A Strong Rebound Ahead

The train continues full steam ahead! 

2021 is off to a killer start for Michael Capital.

We will start this update by providing our take on the current multifamily environment.

Then we will get into what is happening with the business and lending. 

Lockdowns are coming to an end and more people are getting back into their pre-COVID routines as mass vaccinations roll out. 

Amazon recently announced that they plan to open their offices by this fall and hire an additional 25,000 employees on the eastside.  

Washington still has positive net-in migration and remains an attractive destination for those leaving the San Francisco Bay area. 

Seattle is adding 2.2 tech workers for every one that has left. 

Some of those well-heeled Bay Area folks will buy a house in the Puget Sound, while many, especially those under 40, will choose renting. 

Homeownership is out of reach for a significant share of the population. 

A lack of affordability in the home buying market keeps people in apartments. 

While apartment demand for high-end units has been strong over the past decade, not everyone works in high paying tech fields. 

Rental affordability is a major concern in the metro area and demand for lower-end units has skyrocketed. 

The momentum for working class apartments has climbed rapidly over the last year.

We are focusing our attention on the areas that we believe are going to continue to have tight vacancies and increasing rent growths. 

Primary markets, such as Seattle, Bellevue, Kirkland, and Redmond, which are the highest priced rental markets, have seen an exodus of renters move north and south. 

These submarkets saw occupancies drop and rental rates decrease in 2020. 

CoStar, the #1 Commercial Real Estate Information Company, forecasts this trend to continue for the remainder of this year. 

The more affordable apartment markets have seen positive rental growth rates over the last year, as well as decreased vacancies. 

Olympia, Puyallup, Tacoma, Auburn and Snohomish, to name a few, continue to have sub-5% vacancy rates, with incredibly strong rental rate growth, even during the entirety of last year. 

We are in a very strong position to take a piece of this pie. 

Regarding the business, here are some updates. 

Garrett has been adding additional capabilities to our proprietary, institutional quality model for analyzing deals. 

Specifically, we have implemented a more precise analysis of how to model lease-up, as it relates to downtime for renovated units, loss to lease, and vacancy. 

The timing of the renovations is important to compare to the current rent roll, as it impacts the monthly construction draws (amount of interest paid in bridge financing) and ultimately the monthly cash flows paid out to investors. 

Based on our conversations with lenders, we added a construction draw program with a dynamic interest reserve/operating shortfall calculation for any negative cash flows during the renovation period. 

This considers the true cost of the project and mitigates any capital calls during the renovation period.  

We are making our model available to everyone we work with to provide full transparency into our underwriting process. 

This is just one of the many ways we continue to build trust with our partners. 

Now onto the financing piece.

Since we are focusing on bridge lending, we will shed some light into what is going on in today’s bridge financing market. 

For those of you who are not familiar with bridge lending, it is a type of loan program that is typically best suited for value-add acquisitions, which is our strategy. 

Bridge loans are short-term financing arrangements to bridge the gap between immediate needs and long-term mortgage arrangements. 

This type of financing is advantageous due to flexible loan structures. 

It also allows us to have greater up-front proceeds to cover our renovation expenses. 

When underwritten correctly and conservatively, bridge loans are an incredible financing strategy for value-add properties that have a clear path to increase property income (e.g. raise rents to market and reduce operating expenses by implementing experienced management). 

In addition, significant capital has been raised for US real estate debt funds, but the anticipated abundance of opportunities has not materialized. 

Over the past year, lenders have stepped aside from the multifamily space as the uncertainty in the market was too great and unemployment rose. 

As the vaccine continues to roll out, lenders are getting back into the game with significant amounts of deployable funds. 

Bridge loans are extraordinarily favorable right now, as we have seen a major uptick in bridge activity across the multifamily space over the last 45 days.

This is especially due to short-term interest rates being as favorable, if not more, than long-term financing from the historically low interest rate environment. 

With the incredible amount of liquidity and demand for this asset type and highly competitive short-term rates, more buyers are choosing available bridge debt with a 1.0X debt coverage ratio (DCR) and low debt yield, allowing them to maximize leverage with rates in the 3-4% range. 

However, Garrett and I are covering our back end by ensuring we have a DCR minimum of 1.30X, so that with any unforeseeable circumstance, we are ensuring that the property will be able to service the debt, while ultimately giving us more favorable terms with the lender. 

The lenders we work with have competitive bridge programs that automatically roll into permanent loans upon stabilization. 

The options presented to us through several local lenders included three to five-year terms with no prepayment penalties if rolled into an in-house permanent product. 

This ultimately increases investor returns by limiting fees paid on the back end and ensures that our refinance and/or exit strategy is realistic in a rising interest rate environment. 

Additionally, Garrett and I are in the process of finalizing our business plan presentation in order to secure a guarantor that has the liquidity and net worth to allow us to get more favorable lending terms.

This plan covers things like our executive summary, team, why we are building a multifamily portfolio, one to 10-year roadmap, acquisition/portfolio composition criteria, the opportunity for investors, WA submarkets demographic and economic overviews, business plan initiatives for the portfolio, key risks, etc. 

Garrett and I are giving up a portion of our personal equity shares to lock in the guarantor that will not only sign on the loan with us, but also help us strategize to increase the bottom line. 

Our business plan presentation will be shared with each one of you and we will schedule time to address any questions that you may have. 

Let’s keep the momentum and make it a great Q2!