Always hunting!
At Cardinal Oak Investments we have been searching for potential acquisitions. We have had Letters of Intent out to sellers, some even accepted, and a few under contract, but none got further than that.
If you’re a qualified investor with us, you haven’t seen deals from us for that reason.
The economic, social, and market factors today have been exceptionally brutal for most real estate investors. It takes a better deal for it to be a worthy investment because of several factors.
First and foremost are interest rates. High interest rates don’t just make our loans more expensive. They drive capitalization rates up too. Interest rates can move quickly. Just check the last one-year trend in 10 Year Treasury yields. Rates are all over the place, and stuck now at a high level.
Cap rates? A cap rate is the Net Operating Income divided by the Price or Value of the property. When the NOI stays the same but the value declines, the cap rate goes up. Cap rates have risen a little but not enough to make deals attractive again.
NOI, and therefore the cap rate, doesn’t include debt service, your mortgage payment. If the NOI stayed the same and debt service expense went up and the cap rate stayed the same, technically the value stays the same, too. But that doesn’t tell the whole story.
Buyers can’t make the deal because their interest expense will be too high. Sellers have to lower the price, and that means the cap rate goes up.
That is a slooooowwwwwww process. Rents haven’t declined much, maybe even risen in some markets, so owners are making money and holding onto properties rather than selling at a reduced value – for the most part.
We are looking still at just multifamily, although there is a strong case to be made for other sectors including senior assisted living, mobile home parks, and storage facilities.
I have good familiarity with several very strong syndicators in the market. I like what they’re seeing and may team with one or more of them in the future. They have connections to markets that I don’t have, and often have teams already on the ground in their markets. And track records of success.
Focus and flexibility has been my mantra.
There are deals out there but they’re harder to find. If you haven’t had a conversation with me about investing, now is the time. Book time on my calendar and start thinking about your questions. We’ll figure out if real estate investing might be right for you!
Market update
Fort Myers, FL – Fort Myers has emerged as a dynamic market for apartment investors, driven by robust job growth, fluctuating rental trends, and a surge in multifamily construction. Like many Florida markets, its strength is undeniable but excessive growth rates have been followed by calamitous declines.
Fort Myers has experienced consistent job growth, reinforcing its appeal to apartment investors. In December 2024, the Cape Coral-Fort Myers metro area added 4,100 private-sector jobs, marking a 1.6% increase year-over-year. Significant gains were observed in government, construction, and leisure and hospitality sectors.
Have you been to Fort Myers? It’s such a beautiful area, of course leisure and hospitality are top job sources. But when people stop vacationing, as they did during Covid, business drops and renters can’t pay their rent.
Earlier in 2024, the financial sector led with a 4.5% annual growth, while professional and business services added 2,800 jobs year-over-year. Unemployment has remained low, most recently 3.7%, indicating a stable job market. Looking ahead, employment growth in Fort Myers is projected to average around 1% annually through 2028, with the hospitality and government sectors expected to be primary drivers.
The Fort Myers rental market has seen significant fluctuations over the past three years. In 2022, the market experienced a peak in rent growth, with annual increases reaching 34.7% in April. If you’re a builder, you were racing to get land, permits, and a project started. Two years later when your project finishes, many other projects are finishing too and you’re flooding the market with new housing units.
Fort Myers has seen a significant increase in apartment construction to meet growing demand. In the past year, approximately 2,200 units were delivered, with an additional 6,700 units under construction as of Q2 2024.
In May 2024, effective asking rents had declined by 9.1% year-over-year, marking the steepest decline among U.S. markets. It would have taken extraordinary population growth to absorb all the new rental units coming to the market. Nice new apartments.
That’s hard to compete with, and very few populations have grown as fast as Fort Myers over the last 20 years, from 57,000 to 97,000 today, a 67% growth. That was still not enough to keep rents from declining.
What’s going to change in the future? Apartment construction, not population growth. Apartment deliveries will decline, population growth will continue marching forward.
Fort Myers is still a beautiful area, people will keep moving there, but this recent glut of new apartments and high interest rates will scare away all but the most aggressive developers. Despite the recent decline, rents are projected to recover modestly, with growth expected to range between 3% and 4% in 2025 as renter demand strengthens.
The kinds of new businesses Fort Myers attracts are highly amenable to apartment rentals. Overall economic growth, particularly in sectors like construction, finance, and hospitality, suggests increased corporate activity and employment opportunities, and these workers rent apartments in a big way.
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Finer Points of Multifamily Properties Adapting to Changing Priorities
What priorities do you focus on when you own and operate apartments?
My answer has always been occupancy and rent increases. Why wouldn’t it be. That drives cash flow and appreciation, and that’s what real estate investing is all about.
But that is shallow thinking because it ignores the granular details that truly move the needle. You can repeat this priority to your property manager all you want but that may not solve the problems they have today or lead to the results you ultimately want. What actions will increase occupancy, or more accurately, what sequence of activities and what should your expectations or targets be for each one of those activities. That’s how to think of the problem.
Can you increase rents when occupancy is under 90%? Probably not. Can you increase occupancy when your units look like the last tenants cooked meth? No. How about when the paint is peeling, the yard is muddy, the sidewalks cracked, rain spills over the gutters? Not likely.
This is the challenge of any owner/operator. Understanding where your priorities should be focused determines your success. It should be crystal clear before you even close the deal. There should be no “we’ll figure it out and make a plan after we close” kind of thinking. Dig deep, get to know the property, the tenants, the market, and develop your plan.
My team has had to shift priorities multiple times on properties. Unexpected things happen. On-site manager quits, the big freeze hits, local employer lays off. How do you respond? We’ve had to shift from increasing rents to restoring occupancy. Each priority requires its own sequence of tasks, and every task should have targeted goals with real numbers, not real-time subjective judgment.
“I think that outcome looks about right” is not a targeted goal. You should know the targets before you start the task.
Occupancy: we’ll invest X$ in marketing, we’ll install remotely controlled locks for vacant units so a prospective tenant can tour the unit on their own, we’ll call the prospect within one hour of tour completion, we’ll fill our pipeline with 50 inquiries a week, arrange tours for 20 of them, drive applications from 10 of them. Those are real targets. When you’re not hitting one of those targets, you have a very specific problem you can correct.
Likewise rent increases: we’ll do detailed, secret shopping of our competitors to really determine rents, we’ll go to their sites, ask all the good questions. Or we’ll experiment with different rents, we’ll advertise different leasing arrangements. Try different things to see what resonates.
Got your renovations finished? Now the priority is occupancy. Got occupancy up? Now focus on rent increases. Got rent stabilized? Now look at expenses like utilities.
That’s how to reprioritize and refocus. Not necessarily these items or this sequence but this is the mindset it takes to be successful in a competitive business like multifamily investing.
“Buy when there’s blood in the streets, even if the blood is your own.“
– Baron Rothschild
Who We Are
Cardinal Oak Investments acquires, improves, and manages under-valued commercial apartments. We buy B and C class properties of around 100 units in the Southeast and Midwest.
We look for properties whose amenities, aesthetics, and appeal have fallen into obsolescence, whose care reflects tired management, and whose location is where a stable workforce wants to live.
And we partner with like-minded investors looking for stable assets that produce good cash flow and strong appreciation.
Founded and managed by John Todderud, Cardinal Oak Investments has acquired properties on both coasts and in between creating annual double-digit returns.
For more information, schedule time with me or send an email to john@cardinaloak.com.
Please note: Past performance is no indication of future performance.