Introducing: Behind Closed Deals the Podcast

Welcome to Behind Closed Deals! In our first episode, you'll learn about our plans and format for this podcast as well as a little color on how things are going in the multifamily market today.

We're a team in the Midwest selling multifamily investment properties.

You can learn more about us and find our property listings HERE

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Transcript

Hannah Ott/USA
 Hello, welcome to our podcast by the Midwest multifamily team. This is the our first recording and the name of our podcast is behind closed deals.

 George Tikijian/USA
And unlike other podcasts, we are not asking for money and raising equity.  We're actually talking about what's happening in the multifamily market in the Midwest. So I would like to introduce our team on the podcast.

 George Tikijian/USA
 Today is myself, George Tikijian, Hannah OTT and Cameron Benz.  We are 75% of the sales team in addition to the three of us.  Claire Bullard is a member of the sales team.  So those are the four of us and then we have six other team members who keep the trains running on time and keep the trains on the tracks.  So we've got two marketing folks, Christine Nealis and Carrie Ballard, who produced all of our materials and make make our jobs much easier.  And then also we have a transaction manager.  Her name is Kimberly Fetzer, and she does transactions from contract through closing.
 And then we have a couple of very, very talented analysts, Logan Braunecker and Ryan Stockamp, who do all of our financial analysis.  And then finally, we have Jennifer Brown, who keeps keeps us all on track and the scheduling and client service, client services coordinator.

 So the ten of us work out of Indianapolis, and we're based in Indianapolis. We work throughout the state of Indiana, selling apartment properties, and then we also work in the states of Michigan, Ohio and with partners in in that, in Missouri and in Wisconsin and in Illinois.

 So we've got partners and other offices who we work with in in some of those states. So we have a long experience of selling apartments between the Hannah Cameron and I.  It's something.

 Hannah Ott/USA
 George, your experiences, is it 100 years?

 Hannah Ott/USA
 Are we at 100 years yet?

George Tikijian/USA
 Well, if I look like I'm 100 and I my my daily makeup regimen is working.

 Hannah Ott/USA
 The Botox is working.

 Hannah Ott/USA
 Keep it up.

 Hannah Ott/USA
 The Botox that's working.

 George Tikijian/USA
 Rotax is working, no we we probably have 70 years of experience between the three of us that I'm not gonna say how many each of us have because Hannah does not look as old as dash.

 George Tikijian/USA
 Her experience would indicate and and Cameron.

 Hannah Ott/USA
 I'm proud of my age.

 Hannah Ott/USA
 You know how long it takes to get over 20 years of experience over 20 years?

 Hannah Ott/USA
 So you gotta get that.

 Hannah Ott/USA
 You gotta you gotta put the time in.

 Hannah Ott/USA
 So I'm I'm.

 Hannah Ott/USA
 I'm proud of it.

 George Tikijian/USA
 We've worked together for a long time.

 George Tikijian/USA
 Not only have we been doing multifamily brokerage for a long time, but we have had teammates.

 George Tikijian/USA
 We've had the same teammates for a long time, so we've got a great group of folks that we're all very proud of.

 George Tikijian/USA
 So today is our.

 George Tikijian/USA
 Since it's our inaugural broadcast podcast.

 George Tikijian/USA
 Excuse me.

 George Tikijian/USA
 We're just gonna sort of add Lib.

 George Tikijian/USA
 Some of the things we're gonna talk about and we'll let Cameron get started.

 George Tikijian/USA
 What do you wanna start talking about, Cam?

 Cameron Benz/USA
 Yeah, the goal of today's podcast is just to give an overview of where we are in today's market.

 Cameron Benz/USA
 So that would be August 2023 and that's pricing inventory, what your offer summary looks like after going through a marketing process and trends we're seeing in closing after that.

 Cameron Benz/USA
 So, Hannah, what would you say the inventory on the market is like today compared to a year ago compared to five years ago?

 Hannah Ott/USA
 Yeah, a good question.

 Hannah Ott/USA
 So nationally, the inventory is about half of what it was in 2021.

 Hannah Ott/USA
 So looking at the whole nation, Midwest has fared better than the rest of the nation.

 Hannah Ott/USA
 Because what we have continued to have is strong robust rent growth and that has really been the savior of our market for the last year and 1/2 as interest rates have been going up for the first time in my 20 year career and the first time in George's 40 plus year career or wait, no is it 40, George?

 George Tikijian/USA
 Almost.

 George Tikijian/USA
 It 39 years.

