US Apartment Distress with Anton Mattli

Anton Mattli is the founder of Peak Financing, based in Dallas Texas. Anton got his start in banking in Switzerland and held global commercial bank positions in NY, and in Asia before launching Peak Financing. On today's show we are talking about the state of the market and which segments are seeing the most activity. To connect with Anton, visit https://www.peakfinancing.com/home-338322. You can reach him directly at [email protected]. ----------- **Real Estate Espresso Podcast:** Spotify: [The Real Estate Espresso Podcast](https://open.spotify.com/show/3GvtwRmTq4r3es8cbw8jW0?si=c75ea506a6694ef1) iTunes: [The Real Estate Espresso Podcast](https://podcasts.apple.com/ca/podcast/the-real-estate-espresso-podcast/id1340482613) Website: [www.victorjm.com http://www.victorjm.com/](http://www.victorjm.com http://www.victorjm.com/) LinkedIn: [Victor Menasce](http://www.linkedin.com/in/vmenasce) YouTube: [The Real Estate Espresso Podcast](http://www.youtube.com/@victorjmenasce6734) Facebook: [www.facebook.com/realestateespresso](http://www.facebook.com/realestateespresso) http://www.facebook.com/realestateespresso%5D(http://www.facebook.com/realestateespresso) Email: [[email protected] mailto:[email protected]](mailto:[email protected] mailto:[email protected]) **Y Street Capital:** Website: [www.ystreetcapital.com http://www.ystreetcapital.com/](http://www.ystreetcapital.com http://www.ystreetcapital.com/) Facebook: [www.facebook.com/YStreetCapital](https://www.facebook.com/YStreetCapital) http://www.facebook.com/YStreetCapital%5D(https://www.facebook.com/YStreetCapital) Instagram: [@ystreetcapital](http://www.instagram.com/ystreetcapital)

• 0:02Speaker 00

  Welcome to the Real Estate Espresso Podcast, your morning shot of what's new in the world of real estate investing. I'm your host Victor Manash. This is the weekend edition where we interview notable people from the world of real estate investing. Today is no exception. We have a great guest all the way from Dallas, Texas. Welcome to the show, my good friend, Anton Matley.

• 0:17Speaker 01

  Hi Victor, glad to see you again.

• 0:20Speaker 00

  Well, great to have you here. It's been a while since you were last on the show. You are in the world of lending, commercial lending specifically, and you're directly connected with a lot of transactions that are happening in the marketplace. You are seeing things literally firsthand. So love to get an update, but for the folks who haven't met you yet, perhaps give a little bit of your backstory and how you got to this point in your journey.

• 0:44Speaker 01

  Sure, happy to. So I'm based in Dallas, as you mentioned, but as you can hear from my accent, I wasn't born in Texas. I was born in Switzerland, grew up in finance. After I finished school, worked in New York, Tokyo and Hong Kong, then left banking and started my own business. We were working with family offices in Europe as well as in the US and we were involved with ground up developments as well as existing commercial real estate. And as part of that, we realized that there was a need also to have a better understanding

• 1:24Speaker 01

  of the financing and the origination of financing for all these deals. And that's how we started peak financing roughly 20 years ago.

• 1:34Speaker 00

  I love it. And you're involved in mostly, if I recall, multifamily apartment projects, although I think a few other asset classes as well. And certainly this is a market you and I have both been predicting since I'm going to say mid 2022, that there would be distress happening and we're starting to see it.

• 1:54Speaker 01

  Yes, definitely. Yeah. So you and I were probably one of the earlier ones who pointed out that this is going to create distress in the system. I think where I solely misjudged it, the speed of how the distress is actually hitting the market, right? I thought it would happen faster.

• 2:18Speaker 00

  Yeah, me too.

• 2:19Speaker 01

  Right. And I really thought that it would happen already in 24 and 25. And now 26 is really, in my view, the first year where we see a very significant uptake of foreclosures, short sales, and a general view by many lenders that further modifications are not going to work out well for these assets. And I would say it's probably, a lot of it is driven by interest rates where they are today, where lenders recognize that hoping for lower rates and with it lower cap rates and with it higher valuations, obviously, that that is not going

• 3:02Speaker 01

  to work out over the next year or so. And as a result, lenders need to take a step and even property owners need to be look in the mirror and say, okay, we need to find a solution here. And it's not, not in a six month or 12 month, let's find a solution now.

