I've been asked to help with a non-performing loan divestment by a major bank.

The loan is secured by a high density, NoCal location land parcel with the following highlights (rounded numbers):

• Fully entitled mixed use development
  • 200 residential units,
  • 20,000 sf of commercial
  • 50 for sale homes
  • 20,000 sf retail
• Loan balance $10MM
• Recently appraised at $20MM+
• Personal guarantee on the loan.
• Bank will provide 75% LTC debt at accretive rate

If of interest, let me know and we can discuss further on a Zoom call.
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Thanks,
Adam

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This week's Podcast/YouTube show

Guest: Greg MacKinnon, Director of Research at Pension Real Estate Association (PREA)

Why Affordable Multifamily Outshines Luxury

Just two weeks ago, Greg MacKinnon and I unpacked how institutions think about real estate allocations, what “institutional quality” really means, how capital cycles through funds, and why macro uncertainty has frozen much of the market.

In this follow-up, we drilled down into housing specifically: the renter barbell, affordable versus luxury performance, and how preservation strategies are shaping institutional flows.

​Listen to the full episode here >>​

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The Fed Isn’t Your Deal Model
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​Last week, markets cheered a 25 bps cut, but MacKinnon’s core point is the one sponsors should pin above the underwriting desk: the fed funds rate is not the real estate market’s transmission belt.

The yield on the 10-year matters more for pricing and financing, and it can rise even as the Fed eases if inflation risk re-prices. In other words, don’t mistake policy theater for fundamentals.

Real estate returns track the economy’s health - labor, income growth, and demand - far more than they track the FOMC’s dot plot.

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A Fragile Expansion and Mispriced Risk

MacKinnon characterizes today’s macro as “okay but fragile.” Equity exuberance, tight credit spreads, and a low VIX (the so called ‘fear guage’) suggest investors are relaxing about risk at the precise moment when even just a ‘small’ shock could tip sentiment and flows.
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The economy’s momentum leaning, as it is, on outsized AI-related capex underscores the narrowness of growth. For institutional allocators who fear headline risk above all, that argues for portfolios that can absorb a downside surprise without permanent impairment.

Translation for sponsors: emphasize resilient business plans, conservative leverage, and clear downside cases - because LPs are hunting durability, not promises.
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The Renter Barbell: Growth at the Extremes
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​MacKinnon’s analysis of renter segmentation shows robust growth at the top/luxury, Class A end of the market (140%+ of median income) and a surge in moderate-low cohorts (roughly 60–80% of AMI), while the middle thins out.
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The most acute stress is below 60% of AMI (area median income) where household formation is being suppressed as would-be renters double up, return to family homes, or fall into homelessness. This is not primarily a demand problem; it is a supply problem. The policy implication is simple; the execution is not.
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​Affordable Outperforms Luxury
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​Counter to dated assumptions, MacKinnon’s research finds that ‘naturally affordable’ multifamily (not necessarily regulated, just lower rent) has delivered better risk-adjusted performance than luxury across cycles.

The mechanism is straightforward: deep, persistent demand; low voluntary move-out rates; and stickier occupancy through downturns. Luxury can fly in expansions but falls faster in contractions; affordable tends to grind upward with less volatility.

For GPs, that supports strategies targeting renovation-to-reasonable and preservation of affordability rather than “value-add to luxury” plays that rely on elastic demand and aggressive rent lifts.
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​Preservation Is Investable; Production Is Hard
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​Where is institutional capital actually going? Increasingly toward preserving affordability - acquiring existing stock, investing disciplined CapEx, and holding rents on an inflation-like path.

That generates current yield, avoids construction risk, and meets social mandates – but it doesn’t grow unit count. New production remains constrained by higher operating and construction costs, insurance spikes, land, and financing frictions (including limited receptivity to non-traditional methods like modular).

Lower base rates help on the margin, but they are no panacea when cap-rate expectations are moving targets.

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The Only Reliable Cure: Build More, Faster

The Sun Belt’s recent cycle offered a clean Econ 101 lesson: a surge of supply brought rents down and improved affordability, full stop.

Zoning, entitlement timelines, and NIMBY constraints still throttle production in many metros; sponsors should not wait for sweeping reform. Instead, pursue micro-solutions: entitlement arbitrage in municipalities that staff approvals; public-private deals that exchange durable affordability covenants for predictability; and disciplined modular or off-site construction where lenders are willing. None of this is easy but it is investable with the right partners.

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Portfolio Geography Has Evolved - So Should Sourcing

Institutions have widened their aperture beyond the legacy ‘NY/LA/Boston/SF’ gateway city core. Better data and deeper local ecosystems make Seattle, Salt Lake City, parts of the Midwest, and select secondary markets institutionally analyzable.

The implication: alpha is increasingly earned through local information advantages and operating excellence, not just by showing up in a gateway auction.

Sponsors who know block-by-block dynamics, utility and insurance risk, and municipal capacity to deliver permits will win engagement.

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What Sophisticated LPs Want Now

Given macro fragility and political-regulatory noise (tariff, HUD staffing, and program-administration questions), international and domestic LPs are cautious but not absent.

They still need U.S. exposure for depth and liquidity; they just want plans that survive multiple paths. Make the risk management obvious in your deck: show 10-year sensitivity, cap-rate expansion cases, insurance and tax line-items, and a rent-to-income discipline that acknowledges the renter barbell.

The headline risk standard is unforgiving; give investment committees a defensible narrative.

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Bottom line for sponsors:

Stop treating the FOMC as your underwriting partner. Price capital to the 10-year, manage to the economy, and tilt toward affordability-anchored assets where demand is deepest and volatility lowest. Preserve where production is blocked; produce where the city is a co-sponsor in speed.

​Watch/listen to full episode here.

and please weigh in on any thoughts you have in the discussion about the episode we're having here on LinkedIn, here.​

​​If this is your first time seeing this newsletter, please click here to subscribe.​

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