Sun Belt Real Estate Still Presents Distress Opportunities

Investors’ interest in Sun Belt multifamily has slowed over the past year, as rate hikes and falling rents have left some in bad shape. But for savvy players, opportunities are there for the taking.

That’s the word from Kyle Matthews, CEO of brokerage Matthews Real Estate Investment Services, who spoke on The Real Deal’s “Deconstruct” podcast this week.

Many of the market dynamics that brought investors and developers to the Sun Belt have changed. Values are in the basement for multifamily and office properties, thanks in large part to oversupply and financing costs. While these shifts have scared off some investors, others, like Matthews, are motivated.

“There are going to be some purchase opportunities over the next 12 to 24 months that we’re going to look back on in 5 or 7 years and we’re going to be like, ‘Oh my gosh, those guys killed it on the deal,’” Matthews said.

The distress in the region’s multifamily is a stark contrast from just two or three years ago, when favorable migration patterns, rent growth and low borrowing costs led to a boom in investment. Bidding wars broke out across the region, and properties changed hands at unsustainable prices, Matthews said.

Meanwhile, a slew of developer bets, supported by pro-development policies, led to an oversupply problem.

“If you let developers build, what will they do? They’re going to build, build, build until they overbuild,” Matthews said.

The result has been declining rents, increasing vacancy and distress. That will force many owners to hand buildings over to lenders, Matthews warned. This will open doors for some investors.

“We’re going to start seeing opportunistic capital re-enter the market knowing that, if they’re not at the bottom, they’re pretty close to it from a pricing standpoint,” he said.

Ultimately, Matthews stressed, it still comes down to real estate’s essential element: location. In the right place, a multifamily purchase at a good price will pay off.

“Give me the best multifamily property on the best block any day of the week,” he said.

Matthews also sees potential in office investments, given their sunken values. He’s particularly interested in assets that fall just short of a Class A distinction.

“While office may never come back to what it was pre-Covid, I think it’s going to come back significantly from where it is today in terms of occupancy and rent,” he said.

Matthews also weighed in on industrial and retail properties, where distress is less common, but he pointed out that there are still good deals to be had. Investors may have a harder time finding them, though.

The scarcity of mid-sized industrial developments, in particular, offers growth potential in that sector for the next decade.

Check out “Deconstruct” on Apple and Spotify.