Capitalizing on Early Opportunities in a Thawing CRE Market

Capitalizing on Early Opportunities in a Thawing CRE Market


by Max Sharkansky

Commercial real estate markets are showing signs of thawing as lenders, buyers, and sellers get a better grasp on the outlook for interest rates, the US economy, and sector fundamentals. For those willing to search, opportunities are increasingly available.

Results from the National Multifamily Housing Council July 2023 Quarterly Survey of Apartment Market Conditions illustrate improving conditions. Some 14% of responding senior executives in July thought sales volume was higher than three months ago, while the percentage reporting lower sales volume declined to 35%: a notable fall from January when 82% reported lower volume.

As deal flow shows initial signs of picking up, investors may wonder: Does taking action early equate to extra risk? Not necessarily. In fact, transitional environments—like the one we’re in—can present compelling opportunities for the right sponsors in the right deals.

What does it take to succeed in the early innings?

In our view, the sponsors best positioned to succeed in the current cycle phase are those with experience in a variety of environments, including downturns. Nothing beats hard-earned experience. The last cycle brought lots of new entrants into the market—but some of these players won’t survive to participate in the next wave of buying opportunities, and those who do survive may not have the experience to succeed in a different environment.

Sponsors will also benefit from staying disciplined as they search for new opportunities while remaining committed to their principal investment strategy. This requires dedication to diligent underwriting criteria as well as flexibility to look at unique situations that can emerge as the market changes. Sponsors with robust networks and the ability to move quickly when opportunities arise will also be a step ahead of others. Lastly, successful sponsors will be able to appropriately balance awareness of general market movements with the necessary focus on granular, property-specific dynamics.

Investors should be careful to distinguish between sponsors who are searching opportunistically during the early innings and sponsors who are operating in the opportunistic real estate category. Opportunistic strategies are designed to take substantially more risk than other types of real estate investments, such as core or value add. Opportunistic investments are often in dislocated markets and distressed assets with little to no visibility into cash flows. Sponsors can identify early-innings opportunities within their typical wheelhouse without crossing into the opportunistic investment category.

Our strategy in action

We recently capitalized on an opportunity to act when others were uncertain. The transaction is a fitting example of our strategy during this phase of the cycle.

Deal highlights: Trailpoint on Highline

  • $41.4 million deal for 198-unit complex in Denver suburb of Aurora, a magnet for new residents seeking an attractive alternative to downtown Denver
  • Deal allows us to expand presence in Denver area—it’s our fourth acquisition in the area since 2020—and continue capitalizing on high-growth communities
  • Agency fixed loan at 5.09% interest rate; property acquired at 5.84% cap rate going in; positive leverage on day 1 of operations
  • Purchased for $209k/unit, and our all-in basis is $231k/unit; other properties in the submarket have traded in the $250k-$290k/unit range

Importantly, we’ll be deploying our proven value-add strategy to renovate the property to meet the needs of the changing demographic and heightened demand for quality in the area. Our strategy is equally differentiated by what we’re not doing: We aren’t overstretching beyond our capabilities or taking on uncharacteristic levels of risk.

Our confidence to act comes from our unique transaction and operating experience gained during the global financial crisis of 2008-2009—a challenging period during which our strategy thrived. We created the company in 2005 to acquire mispriced and mismanaged properties throughout Los Angeles. Trion executed several acquisitions in its first two years and exited the portfolio ahead of the economic crisis. With cash on hand, the team successfully acquired 20 properties throughout the crisis. Although today’s environment is not as extreme, the lessons learned and confidence earned are certainly applicable.

Looking ahead, we believe our track record of success in a variety of environments and our specialized focus will serve our investors well as the commercial real estate market thaws.