fbpx Sample Page - HLC Equity

HLC Equity CEO Daniel Farber on How Did They Do It? Real Estate Podcast

HLC Equity CEO, Daniel Farber was recently a guest on the How Did They Do It? Real Estate Podcast. 

In the episode, Daniel discusses a variety of subjects surrounding his professional journey, the growth of HLC Equity as a family enterprise, his thoughts on the multifamily market,  and much more!

Key Topics Covered

  • How Daniel got exposed to real estate and the origin of the family firm
  • Challenges of shifting from one asset class to another
  • The importance of mindset and strategy when transitioning to multifamily
  • Utilizing technology and digital assets to remain on-trend and relevant in the industry
  • What makes Dallas, TX a great investment market for multifamily
  • Strategies for holding assets and acquiring new opportunities

To discuss any of these topics or to hear more about investing with HLC Equity, provide us your contact information below. 

Also available via:

HLC EQUITY

Election Year Impact on Multifamily Investments and Commercial Real Estate

Election years inevitably stir the waters of the economy and the commercial real estate markets. As political campaigns unfold throughout the year and candidates propose their visions for future governance, investors of all shapes and sizes prepare for potential shifts in policy that could impact their investments. The CRE landscape is no different. Understanding and anticipating these impacts is crucial for navigating through possible uncertainties that accompany election cycles and what changes may be on the other side.

6 Ways Election Years Can Impact Commercial Real Estate

  1. Election years often spark debates on regulatory reforms that can directly impact multifamily and commercial real estate. Policies regarding zoning regulations, rent control, taxation, and environment may be put under the spotlight and face potential revision, altering many factors that are core to CRE – property development, ownership structures, and operational dynamics and more.
  2. From an investor perspective, political uncertainty during election years can heavily influence investor sentiment and result in changed (often more conservative) behavior. Investors may adopt a wait-and-see approach as they evaluate the potential ramifications of policy changes on multifamily properties. However, long-term investors may view election years as opportunities to capitalize on market fluctuations and invest in assets at favorable terms.
  3. Interest rates and monetary policy are another area that often fluctuate during the period leading up to elections. The Federal Reserve’s monetary policy decisions, including changes to interest rates – which has been quite active over the past years – are closely monitored during election cycles. Political factors can influence these decisions, affecting borrowing costs for developers and investors in commercial projects. Fluctuations in interest rates impact the affordability of multifamily acquisitions and development projects, other macro-economic factors, and consequently shaping investment decisions.
  4. Similarly, inflationary pressures during election years can impact multifamily real estate investments. As we’ve seen in trying to manage inflation, the rise may lead to increased construction costs, maintenance expenses, and operating costs for certain properties. Investors should assess the potential impact of inflation on rental growth rates and adjust investment strategies accordingly.
  5. Election years coincide with shifts in economic outlook and job market dynamics as well. Political uncertainty may lead to fluctuations in consumer spending and job growth, impacting the demand for multifamily housing. Real estate investors should monitor job market indicators to gauge occupancy rates and rental growth potential in different regions.
  6. Rental Dynamics are at the core of a successful multifamily investment. Election years may influence cost dynamics between consumers renting and owning residential properties. Economic policies proposed by candidates may impact wage growth, employment levels, and consumer spending, influencing the demand for rental housing. Also, changes in housing policies and mortgage regulations can affect homeownership affordability. Real estate investors should analyze rental growth projections and market fundamentals to identify areas with strong rental demand and potential for rent appreciation.

Monitoring the Market and How Real Estate Investors Can Maximize Opportunity:

So how can investors use this information to their benefit? During election years, investors should pay close attention to policy proposals related to housing, taxation, and rental regulations. Understanding how these proposals could impact multifamily investments is crucial for adjusting strategies accordingly. Additionally, monitoring economic indicators such as GDP growth, inflation rates, and job market data can provide insights into potential shifts in occupancy rates, rental growth, and investment returns.

Interest rate decisions by the Federal Reserve should also be closely tracked during election cycles, as changes in interest rates can affect costs and asset performance. Therefore, maintaining a focus on market fundamentals, including demographic trends, rental demand, and supply dynamics, is essential. Identifying markets with favorable characteristics for commercial investments and assessing potential risks associated with election-related uncertainties can help investors make more informed decisions.

In summary, election years bring a mix of challenges and opportunities for investors in the CRE market. However, understanding the potential impacts across the entire landscape can position you well. Investors can take advantage of election years as they would in non-election years: by maintaining a long-term investment focus. However, diversifying investment portfolios across different markets and property types may help mitigate risks associated with short-term market fluctuations and election cycles.

 

As a multi-generational commercial real estate investment firm, HLC Equity leverages our deep experience to deliver value to our investors and stakeholders. Our approach is rooted in a proven investment strategy, coupled with a keen understanding of navigating a variety of market cycles. Throughout election cycles and beyond, HLC Equity remains committed to building lasting relationships and generating strong returns for both current and future investors. Contact our team to learn more about how you can invest alongside us in institutional-grade opportunities.  

HLC EQUITY

The Pros and Cons of Investing in Different Types of Multifamily Assets 

Multifamily real estate is a popular and profitable asset class for many investors. However, not all multifamily properties are created equal.  

Depending on the age, location, condition, and amenities of a property, it can be classified as Class A, B, or C (or lower). Each class has its distinct advantages and disadvantages and requires a different investment strategy and risk-reward profile.  

In this article, we will explain the main characteristics and differences of each class and share some insights from our experience as a seasoned multifamily investor, owner, and operator.  

It should be noted that these are generalities, and not all properties will have the characteristics we outline.  

These are purely from our experiences and always recommend investors perform their own due diligence on any investment opportunity.  

Class A Properties 

Class A properties are the newest, most luxurious, and most expensive multifamily assets in the market.  

They are typically located in prime areas with high demand, such as downtowns, urban cores, or affluent suburbs. They offer the best amenities and features, such as pools, gyms, business centers, pet facilities, and high-end finishes.  

They attract the highest-income residents who are willing to pay premium rents for convenience and comfort. 