 Hannah Ott/USA
 Almost 40 and it's almost 40 year career and that sorry prematurely aging you and it's 39 year career about a year and a half ago, Indianapolis was at the top of the market, top of the nation for rent growth with 10 to 12% rent growth.

 Hannah Ott/USA
 Rent growth has moderated across the nation.

 Hannah Ott/USA
 In some places it runs have gone backwards, but we have stayed strong and we are back again.

 Hannah Ott/USA
 We are at the top again.

 Hannah Ott/USA
 We went to the third place for a month or so and we're back as of July.

 Hannah Ott/USA
 You already has already matrix has Indianapolis at the top of the nation, again with rent growth between 5 and 6%.

 Hannah Ott/USA
 So we have continued to have good inventory.

 Hannah Ott/USA
 It is less than before.

 Hannah Ott/USA
 So for example, our team in 2021 sold almost 60 deals and 2022 we sold 52 deals and this year will probably sell 45 or so.

 Hannah Ott/USA
 But will we hear from a lot of people consistently is wow, I can't believe how many deals are still you guys are still bringing out that you guys still have volume activity and there's still an appetite to buy in our market because of all the great things about doing business in the Midwest, but also because of our really strong rent growth.

 George Tikijian/USA
 And also we have owners who even with higher interest rates and higher cap rates who purchase properties three to five years ago.

 George Tikijian/USA
 Who?

 George Tikijian/USA
 Who can still sell them today?

 George Tikijian/USA
 Even maybe for a little bit less than they would have sold it for a year ago and make money.

 Hannah Ott/USA
 Yeah.

 George Tikijian/USA
 So there are still some people who are saying I'm gonna take some profits now and maybe build a war chest for when there's even better deals.

 Hannah Ott/USA
 Yeah, there's no doubt, though, that the equilibrium of power in a transaction between seller and buyer.

 Hannah Ott/USA
 It has is more steady, so as you know, in 2020 and 2021, the sellers really could ask for just very seller centric terms, short time periods, very limited due diligence, very large non refundable deposits up front and most of most often we were.

 Hannah Ott/USA
 If we were asking 50 million, we were selling the property for 5455 million.

 Hannah Ott/USA
 There's much more of an equilibrium between buyer and seller power in a transaction in that the terms have kind of gone back to what we're seeing more normally instead of 30 offers where at 15 offers instead of $1,000,000 hard on every single deal, we're still selectively getting non refundable deposits, but often we're not and buyers are having the opportunity to have more typical and normal due diligence and transaction.

 George Tikijian/USA
 Another reason for the reduction in uh volume is that in the market right now, since there was such a significant difference between short term rates and long term rates, today, deals really only make sense if you can finance it using a fixed rate permanent mortgage at 7 to 10 year mortgage because of properties that aren't ready for a permanent loan have to have a bridge loan, and bridge loans are generally floating rate loans and the interest rates are much higher on floating rate loans.

 George Tikijian/USA
 So in 2021, in early part of 2022, most of the properties that we sold were properties that were financed using floating rate debt at sub 4% interest rates.

 George Tikijian/USA
 Today, that same loan would probably be 6 1/2 to 8% interest rate, and so any deals that can't be financed with a *****, Fannie Mae, Freddie Mac or HUD loan, who's interest rates are closer to 6%, you know, just isn't.

 George Tikijian/USA
 Those deals aren't gonna sell.

 George Tikijian/USA
 They're not gonna trade.

 Hannah Ott/USA
 Yeah, there's a lot of noise in the market too that buyers and sellers are hearing of.

 Hannah Ott/USA
 That really isn't true.

 Hannah Ott/USA
 Like there that there are no deals selling, that there's total gridlock that people aren't getting debt.

 Hannah Ott/USA
 The buyer profile has changed and Cameron, you talked to tons of buyers throughout the week.

 Hannah Ott/USA
 Tell us a little bit about how the buyer profile has changed in the last year.

 Cameron Benz/USA
 I would say that the biggest change in the buyer profile is that there are just a lot or there's a few groups that have equity in House that's who's actively buying properties because they're believers in today's market.

 Cameron Benz/USA
 They're not worried about being able to raise equity, and there's a lot of buyers who lost equity sources because the savings rate that they're investors are getting is like 5% in the bank.

 Hannah Ott/USA
 Mm-hmm.

 Cameron Benz/USA
 So they're having a hard time getting them to pull that money out of the bank and put it into real estate.