• 3:22Speaker 00

  I think there's a few headwinds. You've touched on a couple of them. Certainly the oversupply in a lot of primary markets is a factor and many of the projections for rent and even rent growth haven't come to play. I'm thinking of markets like Austin, Texas, and you know, several others where rents are far below the pro forma. You can have complexes, large ones that are at 95% occupancy with negative cash flow. And, and that becomes a structural problem. There's just no way to get there from here. Going to 99% isn't going to fix it. And so those are very problematic. The second, of course, is that all of this

• 4:03Speaker 00

  new product has put a lot of pressure on existing B-class apartments. So a lot of those value add plays that worked in the latest version of Excel don't work in reality because they're getting squeezed by all of these concessions on the new properties. And even those ones are starting to experience pressure as well. Is that, are you seeing the same thing?

• 4:26Speaker 01

  Yes, definitely. So you mentioned some of the markets where I would say Austin, Nashville, Phoenix are probably the worst hit.

• 4:33Speaker 00

  Yeah.

• 4:34Speaker 01

  When it comes, just because the massive amount of new product that was, was added to, to the markets were just insane in a very short period of time. And we still see in some of these markets, in the extreme cases, you have up to four month concessions. Right. So I would say Nashville is probably the worst of them. And then you have some pockets in Phoenix where you have the same. Austin is seems already be improving, right? But even in other markets, like I live in Dallas, in the northern part of Dallas, like you have Frisco, the Frisco area, a lot of product has been delivered there too. The

• 5:15Speaker 01

  pressure is, is even in markets where no one thinks that the pressure is there. So solely the new constructions, they have been going through that massive adjustment. And you have institutional buyers who pick up these assets at very attractive basis. Obviously, they project that it's going to improve. And I frankly believe that that is the case only in strong markets like Dallas, Austin, and even Phoenix. So for, for the institutional buyers that can pick up these assets, that's actually a very good thing. Now, you mentioned the B-class, obviously, it's always that trickle down effect, right? So now, whenever

• 5:58Speaker 01

  you give a lot of concessions and rent reductions in A-class, it trickles down to the B-class and then it even trickles down from the B into the C, right? So everyone is really feeling that pain. The further down you go, the less of concessions you have to give, but you solely cannot push the rents as you thought that you could. And that brings, brings me back to what you mentioned, that value add play. Very often you do this, these renovations to units, especially in C-class and lower B-class, and it doesn't move the rents at all, right? So, and that is also one of the challenges for a lot of these property owners

• 6:41Speaker 01

  where you went with a bridge loan, as you know, with a lot of these value add deals, you had to commit to the lender to do some renovations and unit upgrades. Now you recognize these unit upgrades do not provide any value, but the lender still insists that you actually do those upgrades because you committed to it. And that has created a lot of problems, has removed, obviously with the interest rates that have moved up, has also removed all the, the free cash flow to do any maintenance, right? We no longer just talk about upgrades. So now the properties are actually deteriorating strictly from a deferred maintenance perspective.

• 7:24Speaker 01

  And that's really a vicious cycle, right? Yes, you might be still occupied, but the property looks, looks no good anymore. There are leaks, there are order issues, and then you, the good tenants move out, they move up to a B-class, right? Or from a B to an A. And in order to continue to keep the property occupied, you have to accept lower quality residents. And that obviously increases your bad debt. And it's that vicious cycle is just getting worse and worse.

• 7:57Speaker 00

  And then, of course, your turnover costs go up because you're not only, your unit turns are no longer just a cleaning now. You actually need to do some heavier lifting to get that unit rent ready again. And that, and so now you've got not just a month of vacancy for the turnover and a month of expense for the leasing commission, and then you're going to lose another bunch of money to make that unit rent ready again. You've lost a quarter of your year in, in a C-class building that you thought you could turn that unit much faster.

• 8:28Speaker 01

  Yeah, definitely. Yeah.

• 8:30Speaker 00

  So let me ask this, are, are normal deals getting done today? Or is everything just sitting on the sidelines waiting for that word opportunistic? Which is code for distress.

• 8:44Speaker 01

  Yeah, it's a good question. I think it depends a lot on on the markets, right? So we have talked about all that distress, which is really happening mostly in the Sun Belt. But so when you, when we look at the Midwest, there has been some more elements of distress that are now surfacing, but overall the Midwest markets have done pretty well and even the northeastern markets other than New York City, which has its own problems, as we know. But other than that, the even in the northeast, the markets have done pretty well and especially in the Midwest. So we have to really look at where where are the the issues really primarily happening?

