Anchor's new Chief Revenue Officer Brad Chmura spent much of Q4 meeting with real estate investors in various parts of the country, and he recently sat down with us to share the low-down on what he's hearing and seeing in the market:
Q. What are you seeing and hearing in the market today? Are certain geographies holding up better than others? Are certain types of projects or price points outperforming others?
A. The sense I get is that some of the sticker shock of the higher interest rates is beginning to wear off. Having said that, there’s no question that investors are more cautious at the moment, and many are trying to accelerate current projects. But, at the same time, they’re also looking at new ones that make sense. Maybe the margins will be a little tighter, maybe their expectations will be a little more grounded, but they need the next project: after all, that’s their business.
When it comes to geographies, I’m not the best person to predict the next hot or cold market: that’s more Matt’s role. Our Chief Capital Markets Officer Matt Miles tracks thousands of zip codes across 140 U.S. markets for Anchor from an investor perspective and ranks them by “investment-potential temperature.” But what I will say is that in most markets there are three price tiers: luxury, middle market and entry level. And, so far, from what we are hearing, the middle level is continuing to perform.
Now, depending on where you are, this could be a variety of price points. In Las Vegas, for example, that could be between $400K and $600K; in Southern California, it’s probably more in the $600K to $800K range. Why is this segment still in demand? It appeals to move-up buyers who have significant equity gains that are less impacted by the higher rates than entry-level buyers and want a new or rehab housing experience. So, while interest rates are up, price escalation has slowed and buyers are still willing to put their equity to work.
Q. What are your more sophisticated clients doing to navigate the market?
A. It depends on the investor, their business model and their market. As I mentioned, some investors are accelerating projects and maybe scaling back on their scope. Because the average Anchor client is usually a professional investor or builder, as opposed to a part-time investor, they tend to have more capital and more options. Depending on the dislocation in their market, some are moving to buy-and-hold and build-and-hold models to take advantage of the continuous strong demand for rentals.
Some are looking at different types of projects. Recently, we visited with a few clients in San Diego that are pivoting to micro-housing projects. Rehabbing 8- to 10-story condo buildings to create smaller, one-bedroom and studio units that offer an affordable, urban experience.
The bottom line is there is a shortage of new and upgraded housing in most markets, and while we may be in a down cycle now, our clients know that this too will change.
Q. If, as many economists predict, price appreciation will slow and perhaps even reverse, what will this mean for investors and consumers? Will it create opportunities or just headwinds?
A. No one wants to see prices decline because it can affect consumer confidence. In some markets, however, this is going to happen. Question is by how much? But there are some pluses as prices moderate. We’re starting to see supply chain issues resolve and lumber and labor prices come down or at least stabilize. And competition for properties has become less frantic. This is happening in part because large institutional players have started to pause their buying and less-experienced fix-and-flip investors can’t get financing.
As a result, professional investors, Anchor’s core clients, aren’t getting outbid and are opportunistically able to find deals that frankly weren’t as available in their markets nine months ago. So, there are some silver linings to the current environment.
Q. This has been a tough, volatile year for investors. What do you think 2023 will bring?
A. That’s a tough one. Three years ago, would anyone have predicted that we’d be sitting here today looking at record home prices or that homeowners would be sitting on $27 trillion in equity? Or that we’d be here after a global pandemic… social and political unrest… supply chain issues…double digit inflation…and unprecedented FED tightening?
Do I think interest rates will come down? Sure. What I don’t know is when. Most clients I’ve spoken to are still bullish on this space. They’re getting over the shock of seeing interest rates more than double in less than six months; and they’re saying supply chain problems, while not gone entirely, are at least moderating. Some see price deceleration as an opportunity to acquire properties.
That doesn’t mean that the market won’t be choppy over the next 12 months. It probably will be. But our clients are positioning themselves for the long game. They have capital, experience, an ecosystem of suppliers, contractors and labor at their disposal. This will help them weather a down cycle and position them to accelerate their growth when more normal conditions return.
When you think about people buying their first home, that's a big decision. Our clients are professionals and they do this on an ongoing basis. That's how they build wealth. That's how they pay their bills, how they create jobs and how they help rebuild communities.
As long as there continues to be a shortage on housing and as long as consumers want new or newly rehabbed homes and are willing to pay a premium for them, our investor and builder clients are going to be okay.
Q. What is Anchor doing to help clients?
A. One of our priorities has been to be in front of our clients, meet them in their markets, hear what they are facing and understand their business models. The reactions have been very positive. The clients appreciate the face-to-face meetings, and they want to know what Anchor can do for them. They want to show us their work product, showcase their operation and have a relationship with a lender.
Our message is simple: We want clients to know Anchor wants to help them expand their business, unlike some of the competition. We have capital, 25 years of experience, and we are growing, even in this difficult cycle.
We’re sharing our plans to strategically expand in certain markets, investing to put boots on the ground. And we’re making it clear that if they have viable projects, including larger, more complex ones, we’re ready to fund them. This is important because we’re starting to get calls from prospects and past clients who have been “left at the altar” by their current lenders.
Relationships are easy when times are booming and everyone is making money. It’s market cycles like the one we’re in that forge strong relationships and that’s what we intend to do.