The main benefits of investing in Class A properties are:  

  • Stable And Predictable Cash Flow. Class A properties have high occupancy rates and low turnover, as residents tend to stay longer and renew their leases. They also have lower maintenance and repair costs, as the properties are newer and in better condition. 
  • Appreciation Potential. Class A properties tend to appreciate faster than other classes, as they are more desirable and competitive in the market. They also have higher resale value, as they appeal to a wider pool of buyers, including institutional investors and REITs. 
  • Tax Advantages. Class A properties can benefit from depreciation deductions, which can lower the taxable income and increase the cash-on-cash return. They can also qualify for tax credits or incentives for green or energy-efficient features. 

 The main drawbacks of investing in Class A properties:  

  • High Entry Barrier. Class A properties have the highest acquisition costs, as they command the highest price per unit and cap rates. They also require more equity and debt financing, which can reduce the leverage and return on investment. 
  • Market Risk. Class A properties are more sensitive to market fluctuations, as they depend on the economic conditions and income levels of the residents. They are also more vulnerable to oversupply and competition, as new developments can erode their market share and rental rates. 
  • Lower Yield. Class A properties have lower cash-on-cash returns, as they have higher operating expenses and debt service. They also have lower cap rates, which reflect the lower risk and higher quality of the assets. 

Class B Properties  

Class B properties are older, more affordable, and more functional multifamily assets in the market.   

They are typically located in secondary or tertiary areas with moderate demand, such as suburban or rural neighborhoods.   

They offer basic amenities and features, such as laundry facilities, parking lots, and standard finishes. They attract middle-income residents who are looking for value and quality.  

The main benefits of investing in Class B properties are:  

  • Value-Add Potential. Class B properties have more room for improvement, as they can be renovated or upgraded to increase their appeal and performance. They can also be repositioned or rebranded to target a different tenant segment or market niche. 
  • Higher Yield. Class B properties have higher cash-on-cash returns, as they have lower operating expenses and debt service. They also have higher cap rates, which reflect the higher risk and lower quality of the assets. 
  • Diversification. Class B properties can diversify the portfolio, as they have different risk-return profiles and market cycles than Class A properties. They can also hedge against inflation, as they can raise rents faster than Class A properties. 

 The main drawbacks of investing in Class B properties are:  

  • Capital Expenditure. Class B properties require more capital expenditure, as they need more maintenance and repair, as well as renovation and upgrade. They also have shorter economic lives, as they depreciate faster than Class A properties. 
  • Tenant Risk. Class B properties have higher tenant risk, as they have lower occupancy rates and higher turnover, as residents tend to move more frequently and default more often. They also have lower tenant quality, as they have lower credit scores and income levels. 
  • Regulatory Risk. Class B properties have higher regulatory risk, as they are more subject to environmental, health, and safety regulations, as well as rent control and eviction laws. They also have lower compliance standards, as they may not meet the latest codes and requirements. 

Class C Properties  

Class C properties are the oldest, most basic, and least expensive multifamily assets in the market.   

They are typically located in distressed or declining areas with low demand, such as inner cities or remote towns.   

They offer minimal amenities and features, such as common areas, storage spaces, and outdated finishes.   

They attract low-income residents who are looking for cheap and accessible housing. 

The main benefits of investing in Class C properties are:  

  • High Cash Flow. Class C properties have high cash flow, as they have low acquisition costs and operating expenses. They also have low debt service, as they are usually purchased with cash or seller financing. 
  • High Demand. Class C properties have high demand, as they cater to a large and stable tenant base, such as students, seniors, immigrants, or low-wage workers. They also have low vacancy rates, as there is limited supply and competition in the market. 
  • Distress Opportunities. Class C properties can offer distress opportunities, as they can be acquired at a discount from motivated sellers, such as banks, lenders, or owners. They can also benefit from market recovery, as they can appreciate faster than other classes. 

The main drawbacks of investing in Class C properties are:  

  • High Risk. Class C properties have high risk, as they are exposed to various challenges and uncertainties, such as crime, vandalism, fire, flood, or natural disasters. They also have low tenant quality, as they have high delinquency and eviction rates, as well as social and behavioral issues. 
  • Low Appreciation. Class C properties have low appreciation, as they have limited growth potential and exit options. They also have low resale value, as they appeal to a narrow pool of buyers, mainly cash investors or flippers. 
  • Management Intensive. Class C properties are management intensive, as they require more time and effort to operate and maintain. They also require more expertise and experience to deal with the complex and dynamic issues of the properties and residents.  

At HLC Equity, we lean heavily into our 70 years of experience in the multifamily investment business to help drive our strategy moving forward. Our investment strategy is largely focused on Class B properties, as we believe they offer the best risk-adjusted returns and value-add opportunities in the current market.  

We target properties that may be underperforming, undervalued, or undermanaged, and apply our proven operational and capital improvement programs to enhance their performance and value.  

We also leverage our strong relationships and reputation in the industry to source and secure attractive deals, as well as to access favorable financing and exit options. CEO, Daniel Farber, explains our philosophy and approach: 

 “We are passionate about creating and maintaining long-term partnerships with our investors, residents, and communities. And this reflects into the properties we acquire. While we are committed to delivering consistent and higher risk adjusted returns, we are also dedicated to improving and enriching the neighborhoods and markets where we operate.”  

Director of Acquisitions, Caesar Nguyen, shares his insights and outlook on the multifamily market: 

“Although the market has been unpredictable, at this point in the cycle, we see more opportunity   in the long-term prospects of the multifamily sector, particularly in the B class segment. We believe that these offer more resilience and stability than Class A now, as they are less affected by market cycles and competition. We also believe that these segments have more upside and growth potential, as they can benefit from renovation, repositioning, and rebranding strategies.”  

Multifamily real estate is a diverse and dynamic asset class that offers various benefits and challenges for investors.   

Depending on the class of the property, investors can expect different levels of risk, return, and opportunity.   

We recommend investors carefully evaluate and understand the characteristics and differences of each class and choose the one that best suits their goals and preferences. —- 

At HLC Equity, we have the expertise and experience to help investors navigate and succeed in the multifamily market. We invite you to explore our current and past projects, and to contact us if you are interested in joining our network of partners and investors.  

 

 

Disclaimer: This article is for informational purposes only and does not constitute financial advice. Readers are encouraged to conduct their own research and consult with financial professionals before making investment decisions.

