Message from our Principle, Matt Ryan:
Happy New Year from Re-viv.
The holidays were good for my family and I; spent mostly with my parents or in-laws eating more than I should have while trying to find comfort in the bleak midwestern gray days. Upon reflection, I’m certainly taken back by the expediency of the year.
From an equities perspective, the central theme is, still, the Central Banks. Even infighting amongst our famed President and the FED has moved beyond the gossip column and into the front page. I anticipate continued volatility as the Algo’s continue to shift and bend the headlines and tweets, while everyone tries to predict how close we are to the recession. For one of the longest bull runs in history it sure has a hint of nervousness coupled with a fear of what the Central Banks’ hands off approach will produce.
From a Real Estate perspective, the looming impact rising rates have on asset prices seems to be the talk of the town (still). While being somewhat unheard of in the earlier half of the year, Opportunity Zones exploded into the press and into the mainstream investment landscape with over 115 funds currently launching (not counting our own). We’re proud to have been tracking this piece for quite some time and are also very proud of the bipartisan effort. As someone who loves free market solutions, it doesn’t seem they happen enough or at least aren’t lauded enough. Whatever side of the argument you’re on, Opportunity Zones, in my strong opinion, have a tremendous opportunity (for lack of a better term). The amount of asset appreciation and subsequent gains in the markets could inject significant investment into communities that may not have turned the corner yet. We’re still in one of the largest economic shifts of job creation since the industrial revolution and communities that are not diversified will continue to be left behind. For the sake of sounding too political, let’s shift gears:
Re-viv’s year in review
While it wasn’t nearly as successful year as we’d like from an acquisitions side of things, we saw some great potential deals and acquired a heavy value add deal in Sacramento that, while relatively small, has proven to be a good deal so far. Our focus for the year was mostly in the Reno and Sacramento markets, which saw cap rate compression along with existing apartment deals rise significantly on a per unit basis and per square foot basis, in some cases moving above replacement cost. This is a vital metric for us and simply put, it is when it makes more sense to build new product. I believe rising rates and some downward pressure from the equity markets will increase buying opportunities in the new year. So many investors who bought pre-2016 are sitting on some massive appreciation; with tax rates and OZ’s available, I think 2019 will be a good year for those to exit. This trend was set in motion in 2018 when sales volume significantly increased from China to domestic sellers . In the end, we put over two hundred million dollars of assets in underwriting and hope to 3x-5x that by next year. Switching back to the Sacramento, we’ll have renovated over 7 units in about two and half months while making substantial progress with both our labor and material suppliers. Our partnerships with key industry allies: General Contractors, Subcontractors, Property Managers, Brokers and Lenders in addition to three key team members was probably one of our biggest gains and something I believe will be fruitful for us in 2019.
Challenges for 2019
Ironically, we could still see some cap rate compression especially if the FED sees a larger macro event and puts the brakes on rate increases. The truth is, because of the equity gains out there investors are still chasing yield, shown by the major appetite for US 20 Year Treasuries and growth in addition to the short term bond market. Additionally, one thing that drastically affected our project timelines was the tightness of the construction market, with Sacramento being one of the top five markets for labor increase with no clear relief in site. This continues to be an issue in primary and secondary markets.
The only thing that would be worse than a drop in 2019 is a flat line while everyone looks around the corner all year only to be suddenly hit hard in 2020.
Hard to end on that line, so we’ll dash you with a bit of optimism. We’ll be cautiously aggressive as we were in 2018, looking to raise $20 million total in equity. The first pool will be for value add assets and the second for our specialized product for Opportunity Zones. While I’ve thoroughly enjoyed the product development and construction side of the business, which has always been a passion of mine, I’m very excited about our value add product this year, and I’m absolutely thrilled about the product we’ve put together for Opportunity Zones – capitalizing on the strongest relationships we have currently while tapping into two major real estate trends in 2019. There will be more to come from of us on that rolling out in late January.
I wish you and yours the very best in the New Year and here’s to a successful investing year in 2019.