 Cameron Benz/USA
 Umm, so there are a few buyers who are really dominating the market and they're like we are believers that today there's good basis, there's and prices will go up in the future and those are the ones who are really coming to the top.

 Hannah Ott/USA
 That's right.

 Hannah Ott/USA
 That's right.

 Hannah Ott/USA
 I remember saying to our team a couple years ago when there were so many more buyers than there were properties, that it was hard to keep up with the number of buyers.

 Hannah Ott/USA
 And I remember saying as it at some point this will change.

 Hannah Ott/USA
 So we gotta be good to these buyers who make offers over and over and over again and unfortunately never are able to rise to the top.

 Hannah Ott/USA
 How do we keep them motivated to look at our deals motivated to fly in and see the property?

 Hannah Ott/USA
 Because it is gonna change and to your point about, there's a lot of repeat, there's a lot, there's a smaller group of buyers, but they're buying a lot of properties.

 Hannah Ott/USA
 So we have several groups that are buying three or four properties all at one time that we're not as active maybe a couple years ago, because they always offered, but they weren't willing to do the terms that the other groups were like, the really hard to really large hard deposit.

 Hannah Ott/USA
 So we're really stretching on pricing and so equity, what's happening in the equity market is driving who really who the the buyers, the buyers are and a colleague of ours at the beginning of this year at NMHC said something that I remembered throughout the year.

 Hannah Ott/USA
 You said I think this is the year of the basis play.

 Hannah Ott/USA
 So we're selling newer construction properties now between 200 and 230 a door a year or a year and a half ago.

 Hannah Ott/USA
 Those same properties would have sold for 250 to $300,000 a door, so maybe they're returns are leaner and these first couple of years because of where interest rates are, their bases is lower.

 Hannah Ott/USA
 And when you go to sell a property in the future, basis matters.

 Hannah Ott/USA
 If you can sell a property in the future for $300,000 a unit and you bought it 200, that's a big difference than selling it at 300,000.

 Hannah Ott/USA
 I'm buying it at 2:50, so there's a lot of people that are highly focused on good deals with what they feel like is reasonable basis.

 Cameron Benz/USA
 That's right.

 Cameron Benz/USA
 Then the other big trend that we're seeing is those buyers that are coming to the top of our offer summaries are basis buyers and the people who are lower are IRR driven.

 Cameron Benz/USA
 They're having to advertise higher Irrs and just higher cache on cache to be able to raise equity.

 Cameron Benz/USA
 The groups who have equity in House are the ones who are baseless buyers and don't care as much.

 Cameron Benz/USA
 To get a higher return in year one or need to model to a high teens IRR or whatever it is to be able to get their investors to put money into deals.

 Hannah Ott/USA
 That's right.

That's right.

 Hannah Ott/USA
 Well, if you put the three of us together in a room and give us a couple questions about real estate, we could talk certainly for hours about it.

 Hannah Ott/USA
 But I want you guys to know that you're not gonna just be hearing from us on the podcast.

 Hannah Ott/USA
 So we plan to do this every month and hopefully it'll go well.

 Hannah Ott/USA
 And if it does, maybe we'll end up doing it more often, but we plan to do it at least every month, and one of the some groups that we plan to bring on are some active buyers.

 Hannah Ott/USA
 So we can hear how how it's going with them on raising, raising equity, interacting with their investors.

 Hannah Ott/USA
 We're also going to bring in some owners that are selling and they can talk about perhaps maybe their motivation for why they sold right now and they're plans moving forward.

 Hannah Ott/USA
 We're also gonna talk to developers and we can hear more about construction costs and the process of building.

 Hannah Ott/USA
 We'll bring on some lenders as well, both brokers and so folks from the banks here.

 Hannah Ott/USA
 So you can hear about about the debt market, but you so you won't be hearing just from the three of us, we'll be bringing out additional people on to the podcast.

 Cameron Benz/USA
 That's right.

 That's right.

 Cameron Benz/USA
 Well, George, what would you say in comparison to today?

 Cameron Benz/USA
 Today's market is the most comparable time in your career where that we come coming up a very hot market.

 Cameron Benz/USA
 Buyers are starting to get more equilibrium with sellers.

 Cameron Benz/USA
 Is there another time that you can compare this to?

 George Tikijian/USA
 Umm.

 George Tikijian/USA
 Well, it's a pretty unusual time period where interest rates have increased this much this fast.

 Cameron Benz/USA
 Yep.

 George Tikijian/USA
 That's not happened in my career.

 George Tikijian/USA
 My career started in 84 and the last significant increase in interest rates was in the early 80s.

