2020 November Update - Which Data is Correct?
Photo by Markus Spiske on Unsplash
Many major Real Estate services (NREI, NMHC) are posting data and of course none of them have the same numbers. This is common in most data and indices created to track occurrences in a variety of markets. One must remember one of the reasons bridge financing exists is the fragmented commercial lending industry. This fragmentation is a major driver to why you can read one article that claims everything seems stable in real estate, then a different report which shows dramatically worse metrics. The “facts” of the data depends on where one is looking, and the attribution of the factors being tracked.
What is important, regardless of data source or tracking indices, is the data is showing commercial real estate is under pressure. Fundamentals of multifamily properties are still stronger than other property sectors, but as can been seen by the survey below, uncertainty still reigns. However, as a fund that launched in the face of this uncertainty, we continue to find comfort in our underwriting and risk assessment protocols.
Rent collection in multifamily, depending on the source, ranged from 89% to 95.7% for the last month. We had 100% collection in our properties adjusted for pre-existing vacancies in units being renovated. Due to historically low relative volatility and that people need a place to live, multifamily continues to be often ranked as the best place for investment. An NREI survey rated multifamily with a rating of 7.3 out of 10 and next highest was data centers rated at 6.3.
Surveys also showed there is still strong demand to buy properties as investors are thinking long-term past the pandemic driven recession. In addition, the news of Pfizer’s 90% effective COVID-19 vaccine and more vaccines from other sources on the way, suggests Spring 2021 we could put the pandemic behind us. Markets have already reacted with a bump in the mortgage interest rate. This bodes well for Kirkland Capital Group and matches the deal flow we are still seeing from our network.
On a side note, there are a record number of distressed debt funds being prepped for a wave of defaults that many predict in 2021. It is not the area we invest but it will be interesting to see how this unfolds. I am guessing too many dollars chasing the same trade in a low interest rate environment will most likely not provide the deals and returns these funds are hoping for.
National multifamily markets are still showing strength. The main driver of this is cheap capital. According to Freddie Mac low interest rates are allowing the Net Operating Income of multifamily properties to still show annual growth rate of 0.4%. However, this number is still well below the historical average growth rate of 1.9%. COVID’s impact is clearly seen in the lower NOIs. Additionally, property prices are only growing at an annual rate of 2.8% compared to a 6.6% historical average growth rate.
The Kirkland Income Fund I had a strong October with a monthly net return of 0.79%. We now have six-months of returns, starting with our April kickoff through October. The six-month compounded net return is 4.50%. Our annualized return would be 9.01%*, right in our target of 8.5% to 9.5%.
KCG also reached a major milestone, on boarding to a large institutional investment platform. We traversed the due diligence process successfully and were invited to their alternative investment platform. Our team is very happy with the high-quality fund we have built, and to have a third party acknowledge this is very exciting. Thank you to everyone that helped with that process!
Deal flow continues to be consistent. Most of these loans do not make the cut, but we are seeing a number of promising properties supported by experienced borrowers. The notional value of the loans is still beyond the capital of our fund. This is a good place to be as this is allowing us to have an opportunity to pick the ones that are best for the fund.
As always, I want to thank everyone for trusting us with your investment and we will continue to work diligently to provide strong risk adjusted returns.
*Past performance is not a guarantee of future results.
