Building Bridges in Key Markets: Breneman Capital's Real Estate Strategy
The Breneman Capital team had a productive month of June, highlighted by recent visits to two of our most important target markets – Phoenix and Dallas-Fort Worth.
We have remained diligent in pursuing new offerings for our investors and have kept pace with the latest market intel and trends. In doing so, we have dedicated ourselves to cultivating relationships with the most influential real estate professionals – brokers, property managers, other owners, and equity relationships – in their respective markets. By planting these seeds, we can have confidence in navigating this market lull and be ready to strike when the time is right.
Through the myriad conversations with key market stakeholders along with exhaustive research and internal discussions, Breneman Capital is reestablishing our emphasis on value-add investments. In a market plagued with uncertainty, we have obsessed over discerning the best strategy for our investors, whether that be new construction, core-plus, or value-add. Value-add provides the most attractive proposition with multiple exit strategies through either sale or cash-out refinance – the latter of which is much more difficult to project for new construction and core-plus opportunities. In a market with more questions than answers, we believe having multiple avenues for success is in the best interests of our investors and is best achieved through a business plan in which we generate appreciation through renovations and/or operational efficiencies and do not rely solely on market appreciation for investment returns.
Met with representatives from eight different brokerage firms:
The consensus is that transaction volume in Phoenix is down about 70%-80% year-over-year.
The average going-in cap rate is about 5.50% for new listings that fit our investment criteria. This is still less than prevailing interest rates, so the average deal remains very difficult to project returns that would warrant an investment purchase. In Breneman Capital’s opinion, this is a factor that necessitates value-add investment in order to achieve positive leverage (i.e. a stabilized cap rate that is greater than the interest rate).
Market illiquidity is buoyed by many sellers who have unrealistic pricing expectations. Owners are reluctant to sell for less than what they bought for or sell for significantly less than what they could have achieved in 2021/2022. There have been many instances of owners marketing their properties for sale to “test the market”, only to continue holding or refinance.
Many brokers are skeptical of there being widespread distress in the market. While they certainly acknowledge that there is some distress in the market, they contest that it’s more specific to certain submarkets and sponsors.
The market for institutional-level investments (200+ unit properties) has dried up considerably more than middle-market investments.
Began preliminary discussions with one of our broker relationships to form an exclusive off-market sourcing agreement.
Met with another owner to share insights regarding the operations of existing assets as well as strategies for new investments.
Toured one prospective investment opportunity. The opportunity was initially intriguing with a ~20% discount relative to the property’s initial pricing guidance from late 2022. However, we ultimately passed due to the location and investment profile not meeting our standards.
We just returned from Dallas and will provide an update on that trip and that market next month. Although it has been a very slow 12 months in terms of new transactions, we are constantly looking for ways to improve as investors and build the foundation for future success. We are actively sourcing and evaluating new investment opportunities, and we are confident that our persistence and commitment to our investors will pay off.