HLC EQUITY

HLC EQUITY’S GUIDE TO YEAR-END PHILANTHROPY: STRATEGIES FOR IMPACTFUL AND TAX-EFFICIENT GIVING 

Economic challenges are largely unavoidable – and this year has proven to be no different. Therefore, it’s critical that strategic philanthropy becomes a part of your financial considerations throughout the year. HLC Equity has compiled a guide, based on strategies we consistently use, to help maximize the impact of your year-end philanthropy while ensuring tax efficiency is factored into the equation. HLC Equity CEO, Daniel Farber, outlines six key strategies you can not only implement today, but utilize in years to come to maximize the impact of your philanthropic giving. 

 Leverage Tax Benefits to Amplify Impact 

“End of year planning in a tax efficient manner is crucial as it allows us to not only contribute to the causes that are important to us, but by making it more tax efficient, we can amplify our ability to give by utilizing deductions and leveraging resources.” says Daniel Farber, CEO of HLC Equity. Charitable deductions are the ingredient that makes giving a win-win, positively impacting recipients and givers alike. 

ACTION: Explore non-cash asset donations, which not only allow for potential capital gains tax elimination but also provide an opportunity to increase the overall contribution to charity. 

 Identify Strategic Investments for Maximum Impact and Tax Efficiency 

“It’s important to evaluate your investments to make giving a tax-effective endeavor,” notes Farber. Consider non-cash assets with substantial appreciation for charitable donations. 

ACTION: Confirm your investment advisor has tax efficiency on the short list of factors in which they evaluate the efficacy of an investment. 

 Consolidate Gifts for Maximum Deductions 

“Strategic planning is key. Bunching donations can be a powerful tool,” says Farber. Exceed the standard deduction by consolidating contributions over multiple years. 

ACTION: For a longer-term strategy, individuals can use donor-advised fund accounts, allowing you to combine several years’ worth of contributions, optimizing tax benefits and potentially eliminating capital gains taxes on appreciated non-cash assets. Additionally, if the funds in the donor advised account are invested well, it can grow tax free, allowing you to amplify your giving capabilities.  

 Align Your Donations with Taxable Events  

“Aligning giving with significant taxable events is a strategic way to maximize impact and reduce tax liabilities,” states Farber. Charitable contributions can offset unexpected tax liabilities. 

ACTION: Consider events like unusual income years, investment portfolio rebalancing, and retirement account withdrawals, emphasizing the tax benefits associated with strategic giving. 

 Explore Emerging Philanthropic Markets 

“Innovation exists in the world of philanthropy just like the private markets. New opportunities continue to arise,” continues Farber. Identify innovative charitable initiatives or organizations that align with your values and are making a significant difference in areas that may not receive mainstream attention.  

ACTION: Stay informed about emerging causes and organizations to ensure your contributions create a meaningful and lasting impact in the ever-evolving landscape of philanthropy.  

 Strategize Giving for the Present and Future 

“Giving now and later requires careful consideration of your goals and financial situation,” states Farber. Segment your charitable goals into immediate impact and future-focused strategies. 

ACTION: Align giving strategies with your financial goals, family needs, and desired charitable legacy, offering a holistic approach to philanthropy. 

 As we come to the end of this year’s giving season, HLC Equity’s strategic framework for philanthropy not only maximizes impact but also aligns with the current economic landscape. By following these six key strategies, individuals and families can make a meaningful difference in their communities while optimizing their tax benefits. 

To discuss more about this topic and more, email us today at partner@hlcequity.com. 

 Disclaimer: 

The information contained in this guide was developed for internal purposes and is intended for general informational use only. We are not financial advisors, and the content presented should not be considered as financial, tax, or legal advice. It is strongly recommended that individuals and families seek professional guidance from their personal financial advisor and tax consultants before making any decisions or take any actions pertaining to their financial or tax planning.  

HLC EQUITY

In the ever-shifting seas of commercial real estate, where economic tides rise and fall, discerning investors find potential amidst uncertainty. The multifamily market, currently revealing signs of distress, serves as a canvas for strategic investors to carve their path to success.

Daniel Farber, CEO of HLC Equity, shares his perspective, stating, “Challenges in the current economic climate are not obstacles; they are opportunities for those who can discern and navigate wisely. We see potential in challenged and distressed assets, and our focus is on leveraging our expertise to capitalize on these opportunities.”

Navigating the Landscape

As the economic horizon remains clouded, Caesar Nguyen, HLC Equity’s Director of Acquisitions, observes a cautious investor landscape. “We’re witnessing the initial stages of a market shift,” Nguyen remarks. “While many are on the sidelines, a select few are making strategic moves. The real surge is anticipated in the coming quarters, making ’24, ’25, and ’26 pivotal for disciplined buyers as sellers with loan maturities have limited options other than to sell.”

Market Dry Powder

Unlike previous economic downturns, this cycle is marked by significant “dry powder” awaiting deployment. This capital readiness offers investors the flexibility to make direct acquisitions or finance deals with relatively attractive terms. Nguyen emphasizes the importance of analyzing markets with a pro-business stance and strong job growth. “Identifying longer-term winners among industries and pinpointing areas with a strong labor force and pro-business environments is the key to success.” The critical importance of meticulous due diligence is underscored. Investors must scrutinize every aspect to ensure their investment aligns with their goals, especially in the multifamily market.

Multifamily Market Dynamics

In the multifamily sector, recent challenges are steering investment strategies. The flight to quality is evident, with investors veering away from risky ventures. “Financing options for underperforming assets are becoming impractical,” notes Director of Acquisitions, Caesar Nguyen. “Investors are leaning towards properties in good condition within top-performing markets, seeking steady income and utilizing fixed-rate loans.”

Market Velocity

Anticipating a surge in alternative financing options in 2024, many investors are embracing this creative approach as well – such as Mezz finance and subordinated seller notes.

A significant bid/ask spread between buyers and sellers is hindering deals, resulting in decreased velocity. “Owners holding onto deals with cheap, long-term debt from 2020 and 2021 are cautious about reinvesting in the current high-interest rate environment,” observes recent reports. Multifamily distress reinforces the regional nature of the challenge. While overall delinquencies remain low, certain regions, such as many  cities in Texas, exhibit distress in debt service coverage ratios.

