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Investors in the private multifamily real estate market today are achieving impressive cash yields that are not possible in other sectors for the same level of risk, says Douglas Eisner, Co-Founder & Managing Director, The Calida Group.

The Calida Group, a developer, investor and operator of multifamily real estate properties, is taking part in the marcus evans Private Wealth Management Summit 2020.

How is this recession different from prior recessions, such as the great financial crisis?

This recession is very different from prior recessions. It was not exactly clear how this was different at the start of the pandemic, and how it would play out. There was discussion that this could be a perfect storm of a Supply Shock + Demand Shock + Deflation Shock all in one. That has not played out quite as dramatically as feared (especially on the deflation side) but we do not really know how this will all play out, because government intervention is largely clouding the data. Frankly, one of the myriad ways this recession is different from past cycles is the massive government intervention. I think this experiment proved “You can’t fight the Fed”.

How do you think about public vs. private valuations?

Public vs. private investments have really diverged in the last 12 months. Excluding a few niche sectors, they were priced fairly similarly, with privates perhaps achieving a slight premium. Today that relationship has completely flipped. 

Today, with interest rates near zero, credit yields are razor thin. As a result, capital has moved back into equities with them now yielding incredibly low rates and growth stocks at record multiples. (Roughly speaking, the S&P traded at 14x earnings prior to COVID. Today, the S&P is trading at roughly 29x earnings.) But I think most reasonable people would agree that the world feels riskier today than it did in December 2019. So, in public credit and equities, investors are accepting lower returns despite higher perceived risks.

In the private commercial real estate market, however, pricing is not necessarily mirroring that pattern. In real estate, for example, trades are occurring at slightly lower cap rates (perhaps 25 basis point lower yields than pre-COVID) but not the dramatic drop in yields that has occurred in the public sectors. Said another way, the “PE Ratio” of private multifamily investing is essentially the same as it was last year, which is extremely attractive when compared to the S&P that is trading at more than a 50 percent premium to its PE Ratio last year. 

When you couple the relatively stable cap rates with historically low borrowing rates, buyers that are in the market are achieving impressive current cash yields (with tax benefits) far in excess of the public markets. Moreover, in multifamily real estate, we have downside risk protection (i.e. its PE Ratio was not dramatically inflated, there is essentially unlimited liquidity because of the government backed debt markets, and the non-discretionary nature of rental housing demand makes for durable earning streams), with the same or higher returns. In short: same or lower risk with same or higher returns.

If that is the case, how are you approaching investments for 2021?

Well, it is pretty simple. If you compare public debt or equities today versus 12 months ago, I do not think most people would say to themselves, “I’m getting more return today for the same risk,” or “I’m getting the same return today for less risk”.

We think we can say that in the private multifamily real estate market today. That means that whatever your weighting was 12 months ago, today it certainly seems like it should be shifting away from public debt or equities. 

What real estate asset classes are you favoring, and why?

The obvious darlings are Multifamily and Industrial. There are amazing assets in all sectors, but by and large those two sectors have the tail winds. I think hospitality will show some interesting opportunities, but at Calida we are fairly risk adverse. And we are finding ways to generate returns without bearing that type of risk. I like industrial a lot for institutional investors. I am not sure I like it for private investors and family offices.  So much of the return in industrial these days is coming from the development phase.  Once you have locked in the income stream though, there is rarely yield or inflation protection. So for those reasons, I like the short-term leases of apartments and the (essentially) unlimited debt liquidity in the multifamily space.

Is now the time to “jump in” or is it too early?

We are an “always on” investor. The firms that find the best deals, by and large, are the firms that evaluate the most deals. And we are finding deals now. Great assets at great values. But these are not like buying an index fund. We cannot wait for “the index” to tick the bottom and start to trend back up. When a specific asset we have been tracking for five years finally sells, we price it to what you think is fair, buy it or move on. We get turned down a lot on these offers but we are getting a lot more calls back though these days. So we think our acquisitions activity will be growing considerably in the coming months.