• 9:29Speaker 01

  And that is definitely in the Sun Belt. So now when we look at who are the buyers, as I mentioned in the class A, you have institutional buyers that are very much willing to step in and pick up from usually from developers that are just running out of time. And particularly merchants, developers, merchant builders, they they are in that business to sell. Right? Once you have it stabilized and they realize we don't make any money with with that development, so let's just sell it. And that's where you have very active buyers. The B space, I think you still have some institutionals. Right? And then talk, when I talk about B class, I really talk about two thousand plus.

• 10:12Speaker 01

  Uh, maybe some nineteen nineties in better markets, but mostly two thousand plus. I think there is still quite a bit of institutional buyers. Once you go into the C space, especially the eighties and older, uh, no institutional goes in there. Right? Uh, because they can pick up distress or at least capital stack distress with much better quality assets. So they tend not to go into that C space. So that is really where it's it's the hardest to find quality buyers. And when you look at uh, at all these Sun Belt markets, uh,

• 10:52Speaker 01

  I would say it's hard to tell, right? Because no one, not the listing brokers are not always very forthcoming with what actually trades and or not. But based on my discussion with various listing brokers in different markets, I would say it's it's safe to say that fifty percent of all the properties that go come on to market, they never trade. And uh, even those that actually are trading, they're trading well below of what the original anticipated price expectation was by the sellers, right? So, uh, are there buyers out there? Yes, they are. But uh, like the typical syndicator

• 11:36Speaker 01

  that has been looking at the C class properties, they struggle, as you know, with equity raises. So they are stepping back more and more. So now you have more the family offices or private individuals that might be willing to step in. And they are the more opportunistic buyers there that have a long term view. But I do not see that those buyers are uh, large enough of a pool to really pick up all these these properties. So as a result, a lot of these uh, properties come to the market and then eventually they will just are being pulled.

• 12:14Speaker 01

  And then if the lender needs needs a solution, they're foreclosed and then it's on the lender's balance sheet. And eventually they come to the market with that. And we have seen a lot of that. But even of those properties, many are still not trading because the lenders are not willing to let the property go for the value they really should sell it for, right? So it's still that that gap between what buyers are willing to pay and what sellers are willing to accept. But I feel that with every month that goes by, that gap is shrinking and it gets be it's getting more attractive for buyers. And that's really, I think, the next twelve to twenty four month.

• 12:59Speaker 01

  And I have said that already for a while, but I I still believe that the next twelve to twenty four month will be creating massive buying opportunities. We see now cap rates for for stabilized C class properties in some of the Sun Belt markets where they are clearly in the sevens. Sometimes even the eights, which we have never seen before, right? And obviously.

• 13:26Speaker 00

  Post two thousand eight, right?

• 13:28Speaker 01

  Yep, that's exactly right. Yeah.

• 13:30Speaker 00

  If we segment the market, let's let's segment in a couple of different ways. Number one, let's talk about size of asset. You know, there's the sub hundred unit, there's the one to two hundred unit, and then there's the two fifty plus, let's say. If you were to segment the market in those three, are you seeing the same things? Are you seeing anything different? What what's your observation?

• 13:53Speaker 01

  Yeah, so the the two fifty plus, uh, the institutional buyers are are active in there. But as I mentioned, they go look for mostly newer product, right? So if you have a larger C class property that is, let's say, two hundred and fifty units and up, your buyer pool is has really shrunk, right? Because in the past, it was over the last ten years, it was mostly syndicators. Right? So now we can argue that even institutional buyers are technically syndicators. It's all with other people's money, right? But it's it's they have such a massive amount of money that they pool together.

• 14:33Speaker 01

  So when we talk about syndicators, we really talk about these individual private placements, purchases, individuals, single asset purchases in most instances. And there you just do not have the ability by most syndicators to raise equity, right? So I would say the hundred to two hundred, maybe two fifty for the better syndicators. That's where syndicators are still willing to to accept that challenge to raise the equity. But above the two fifty, it's really tough, right? And these assets are very hard for anyone to pick up.