Charting the Course Ahead

As the multifamily landscape weaves through uncertainty, and opportunities begin to arise, stakeholders must adapt to market shifts, embrace creative financing solutions, and conduct thorough due diligence. HLC Equity stands poised to navigate these complexities, fueled by a commitment to unlocking value in distressed assets.

“In every market fluctuation, there lies an opportunity for growth. Our goal is not to merely weather the storm; but rather to capture opportunities when they present themselves,” concludes Daniel Farber, CEO of HLC Equity.

Disclaimer: This article is for informational purposes only and does not constitute financial advice. Readers are encouraged to conduct their own research and consult with financial professionals before making investment decisions.

HLC EQUITY

Innovation is the lifeblood of modern business. It’s the driving force behind growth, competitiveness, and relevance in an ever-evolving market landscape. But what happens when innovation encounters the intimate world of family businesses and enterprises? In this blog post, we analyze the complexities of balancing tradition and change in family-owned ventures. Contrary to the documented importance of trust in family businesses, a mere 19% prioritize innovation. Why is that? We will explore the duality of this approach, where focused attention should be placed without being inefficient and distracted by change. We will also address the potential challenges and how a lack of innovation can render businesses more susceptible to competitors and disruption. Join us as we unravel the delicate balance between stability and innovation in family enterprises.

The Family Enterprise Landscape

Family enterprises are the backbone of many economies worldwide. These businesses often pride themselves on traditions, values, and a deep-rooted sense of trust among family members. While these qualities can be assets, they can also create a culture resistant to change. The familial bonds and shared history that make these businesses special can inadvertently stifle innovation. However, family businesses must recognize that innovation is not the enemy of tradition; rather, it is the bridge to future success.

The Duality of Innovation Prioritization

Let’s first understand the duality of prioritizing innovation in family businesses. On one hand, it can be beneficial for family businesses to maintain focus and not get distracted by every new trend or technology. The conservative approach can help preserve what works and ensure stability. However, this approach can be a double-edged sword. The danger lies in becoming too comfortable with the status quo, failing to adapt to changing market dynamics, and ultimately falling behind competitors. 

  1. Preservation of Tradition: Family businesses often have deep-rooted traditions and values that set them apart. While these traditions should be preserved, they should not hinder progress. Innovation can help modernize these traditions, making them relevant to today’s market. 

  2. Mitigating Risk: By being cautious about innovation, family businesses might avoid the risks associated with untested technologies or strategies. However, avoiding innovation altogether can also be a significant risk. Newcomers or competitors who embrace innovation can quickly outpace traditional businesses. 

The Innovation Challenge

The challenge of innovation in family businesses is not solely about the willingness to change; it’s also about the capacity to do so effectively. Here are some key challenges family businesses may face:

  1. Resistance to Change: Family businesses may resist change due to the fear of disrupting the established order or alienating loyal customers. Overcoming this resistance requires a clear vision of how innovation aligns with the core values and goals of the business.

  2. Succession Planning: Many family businesses struggle with succession planning, making it difficult to pass on the reins to the next generation. Innovation can help attract and retain younger family members who are eager to contribute fresh ideas and approaches.

  3. Resource Constraints: Innovation often requires investment in technology, talent, and research and development. Family businesses with limited resources may find it challenging to allocate funds for innovation.

  4. Lack of Expertise: Innovating effectively requires specialized knowledge and skills. Family businesses may lack the expertise needed to implement innovative strategies successfully. Seeking external guidance or partnering with experts can be a solution.

The Vulnerability of Non-Innovative Businesses

  1. In today’s fast-paced business environment, companies that fail to innovate are at greater risk of disruption. The examples are numerous – Blockbuster, Kodak, and Nokia are just a few giants that lost their market dominance due to their inability to adapt to changing customer needs and technological advancements.

  2. Competitive Threat: Newer, more innovative competitors can quickly gain an edge. Family businesses that prioritize innovation can stay competitive and maintain their market share.

  3. Changing Customer Expectations: Customer preferences evolve over time. Businesses that fail to innovate risk losing touch with their customer base, leading to decreased customer loyalty and revenue.

  4. Technological Advancements: Technology is a driving force of change. Companies that do not embrace technological advancements risk becoming obsolete.

  5. Globalization: The world is more interconnected than ever before. Family businesses that do not innovate may miss opportunities to expand into new markets or adapt to global trends.

Striking the Balance

So, how can family businesses strike the delicate balance between stability and innovation? Here are some strategies:

  1. Create an Innovation Culture: Foster an environment where innovation is encouraged and rewarded. This can include setting aside resources for R&D, offering training in innovative thinking, and recognizing and celebrating innovative ideas.

  2. Embrace Digital Transformation: Embracing technology is often key to staying competitive. Invest in digital tools and processes that can streamline operations, improve customer experiences, and open new avenues for growth.

  3. Open Channels of Communication: Encourage open dialogue among family members and employees. Sometimes, the most innovative ideas come from unexpected sources.

  4. Plan for Succession: Ensure a smooth transition of leadership by identifying and nurturing family members with a passion for innovation and a vision for the future.

  5. Seek External Expertise: Don’t hesitate to consult with experts in your industry or hire outside advisors who can provide fresh perspectives and innovative insights.

    Innovation is not the enemy of tradition; it is the path to sustaining and growing family businesses in an ever-changing world. While it’s crucial to respect and preserve the values and traditions that make family businesses unique, it’s equally important to adapt and innovate. The duality of innovation prioritization in family businesses highlights the need for a balanced approach. Those who embrace innovation with caution and purpose can position their businesses for long-term success, staying resilient in the face of disruption and securing their legacy for future generations.

HLC EQUITY

In this dynamic era of real estate investing, the landscape has evolved over the past decade through the emergence of Real Estate Crowdfunding Platforms, which provided new avenues for accessing real estate projects, proverbially “democratizing” the space. This article compares key differences between the various “deal platforms” and the more traditional owner/operator investment management model. 

 It’s undeniable that the emergence of real estate crowdfunding has significantly transformed the landscape of commercial investing. Traditionally, investing in commercial real estate was limited to wealthy individuals or institutional investors. Once an asset class reserved only for the elite, most wealthy individuals would identify investment opportunities through their personal and professional networks, whether that be the country club or other social circles. However, with the advent of crowdfunding platforms, barriers to entry lowered, allowing a broader range of retail investors to participate.  