 George Tikijian/USA
 So before my time, there was a period of time we had a downturn in 1990.

 George Tikijian/USA
 So in 9495, Patrice rates started to increase and it did cause things to slow down a little bit, but it wasn't from a a slowdown from A and exceptionally busy period of time.

 George Tikijian/USA
 It was just a slowdown from a normal period of time, so I'd say what we're seeing is is exceptional of for the last 40 years.

 Cameron Benz/USA
 If you had to guess how many properties do you think sold in that time frame per year?

 Cameron Benz/USA
 If we're saying, you know, this year 60 to 70 properties.

 Hannah Ott/USA
 Hmm.

 George Tikijian/USA
 Umm, probably somewhere in the 15 to 20 that that really, you know in most of the years of my career, if you take out the very early years cause because from 84 to 87 was another period of time with rapid property sales and turnover because of tax oriented syndication which changed with the tax law change in late 86.

 Hannah Ott/USA
 Mm-hmm.

 George Tikijian/USA
 You take that out most of the time it's been 10 to 25 sales per year and the and also don't forget there were a lot fewer properties during that period of time as well.

 Hannah Ott/USA
 Yeah.

 Cameron Benz/USA
 What about cap rates?

 Cameron Benz/USA
 Well, we're cap rates then.

 George Tikijian/USA
 Cap rates did not come below 7 1/2% until about.

 George Tikijian/USA
 Ah, the late 90s, I think.

 George Tikijian/USA
 I think 9798, when the refs were very busy buying properties, cap rates came down below 7 1/2, but that was really the first time.

 Cameron Benz/USA
 Staying.

 George Tikijian/USA
 So A6 cap sounds high to you, since you've your whole career has been, you know, 3 1/2 to 5 caps, but A6 cap is still pretty good and and the peak of the last cycle which was 2007 right before the 2008 downturn, 1/6 cap when we got down to six caps that was like ohh my goodness, it's the lowest cap rate we've seen for a long time.

 George Tikijian/USA
 So that was the peak pricing in the last cycle.

 Hannah Ott/USA
 George, you mentioned interest rates.

 Hannah Ott/USA
 I'm going to put you on the spot, which I know you won't mind and ask you a question, and this was something that we did this week.

 Hannah Ott/USA
 Then we were sort of surprised by the answer is I I'll see if you get it.

 Hannah Ott/USA
 So you talked about interest rates since the 80s have really been declining.

 Hannah Ott/USA
 We were looking at for a BOV we're doing for a client as what has the average interest rate been over the last 20 years.

 Hannah Ott/USA
 So from the 10 year Treasury, because that's really the best way to measure it is what is the average 10 year Treasury bin from 2000 to 2021.

 George Tikijian/USA
 2.73%.

 Hannah Ott/USA
 And they're gonna think we made this up.

 Hannah Ott/USA
 It's 2.66%.

 Hannah Ott/USA
 Uh what?

 Hannah Ott/USA
 But if you expand that time frame by five years, so you go by from 1995 to 2021, what is it?

 Hannah Ott/USA
 What's that?

 Hannah Ott/USA
 What's the average 10 year?

 George Tikijian/USA
 375.

 Hannah Ott/USA
 This is why he's the Oracle, my friends.

 Hannah Ott/USA
 It is 3.6.

 Hannah Ott/USA
 What we were surprised at what I was surprised at and my career really goes from, you know, about 2000 ish till till now is if you go back and just add those five years in of the 90s, how much it changes that average interest rate from 2.66 to 3.6 and what and the shorter you make that because we've been in a declining interest rate environment, the shorter you make that time frame, the lower the rate is.

 George Tikijian/USA
 You know who you can attribute that to?

 Hannah Ott/USA
 Tell us.

 George Tikijian/USA
 Osama bin Laden.

 George Tikijian/USA
 Because.

 Hannah Ott/USA
 Because of desert storm.

 George Tikijian/USA
 Because.

 George Tikijian/USA
 No, no.

 Hannah Ott/USA
 Is it?

 George Tikijian/USA
 This is after desert in 2001.

 Hannah Ott/USA
 Yeah, I guess it is.

 George Tikijian/USA
 In 911 that the Fed lowered interest rates dramatically because the market was freaking out from 911 and that interest rates went down a lot.

 Hannah Ott/USA
 Yeah.

 George Tikijian/USA
 But you know that you would think that would be good for apartments.

 George Tikijian/USA
 It was actually terrible for apartments.