• 15:14Speaker 01

  Below the hundred mark, I would say it's now you have some private individuals, families that are entering that space. And I would say there is probably a better chance in that thirty to hundred unit

• 15:30Speaker 01

  space where someone is actually willing to pick it up. And then you have families, individuals, ten thirty one buyers very often, uh, that also compete with some syndicators that are willing to do some of these smaller deals, right? So overall, I would say to summarize, probably the thirty to two hundred unit space is the easiest where things still can trade. Above that, it gets harder and harder. And then once you go below the thirty unit space, that's very unique, right? We we are not really that active in in in in that space, but from what I'm seeing, it's it's it's not easy.

• 16:12Speaker 01

  Because usually you have private individuals that want to stick to the one to four unit space where you have the the great financing available, right? And then it's kind of that five to thirty units is kind of in a no man's zone.

• 16:27Speaker 00

  Exactly.

• 16:29Speaker 01

  Right? Which is hard to finance. It's hard to justify from an economics perspective and so on. But I I've I've not active in that space that much, so I cannot really. I'm not an expert in in in that segment, right? That I could really make a prediction how much rates there.

• 16:47Speaker 00

  If I think about who the sellers are and segment the market from that point of view, there are the folks that have held a property for, gosh, whatever, thirty years, they're aging out, the kids don't want it. So they it's just time for them to sell because they've aged out of the market. And the fact that rates have gone up or down or whatever, doesn't change that fact that that's group number one. Group number two are the funds where they happen to be at year ten of a ten year fund and the mandate says we need to exit. And then, of course, the third, which we've talked about already in abundance, are the folks that have to sell.

• 17:25Speaker 00

  How do you see the market segmenting? And maybe there's more categories than that, but how do you see the market segmenting at least amongst those three?

• 17:33Speaker 01

  Yeah, uh, so the the funds that need to liquidate, they're liquidate, right? So that's just the the normal process where everyone goes through. To be fair, the the typical REIT, right? When we talk about these funds that have the, let's say, the ten year timeframe, their leverage in most instances is is pretty is pretty low to begin with. Right? So they've depending on the REIT, it's fifty to sixty percent. So they can take that hit. Obviously, do they like to take that hit? No, they don't, but it's just a part of the process. And to be fair,

• 18:14Speaker 01

  right? Anyone who who bought ten years ago and now we just the end, yes, values have come down from the peak in twenty one and early twenty two, but the valuations still have gone up quite a bit compared to ten years ago. So they are fine. Right? Uh, now, uh, when it comes to syndicators, obviously, it's a it's a completely different story. Right? And when we talk about funds, so we have the true funds, the true REITs, right? With with large portfolios that bought ten years ago. And then we have the orders that are quasi funds, which are the large syndicators, as we know them, right? Like a Tides, like S two Capital and some of the orders.

• 18:59Speaker 01

  Right? Uh, GBA and so on. And uh, they are, I would say, they they we already know because a lot of them have had massive issues. Because they have been churning their assets much quicker than the traditional fund, right? That bought a property ten years ago and was just holding it. So they bought property, turned them and sold them very often in twenty one and twenty two for a massive profit and then reinvested immediately at the peak. And those, they are really in the worst situation in my view of the funds. And they are in a very similar situation really as what the individuals syndicators are in, right?

• 19:43Speaker 01

  So now when it comes to families that have owned properties for a long time, I would say many of them, they're just refinancing, uh, unless they have a family situation where everyone is aging out, no one wants to deal with it, and along with the kids do not want to deal with it, then they may sell. But if they are still in a have a view, look, we we we like the asset, we like the cash flow, they're just refinancing. And we actually have have seen quite a bit of these type of refinancing ourselves. These are the easiest refinancing to do, actually.

• 20:20Speaker 01

  Because their basis is is pretty low, they have have not leverage to the to the max to begin with. And yes, the interest rates are higher, but they are still cash flowing because they don't have to go for that extreme leverage.

• 20:36Speaker 00

  Exactly. Well, fascinating. Anton, if folks want to connect, if they want to learn more, what's the best way?

• 20:43Speaker 01

  Yeah, so I'm I'm on social media, I'm on LinkedIn, I'm on Facebook, I'm on X. If you want to reach out by email, that is Anton at peakfinancing.com. So that's A N as an N C T O N as an N C at peakfinancing.com.

• 21:02Speaker 00

  Love it. Well, Anton, great to catch up as always. And for the listeners at home, you definitely want to connect with Anton Matley at peakfinancing.com. Links will be in the show notes. And in the meantime, have an awesome rest of your weekend. Go make some great things happen and we'll talk to you again tomorrow.