 Real estate crowdfunding leverages the power of digital technology to pool capital from numerous accredited investors to fund various commercial projects, such as office buildings, retail spaces, and apartment complexes. Born out of the JOBS ACT in 2012, this legislation allowed for syndication companies to offer these investments. Title III of the JOBS ACT, also known as the Crowdfunding Act, has drawn the most attention because it empowered companies to issue securities by way of crowdfunding, something that was not previously permitted. This newfound access to commercial real estate opportunities has, on the one hand, provided investors with greater diversification options, but has also enabled sponsors to secure funding more efficiently and dynamically. This trend has reshaped how investors engage in the world of commercial real estate and has also provided additional liquidity to the market. But it’s not without its downside – especially with shifts and tightening of the economy. 

 As many of these crowdfunding platforms face new challenges, several high-profile players have been in the news as they have either faltered or been acquired by better capitalized companies. In some cases, mismanagement and even fraud have been reported. Many of these platforms received Venture Capital funding from large investors, which allowed them to enjoy accolades over the past decade, but simultaneously the led to some unforeseen obstacles for these platforms.  

Experience, Legacy, and Sponsorship  

A fundamental challenge native to these platforms is their youth, and the lack of storied heritage that engenders investor trust. Operating as intermediaries between sponsors and investors, these platforms offer a diverse array of projects. Yet, their relative lack of proven experience might lead to investor skepticism. Often they rely heavily on consistent deal flow to sustain their operations; however, during market downturns, the availability of high-quality projects diminishes, potentially causing a decline in investor engagement. 
 

In selecting a strong investment partner, you will want to seek out one who is anchored in their consistent ability to identify valuable properties, execute meticulous due diligence, and provide reliable returns, while always having their own capital at risk in every transaction they invest in, otherwise known as “skin in the game.”  

Due Diligence and Risk Management: 

The bedrock of deal success for experienced real estate investors and managers lies in exacting due diligence procedures and comprehensive risk management strategies, while also having the knowledge and resources to correct situations when investments have challenges (which they often do). Without this, you’re simply rolling the dice. Private investors are best served by partnering with real estate owners and operators who scrupulously examine potential projects – upwards of 100 per month –assessing financial viability, market trends, property conditions, and other pivotal factors. This approach ensures top deal quality and minimizes the possibility of subpar investments. 

 Investment owners and operators are constantly in contact with local and national brokers and other service providers who offer deep industry knowledge. Additionally, quality investment groups have their own portfolio to lean on and inform their operational capabilities when performing due diligence.  

 Juxtapose this against many of these platforms, which rely heavily on “sponsors” – or third-party operators – to bring them deal flow and inform their investment decisions.  

 Platforms thrive in presenting investors with options, diversity, and access to a multitude of projects. That may sound appealing, however one key fact remains: the principals of the platforms are not personally invested in those deals. Additionally, the scale and reliance on technology often encumbers their capacity to conduct the same thorough analyses that experienced firms can offer. Cons

Investor Relations and Alignment of Interests 

Real Estate Crowdfunding Platforms employ digital technology to bridge the investor-sponsor gap, fostering a more superficial, transactional relationship vs. a genuine one. While this digitization set the stage to attract significant Venture Capital, from the vantage point of a real estate investor, the absence of personalized interaction might compromise the depth of understanding that investors possess concerning projects and overall investment experiences. 

 Private real estate investors commit to unwavering transparent communication and the alignment of interests with investors. Investors should seek out a personalized approach, with direct access to the asset and property management teams, fostering a genuine sense of partnership. Furthermore, investors should only invest in deals in which the firm principals personally invest, an embodiment of the alignment that underscores a mutual commitment to success. 

Challenges with a Middle Man 

The business model of these platforms is fundamentally based on deal volume – a constant flow sustains their “hyper growth” Venture-backed business plan. That business model over the past decade has led to lower investment standards as these platforms are generally paid based on a percentage of deals that are brought into the platform. This is one of the key factors behind the current challenges that many of these platform’s face.  

 Real Estate owners and operators, however, generate sustained cash flow from investment revenue and management fees, which allows them to be more selective for a longer period, selecting only the best investments they come across.  

Market Volatility and Deal Flow: 

These platforms grapple with unique challenges during market contractions. Due to their reliance on deal flow to collect fees, in a declining market where transaction volume diminishes, these platforms might struggle to identify projects that maintain investor engagement. Likewise, the quality of deal flow becomes even more questionable, as these platforms continue to collect their fees. The emphasis on volume for revenue might pressure prioritizing deal quantity over quality, potentially resulting in suboptimal investment opportunities for their investors. 

During these times, private real estate investors are best served by partnering directly with owners and operators with experience that span many cycles, coupled with a rigorous approach to project selection and due diligence. This allows them to adeptly navigate changing market conditions, leaning on their experience, process, and protocol. Industry knowledge enables owners and operators to make informed decisions, mitigating risks associated with market downturns. 

When considering an investment partner, it’s critical to ask the right questions. Here is a list of questions compiled for private investors. 

  • How much of your group’s principal’s personal capital is invested in each project? Do you really have skin in the game? 
  • How many properties/units/projects does your group currently own and operate? 
  • What risk-mitigation strategies are in place to help your investor partners?   
  • Is your group’s business model reliant on making origination fees on each project? 
  • What management fees do you charge?  
    Investor Note: Cheaper does not always mean better and like other things in life, you get what you pay for. Higher management fees may translate into a higher service level and may be done so for worthwhile reasons. Make sure management fees and any origination fees are transparent and that there is a solid alignment of interests.  
  • How many years has your group been in business? 
  • Give one example of an investment that your group invested in that has underperformed or been challenged. What did you do to overcome the situation? 
  • How do you operate your investments? Do you directly own and operate? Do you utilize third party property management? 
  • What is the added value of investing with you compared to some of your peers? 
  • Who underwrites your deals? What data do they use for their analysis? 

Conclusion  

The fundamental make up of owners and operators sharply contrasts with challenges that confront many Real Estate Crowdfunding Platforms. While they provide a new and distinct solution to democratize real estate investing, they are fundamentally built for sunny days. There are some crowdfunding platforms that have performed well, even during these challenging times. While the overall model remains challenged, it is feasible that with time and maturity these platforms will offer a viable solution. However, nothing can replace the reputation, stringent due diligence, personalized investor relations, and risk management expertise of established real estate sponsors that deliver investment opportunities that can ebb and flow with market conditions, while still having investor success at the forefront.   