 Hannah Ott/USA
 Because of home buying, yeah.

 George Tikijian/USA
 The worst period of time for apartments was from O2 to 06.

 George Tikijian/USA
 Interest rates went down and then between Clinton and Bush, there were incentives to to buy homes.

 George Tikijian/USA
 And during that period of time in the early to mid 2000s is when anybody who could fog a mirror could buy a home, qualify for a mortgage, and it sucked the lifeout of apartments, even though interest rates went down.

 George Tikijian/USA
 So you know, there's always multiple factors that you've got to look at.

 George Tikijian/USA
 You know, it's not just interest rates, it's also supply and demand.

 Hannah Ott/USA
 Yeah, yeah, absolutely.

 Hannah Ott/USA
 Cameron, who's the number one buyer buying deals in Indianapolis right now.

 Cameron Benz/USA
 I would say musing management.

 Hannah Ott/USA
 Yeah.

 Hannah Ott/USA
 Yeah.

 Cameron Benz/USA
 No.

 Hannah Ott/USA
 So for those of you guys that don't know, musing management and George, correct me, since you've had a really long history with them.

 Hannah Ott/USA
 They're an Indianapolis based, really second generation family office that is being run by the president, who's not a member of the family, but by a president who's running it on behalf of a family.

 Hannah Ott/USA
 And they own only in Indianapolis, MSA, and they're buying, I think, 4 properties right now, which I don't think they've acquired anything in the last couple years, is that right?

 George Tikijian/USA
 Red block water side in Castleton.

 Hannah Ott/USA
 Who has probably five years ago.

Cameron Benz/USA
 19.

 George Tikijian/USA
 About three.

 George Tikijian/USA
 Yeah, it's three or four years ago.

 Cameron Benz/USA
 Yeah.

 Hannah Ott/USA
 Yeah, I think that's yeah, three or four years ago.

 George Tikijian/USA
 And like a lot of other investors, they they've been more focused on building, so they're they're building a 348 unit property and they've got some other sites.

 George Tikijian/USA
 So he's also working on building, but you know, he missed out on a lot of deals with cap rates in the you know sub five cap rates and he has a long memory and a long time horizon.

 George Tikijian/USA
 So he's looking back.

 George Tikijian/USA
 What you're calling basis plays, he's looking back and just saying, you know, if I can buy a property at A5 cap or a 5 1/2 cap, even though interest rates are higher in the deals are tight.

 George Tikijian/USA
 Umm I I still think it's a it's a better, better pricing than we saw a few years ago.

 George Tikijian/USA
 And I'll I'll go win some deals and I'm using my own money.

 George Tikijian/USA
 So over the last 10 years, he's taking advantage of low interest rates and if refinance their properties and build up a war chest and now he's spending some of that war chest.

 Hannah Ott/USA
 So, Cameron, what does it mean?

 Hannah Ott/USA
 What does it mean that music management is the most active buyer right now in Indianapolis?

 Cameron Benz/USA
 To me, what it means is if we're talking about a guy that has a long time horizon, a long memory of previous years, it is buying a lot right now.

 Cameron Benz/USA
 Probably a pretty good buying opportunity.

 Hannah Ott/USA
 Yeah, yeah.

 Cameron Benz/USA
 Right.

 Cameron Benz/USA
 Yes, equity.

 Cameron Benz/USA
 I ready to go, and he's buying a lot of properties on the market.

 Cameron Benz/USA
 He's gotta be seeing something.

 George Tikijian/USA
 Well, he's buying.

 George Tikijian/USA
 He he's.

 Hannah Ott/USA
 Yeah, to me it also speaks to captive equity.

 Hannah Ott/USA
 He doesn't have to go convince anybody like.

 Cameron Benz/USA
 Right.

 Hannah Ott/USA
 Yeah, I know this or that.

 Hannah Ott/USA
 He's got captive equity.

 George Tikijian/USA
 He's also buying locations at he wants.

 Hannah Ott/USA
 Yeah.

 George Tikijian/USA
 He's not gonna just go buy anything, so it's specific locations that are attractive to them.

 Hannah Ott/USA
 Yeah.

 Cameron Benz/USA
 That's right.

 Cameron Benz/USA
 That's right.

 Hannah Ott/USA
 Well, thank you guys so much for joining us today and we hope you gained some valuable insights and had a little bit of fun with us as well.

 Hannah Ott/USA
 And remember what George always says?

 Hannah Ott/USA
 You're only as good as your next deal.

 George Tikijian/USA
 Chao.