the latter half of 2023.
We believe firmly in the underlying fundamentals of the multifamily sector. As the market continues to stabilize throughout 2023, investors and lenders will increasingly deploy capital into the market.
We will continue to strengthen our position and will continue to confidently bid on multifamily assets located in strong areas, including Sun Belt markets. We foresee a bona fide opportunity in 2023 to stabilize at cap rates much higher than possible when compared with previous years.
Additionally, we see upcoming opportunities to take a financial position in performing assets, with strong occupancy, that are faced with interest rate exposure. We are well considering the placement of funds to obtain above market returns in a preferred equity position. Stay tuned for some exciting new opportunities!
If you are an accredited investor, we invite you to invest alongside us in the multifamily assets we will be acquiring in this opportune time via Goodegg Wealth Fund II.
Check Out Our Full Track Record
To get a full picture of our strong track record and extensive experience, we invite you to download a copy of the Goodegg Track Record, which will show you the original projections and actual results on all the deals we’ve exited to date.
We are extremely grateful for the trust that all of you have granted us over the years. We are overwhelmed with gratitude that so many of you continue to invest in our newest offerings each and every month.
On top of that, we are so grateful to have the opportunity every week to meet so many of you during our Goodegg Popovers sessions – to hear your questions and ideas, and to hear more about your goals and dreams.
As fellow investors, we are humbled to be working alongside all of you to continually build wealth, limit risk, and positively impact the lives of all of those within the Goodegg community.
New Goodegg Investors
We continue to welcome new investors each and every day. As the economic forces in the market have become more difficult (along with highlights in the news), investors are looking for value and a solid platform.
Our stellar track record is always available and speaks to our consistent focus on stable market factors. On average, our new investor activity has increased by more than 25% over years prior. We are thrilled that so many new investors see our value and decide to partner with us.
Your Friends & Family
We consider it one of the highest honors when you refer your friends and family to invest together with us, which is something so many of you have done. Well over 50% of our investors have taken the step of making additional investments and/or referring new investors to us.
It means the world to us that you continue to trust in us and our team enough that you send people within your network to us. It’s the highest compliment you could possibly give us, and we take the responsibility of protecting and growing the collective wealth of your friends and family very seriously.
No matter how big we get or how many acquisitions we pursue, we’re never too busy for your referrals, so keep sending them our way!
What Investors Are Telling Us
The clear feedback is that there is a desire to create consistent cash flow with a conservative approach to risk. Simultaneously, we are being asked to find opportunities that maximize long-term value creation. The Goodegg team is working each and every day to create these new opportunities.
Our goals have remained the same. We aim to create surety and consistency with a long-term view on strong returns on exit. To that end, and based on feedback from all of you, we are looking at a number of investment opportunities outside of multifamily.
Stay tuned for some exciting new fund launches in the coming months that will help to diversify your risk while creating the opportunity for above-market returns.
We always value your input as part of the Goodegg Community. Please do not hesitate to reach out to anyone on our team. We’re all in this together!
As We Move Forward…
As we continue to face a volatile economy, we stay focused on sourcing strong investments 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 Q2 2023, we are excited about the opportunities ahead. The future for investments is quite strong, and we are thrilled to be in a position to help all of you strategically and intentionally protect and grow your wealth in this quarter and beyond.
If you’re an accredited investor and haven’t already, be sure to join the Goodegg Investor Club so you can stay in the loop on all future investment opportunities.
And, remember that we have a current investment open – Goodegg Wealth Fund II – which is accepting investments now!
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 Q2 ahead!
Julie, Annie, and The Goodegg Investments Team