 

Don't miss the original video from Daniel Farber at the end of this post!

In the ever-evolving landscape of business and investments, one principle remains steadfast: the importance of treating your investors as partners. While profit and growth are undeniably critical aspects of any successful business, they should not overshadow the significance of building strong, transparent relationships with your investment partners. In this article, we will explore the fundamental ideas and how it can lead to long-term success for both parties involved. 

  1. The Power of Openness, Honesty, and Transparency

At the heart of a fruitful relationship lies genuine honesty, and transparency. Investors appreciate being kept in the loop about the company’s progress, challenges, and even setbacks. When sponsors treat their investors with transparency, even during the tough times, it establishes a foundation of trust that is invaluable. This trust, in turn, acts as a resilient bond, withstanding the turbulence of choppy markets and uncertain times. 

In an ever-changing business environment, not every decision may lead to immediate success. However, when they are candid about their actions and the reasons behind them, investors gain insight into the thought process, fostering a sense of involvement and collaboration.  

  1. Nurturing Appreciation and Trust

By considering your investor community as true partners, you’ve taken the steps to cultivating appreciation and trust. When investors feel valued and respected, they are more likely to remain committed and loyal in the long run. This trust and loyalty, like compounding interest, can yield significant returns, both financially and in terms of business partnerships. 

When reality seems grim, the investors who truly appreciate the open and honest approach will stand by the your side. These are the investors who recognize the intrinsic value of transparency and recognize that challenges are a natural part of the business journey. As the partnership weathers storms together, the bond strengthens, and the chances of emerging successfully increase. 

  1. Alignment of Personal and Business Values

A business is not merely a collection of products or services; it is a reflection of the values upheld by the people who run it. Treating investors as partners involves not only aligning business values with success but also integrating personal values into the business ethos. 

Entrepreneurs who operate with integrity, ethics, and a commitment to the greater good will attract investors who share the same values. This alignment creates a harmonious partnership, where the collective pursuit of shared goals becomes the driving force behind every decision and action.  

  1. The Role of Communication

Communication is the lifeblood of any successful relationship, and this is no exception. Honest and frequent communication is the thread that weaves trust, transparency, and alignment together. 

During turbulent times, it becomes even more critical to communicate openly. As markets fluctuate and uncertainties arise, investors appreciate being kept informed about the business’s strategies, potential risks, and contingency plans. Regular updates, whether positive or challenging, demonstrate a commitment to the partnership’s growth and success.  

  1. Separating the Wheat from the Chaff

Adhering to the core operating fundamentals of honesty, transparency, communication, and openness does more than just foster strong relationships with investors. It also helps discern between valuable partners and those who may not fully align with the sponsor’s values and vision. 

Not every investor may appreciate this approach, and that’s perfectly fine. In fact, entrepreneurs are better off without investors who do not resonate with their values. By attracting like-minded investors, the partnership becomes more cohesive, making it easier to weather storms together and seize opportunities for growth.  

—- 

The bottom line is, treating your investors as partners is not just a lofty ideal; it is a tangible strategy for long-term success. The power of openness, honesty, and transparency creates a foundation of trust that can withstand even the harshest of challenges. When personal and business values align, the partnership becomes more than a financial arrangement; it becomes a shared pursuit of common goals. Communication serves as the glue that binds the partnership, fostering a sense of involvement and shared responsibility. 

By following these core operating fundamentals, you can not only build genuine trust but also attract the right investors while weeding out those who may not align with their values. In this way, the partnership becomes a powerful force driving growth, innovation, and success in both good times and bad. So, the next time you think about your investors, remember that treating them as partners can be the key to unlocking a prosperous and fulfilling journey together. 

Don't miss the original video from Daniel Farber at the end of this post!

The landscape of urban life is undergoing significant transformations driven by a multitude of factors, including changing priorities in a post-pandemic world. From shifting work dynamics to the rise of the caring economy and the renewed emphasis on outdoor spaces, cities are adapting to meet the evolving needs and desires of their residents. In this article, we explore the seven key dynamics that are shaping the future of cities and redefining urban living. 

1. Redefining Urban Priorities 

Traditionally, work was a primary driver for people to head into downtown areas. However, the pandemic has accelerated remote work and demonstrated that the city’s appeal extends beyond employment opportunities. As a result, cities now need to focus on creating vibrant spaces that prioritize parks, culture, and the overall environment. Revitalized shopping districts and a diverse range of amenities can attract residents and foster a sense of community. 

2. Ensuring Safety and Security 

Safety is a fundamental concern for any urban dweller. Ensuring the well-being of residents is crucial for attracting and retaining a diverse population. Cities must invest in effective security measures, including enhanced lighting, surveillance systems, and well-designed public spaces. Collaboration between law enforcement agencies, community organizations, and residents is vital to creating a safe and inclusive urban environment. 

3. Emphasizing Walkability 

In the pursuit of convenience and sustainability, walkability has emerged as a key factor shaping the future city. People increasingly seek cities that prioritize pedestrian-friendly infrastructure, such as wide sidewalks, bike lanes, and well-connected public transportation systems. Compact and mixed-use developments that integrate residential, commercial, and recreational spaces create vibrant communities where residents can live, work, and play within a walkable distance. 

4. Promoting Affordability 

The affordability crisis in many cities has reached alarming levels. To retain talent and foster diverse communities, city planners and policymakers must prioritize housing affordability. This involves implementing strategies such as mixed-income developments, rent control measures, and public-private partnerships to ensure that city centers remain accessible to a wide range of residents. 

5. Rise of the Family Tech Sector 

As the digital landscape continues to evolve, so do the needs of modern families. The rise of the family tech sector highlights the importance of a robust digital infrastructure within cities. High-speed internet access, smart city technologies, and reliable connectivity are essential for families to thrive in urban environments. By embracing technology and providing the necessary support systems, cities can attract and retain tech-savvy families. 

6. The Caring Economy 

With changing demographics and an increased focus on work-life balance, the caring economy has gained prominence. Health care, childcare, and elder care services are now key considerations for families when choosing a city. Urban centers that prioritize accessible and affordable healthcare facilities, quality educational institutions, and comprehensive support systems for families will be more appealing in the future. 

