Massive Cash Bleeding Worse Than I Thought
Renter Revolt at 2010 West End
A few short months ago, 2010 West End in Nashville Tn was one of the best performing multifamilies I could find. In fact I covered it as a “best case scenario” specifically because even with 94% occupancy and effective rent of $2,400+ it was obvious that it would be stung by cap rate expansion, pushing the value down 10-20% as long as they could hold up NOI. ← AS LONG AS THEY COULD HOLD UP NET OPERATING INCOME
Fast forward to today. Occupancy 83% / Effective Rent $2,165. 12% drop in occupancy. 10% drop in rent. The trend is brutal.
Here’s my October twitter post:
2021’s Most Expensive Multifamily Purchase
2021 Was a banner year. Hot of the money printing presses the flow of capital led Adam Neuman a billionaire unscathed from the dumpster fire known as WeWork to buy the most expensive multifamily purchase in Nashville for his new start up FLOW.
$158.7M. (source CoStar). with $119M of floating rate debt.
Disregarding 2 Major Red Flags - Supply and Inflation:
Multifamily supply was surging at record pace in Nashville in 2021. Even more than much larger cities like Atlanta.
Inflation had just hit a 40 year high putting major risk on interest rates and operational costs.
Raising Money
The Real Deal is reporting they have no distributions and are raising money to help not only buy an interest rate cap but also cover operating costs. This is literally a blind folded Hail Mary.
While they won’t pay anything on their new loan now, by December 2025 everything including interest will be repaid all at once.
This isn’t just an interest only loan. They are capitalizing the interest. This is a no payment loan until December 2025 when they will hopefully be able to repay the investors with “compounding” interest.
According to their offering posted on YieldStreet, “Interest generated…is expected to compound and accrue” on a monthly basis.
Renters Revolting - Uncovering the Trend
Occupancy
The January loan offering had to be panic. They were dropping tenants rapidly and they needed coverage before it got so bad they wouldn’t be able to raise funds.
For the YS loan they were reporting 90% Occupied in January. Now I initially called BS because as of this writing, CoStar is reporting an 83% occupancy. Zillow is advertising 57 Units avaiable now ~84% occupied.
So how could they be saying 90% occupied? I went back and I had covered this Apartment in October calling it a disaster even with 94% occupancy. That means that over the next few months they lost 12% of their occupants. 336 Units Occupied (4 months ago) vs 296 Today. How many renewals did they have in Q4? How do you lose 12% of your occupants in the slowest leasing months of the year?
The January loan had to be panic. They were dropping tenants rapidly and they needed coverage before it got so bad they wouldn’t be able to raise funds.
There are still 18,000 units under construction (CoStar) in Nashville and likely 12,000 to be delivered this year. Vacancy will continue to climb as new buildings come online. The competition is getting brutal.
Rent Rates
Rents have dropped from $2,405 to $2,165 according to CoStar effective rent. I remember being surprised their rents were so high in October, and I was actually impressed thinking they were doing something different. Nope, renters left in droves.
It’s no secret that rents have been dropping for a while. Here’s Fallyn which opened in 2022 just down the street from 2010 West End. Rent will continue to drop as vacancy builds.
$7M in Interest Expense!
YS is saying even with the rate cap, interest rate is 6%. 6% on $118M = $7M. Their rent revenue annualized (based on CoStar data) is ~$7.7M. That means they are barely covering interest expense with rent and that’s before their YS loan. The risk that interest rates could continue to stay high is a brutal reality that could prove fatal to this investment.
Conclusion
100bps is $1.8M. So if rates fall to 3-4 again, they could have a chance of saving this deal. That is if rent rates and occupancy can hang on and they don’t have to refinance. They really need the stars to align. And that’s what makes this so bad. They need to increase occupancy, rent rates, have interest rates fall, and no refi requirement to dig out of this hole. I guess it’s possible, but right now rents are falling, occupancy is falling and interest rates are now expected to stay higher for longer than expected.
Only time will tell, but it doesn’t look good.
TLDR:
Rapid Decline: 2010 West End in Nashville has experienced a 12% drop in occupancy and a 10% decline in effective rent over a few short months
Risky Financial Strategies: The use of floating rate debt and a no-payment subordinate loan structure until December 2025, compounded by high inflation and a surge in multifamily supply puts this at the top of high risk investments in Nashville.
Failure Likely Outcome: They need to increase occupancy, increase rent rates, have interest rates fall, and no refi requirement to dig out of this hole.