7. Easy Access to the Outdoors: 

The COVID-19 pandemic highlighted the importance of outdoor spaces and the connection with nature for physical and mental well-being. Urban dwellers now seek cities that seamlessly integrate the best of both worlds – vibrant city life and easy access to nature. Cities that provide green spaces, parks, bike trails, and nearby recreational areas offer residents the opportunity to enjoy the outdoors without compromising the amenities of urban living. 

The dynamics reshaping urban life reflect the changing priorities and aspirations of residents in a post-pandemic world. Future cities need to embrace these shifts and adapt to the evolving needs of their communities. By prioritizing these, cities can create an environment where residents can thrive, fostering vibrant and inclusive urban centers that stand the test of time. As cities evolve, it is crucial for policymakers, urban planners, and stakeholders to collaborate and create sustainable and resilient cities that enrich the lives of their inhabitants. 

Daniel Farber recently joined Andy Hagans on The Alternative Investment Podcast to discuss HLC Equity’s approach to real estate investing. Check out the podcast below. 

Andy Hagans is co-founder and co-CEO at WealthChannel. Get all of the episode details via WealthChannel here.

Episode Highlights

  • Background on HLC Equity, and the firm’s origin as a single family office.
  • How the firm’s 70-year history helps them to maintain a patient, long-term investment philosophy.
  • Why long-tenured employees can be a unique asset when determining things such as a company’s “core values.”
  • Daniel’s thoughts on inflation, interest rates, and where the economy may go from here.
  • Why Daniel is bullish on CRE opportunities in the year ahead, and how HLC Equity plans to take advantage of the opportunities that may arise

Related Content:

Princeton, Texas – March 10, 2023 – HLC Equity, a leading private equity firm specializing in real estate investment and management, has successfully refinanced Southgate Apartments, a 156-unit multifamily property in Princeton Texas into long-term debt. Originally a lease up investment, Southgate Apartments exceeded expectations by reaching occupancy much quicker than anticipated. This result, combined with foresight of capital market unease, enabled HLC Equity to pursue long-term debt in less than a year after taking ownership.  

In the face of turbulent and unpredictable times in the market, HLC Equity’s proactive approach to secure long-term financing resulted in positive leverage, balance sheet health, cash flow, and the ability to make future distributions to our valued investors.  

Daniel Farber, CEO of HLC Equity commented “Our firm has a wealth of experience navigating a variety markets, and we were able to proactively secure favorable financing for Southgate Apartments. Our internal team, along with Berkadia, was able to facilitate the deal. We are excited about the positive impact this will have for our valued partners and investors.” 

“Fannie Mae rewarded HLC Equity for the strong lease-up of the property with long term, accretive financing that provides them with several years of interest only and a higher amortization than typically offered in the marketplace.  Additionally, we were able to lock in the rate at a time when there was a drop off in the treasury which helped save on debt service costs and gives HLC Equity stability in a turbulent capital markets environment,” added Phil Brannigan, Director of Mortgage Banking at Berkadia.  

About HLC Equity (www.hlcequity.com  

HLC Equity is a multi-generational real estate investment management company, with over 70 years of experience and an expansive real estate portfolio. Their entrepreneurial spirit of a startup is juxtaposed with institutional level execution. HLC Equity utilizes its real estate portfolio to carry out its mission of building thriving communities. For more information about HLC Equity, please visit www.hlcequity.com or email press@hlcequity.com 

It’s tough out there. The CRE markets are facing perhaps the most challenging environment since the 2008 crisis, with tightened Fed policy and heightened geopolitical uncertainty providing a one-two punch to the CRE space.  

While some onlookers are signaling that it’s time to head for the hills, we believe that the current moment presents significant opportunities for CRE investment firms, Family Offices, and most importantly- the investors we represent here at HLC Equity. 

Let’s take a hard look at several CRE and MF challenges we may collectively face in the days, weeks, and months to come.  

Private equity slowed significantly in the second half of 2022, in stark contrast to the period of unprecedented activity we saw from late 2020 through the middle of 2022.  

This change was a result of widespread market disruption and uncertainty, largely driven by recent energy shocks, geopolitical chaos, the withdrawn debt market, and the twin dragons of rising interest rates and inflation.  

Over the same period, PE volume dropped by 22%, compared to the same period 12 months earlier, and in most cases, has returned to the levels we saw before the COVID-19 pandemic. In light of record levels of dry powder- with US PE holding roughly $1.1 trillion, PWC expects the rise of more creative approaches to deploying capital, including all-equity deals, private debt placement, and minority investments.  

They also see a broader recovery in activity, either as a result of the Fed reining in inflation or as a result of depressed asset values. Regardless of the long-term outlook, it’s clear that PE firms will be tested by the near-term investing climate.  

HLC is currently weathering the storm, largely as a result of prudent decisions taken during the runup, but we are not immune to the winds of change dislocating the wider PE markets. With that said, this is not HLC Equity’s first downturn. Over our 70+ years in the markets, we’ve seen several severe declines, including the high-interest rate climate of the 1970s and early 1980s, the 2008 crash, and the steep decline we saw during the start of the pandemic. Our multigenerational long-term investment thesis, and ability to execute on a high level, has ensured we’re able to continue to deliver value for our clients- good times or bad. 

Multifamily Trends We See in 2023 

Now, on to the question that’s probably at the top of your mind: what does the next year have in store? 

Multifamily Challenges in 2023 

First, we’ll start with some of the obstacles we expect to see in the year to come.   

As Q1 approaches, the big question on everyone’s mind right now is: 

Where do you price equity? 

We’re entering what is potentially the most challenging financing environment in recent memory- even taking into account the high rate atmosphere we saw in the 1980s.  

Senior lenders lending on non-full stabilized assets want 7-8%.  

The preferred equity and subordinate groups want somewhere in the range of 13-15%…so what does that mean for equity pricing? 

In theory equity pricing, needs to be at 20% given current market conditions and interest rates, but that’s not what we’re seeing on the ground. We’re seeing a disconnect in the market- and we’re not seeing the tailwinds at our backs as we have for the past few years.  

How do you price that? How do you plan against that? And how do you mitigate the negative effects – those are some of the questions we’re asking.  

Up until now, negative leverage was offset by historical rent growth – at least 6-8% annually – on a renewal basis, rents are still sticking, but we’re also seeing significant challenges and softening rents- not just in the markets we serve, but nationally. 

Dislocation in the Market 

Despite challenges, with both broader markets and specific properties within our portfolio, real estate remains incredibly attractive compared to other asset classes- like equities, with some high-flying stocks down more than 70% from their peak- a number we’ve not seen anywhere in the RE space- even in the most impacted properties.   

If you can buy and hold for a long period of time- you’re still probably going to do very well.  

Every cloud has a silver lining, and one takeaway we’ve gleaned from our current market woes is that HLC’s long-term thesis continues to deliver value for our partners. If you can buy and hold for a long period of time- you’re still probably going to do very well.  

A short-term focus might pay dividends- and it might not- at the end of the day, your gains and growth are at the whims of the market- that’s closer to gambling than investing. Conversely, a long view, with the right thesis, allows us to better withstand market tides and create and defend value over time.  

The HLC Equity thesis is simple- we believe that a focus on core markets with attractive demographics and a healthy demand/supply ratio is the best way to protect and grow investor value. 

Real estate is still a solid investment on a risk-adjusted basis- because of many of its historical advantages, like favorable tax status and its position as a shield against inflation, etc.  

A lot of this is reinforcing the faith we had in our historical underwriting model- being practical and moving deliberately. That measured approach is paying dividends right now as the majority of our portfolio is enjoys fixed rate debt and consistent income growth. 

The negative leverage safety net is no longer in play.  

Over the past few years, if something went wrong, you could employ the (at the time) awesome power of negative leverage and count on rents to continue to grow enough over time to cover you.  

Leading experts in the multifamily space do expect some moderation of rent growth, although rents are still projected to grow at a higher rate  than the historical average.  

In addition, income growth will likely remain positive, with the Freddie Mac Multifamily 2023 Outlook forecasting a decline in property values, and positive gross income growth, with fundamentals rebounding, albeit slowly, in early Q3 

Redemption Woes 

If you follow news in the P/E and CRE spaces, you’ve probably heard about some of the redemption issues at the Blackstone REIT, amongst others. In early December, the $69 billion dollar real estate fund for wealthy individuals gave notice that it would limit redemption requests– a move that many in the industry viewed as a potential “canary in the coal mine” for the broader real estate markets.  

The news spooked investors, with the firm’s stock falling as much as 10% on the Thursday after the letter was published. Beyond the headlines, we’ve also heard of similar issues through the grapevine. There are a lot of challenges with fund structures, many of which were first made clear during this recent discovery phase.  

These woes are not limited to the public markets. Private real estate firms are facing similar hurdles, with private partnerships having to start to call capital on projects- particularly if they are facing issues with floating rate debt. The inability to tie down debt costs and our current advanced inflationary environment are both major challenges faced by many private real estate companies right now.  

However, there are strategies investors can take to not just survive- but thrive, during a market downturn. HLC Equity’s strategic plan for success in a down market includes: 

-Mitigating the impact of rising interest rates through the strategic repositioning of assets 

-Solidifying and protecting previous growth 

-Embracing a holistic approach, with expense reduction, supplier and vendor management, and process improvement as equally important priorities for the HLC Equity team 

Potential Opportunities in 2023 

 Let’s look at some of the trends currently buttressing the HLC Equity portfolio and the multifamily market as a whole. 

Sustained Demand for Multifamily Housing 

We believe demand for multifamily housing will continue to grow in 2023.  

Despite softening conditions globally, we are seeing tremendous sustained demand for multifamily. Rising mortgage rates across the board have put a damper on the overall housing market- to the benefit of the multifamily sector.  

Rising Mortgage Rates Reduce SFH Demand 

Home sellers and home buyers are staying on the sidelines for two main reasons.  

For buyers, it’s the fact that financing costs have gone through the roof compared to last year.  

And many sellers are not yet ready to come to terms with the fact that their homes are probably worth a lot less than they were last year.  

Hence, the decline in home sales and overall home-related transactions, like refinances. This is part of the reason we see demand for multifamily housing continuing to grow- people still need a place to live, and if they’re not buying, they’re renting. 

Projected Multifamily Construction Starts  

Multifamily starts are also likely to decline significantly- restricting future supply and defending existing multifamily investors. Lower lending volume is leading to higher financing costs, which is curbing new projects. You’ll see less multifamily delivery on the market as a whole.  

While we may see some projects come online in 2023-2024, due to the advanced/almost-built state of these projects, that is likely to slow to a trickle in 2025- largely due to the multi-year nature of the development and construction of a new multifamily property. Greenstreet and several other firms see new supply in 2025-2026 coming in at 1% of inventory- which is not enough to absorb all the coming demand for multifamily units. 

Roadmap to Growth 2023 

We plan to meet 2023’s challenges head-on. Here’s where HLC and other owner/operators can find and defend value in the coming year. 

Strategic Repositioning 

Like everyone else, we’ll be impacted by rising interest rates. To mitigate any rate-related issues, we plan to follow several strategies, including: 

-Reducing our total interest expense via refinancing 

-A focus on revenue growth to create the conditions to refinance when the opportunity presents itself 

-Implementing effective cost controls 

Solidify Previous Growth 

We’ve had a good run these last few years- and it’s vital that we solidify that growth. This may be more challenging simply due to worsening market conditions, but there are several paths to protecting said growth.  

Enacting more robust occupancy management will reduce our dependence on offering concessions, giving us the ability to bring renewals that are currently at a discount-to-market up, ideally resulting in net rent growth despite declining asking rents. 

Deliberately Reduce Expenses 

We’re also laser-focused on reducing expenses wherever possible. Our expense reduction strategies include (but are not limited to): 

-Capping exposure to energy costs through long term contracts 

-Property tax appeals where necessary 

-Vendor evaluation and consolidation to achieve better pricing through economies of scale 

Where We Stand 

The vast majority of the HLC Equity portfolio is fixed-rate debt- our properties are performing at a high level, and for the few where we do have challenges, we have people on the ground, managing them diligently, and we believe we’ll manage through the current challenging environment to produce solid results in the long term.