Multifamily Distress Is Here: How Real Estate Investors Can Prepare for the Next Buying Opportunity

Darius Ross (00:00)
Let me give you an idea what the reality is. There’s a quadrillion dollars of dry powder. And for those that don’t understand what dry powder is, money that’s sitting on the sidelines from sovereign wealth funds, from pension funds, from family office, etc. It’s not sitting on the sidelines for no reason. We got Warren Buffett sitting on eight hundred billion dollars. That’s telling you something. They’re not getting in the market. They’re waiting for the moment when this thing becomes crisis time and you can take advantage of the CMBS’s collateralized mortgage obligation. There’s

Over a half a trillion dollars sitting waiting to go wrong in two thousand and twenty seven, two thousand twenty eight, two thousand twenty nine. This is going to be the moment of opportunity.

Dylan Silver (02:11)
Hey folks, welcome back to the show. Today we’re joined by Darius Ross, a value-add multifamily investor, consultant, and speaker. You can find him at DariusARoss.com. Darius, thanks for joining us here today.

Darius Ross (02:26)
Dylan, it’s been a pleasure. Look forward to having a great show.

Dylan Silver (02:29)
These days, what types of deals are coming across your desk and what types of clients are reaching out to you for consulting?

Darius Ross (02:39)
Getting a lot of clients that are coming across and deals that are coming across that are distressed. You know, which leads to what I’m seeing now and what I’ve been saying for the last four or five years. We’re in a market time period that is going to be very detrimental and very catastrophic for those that are just novice in this industry.

Dylan Silver (02:56)
Let’s dive in there. There’s a lot of sources for this distress. People talk about, you know, variable rate debt, the increase cost to build, especially ground-up construction. But also you had a lot of people who were newer maybe seeing the successes of 2012 to 2020 and saying, Well, I can get in there. You it was difficult to lose money on these deals. Where do you see as the biggest pitfalls for a lot of

developers and value add investors.

Darius Ross (03:28)
One thing that’s very important is two thousand and seven, if we never really got rid of the garbage in the system. So a lot of lenders were extend and pretend and a lot of the investors just kind of got a pass. And so as a result, they were given the ability to just keep those assets and just will extend you more money. What we’re seeing now in the reality of it is there’s a company just recently, United Wholesale Mortgage, that just saw their stock price go to the lowest, which tells me the indicator is like we’re gonna see two thousand and seven.

Nineteen ninety nine, nineteen eighty seven, Resolution Trust all over again. This time it’s gonna be Disneyland. It’s one hell of a ride.

Dylan Silver (04:05)
Now, when we talk about what should and could happen, right? It’s oftentimes we would like to see people operate in a in a profitable way that’s beneficial for the community, but also we don’t want to have more guidelines in place. Do you think that there’s a happy medium?

Darius Ross (04:23)
No. See, when they got rid of the Glass-Steagall Act and all these kind of things that were going on for the investor community and the banks and everything else basically dropped the walls, that’s a no no. You’ve gotta have things in place to make sure that there’s parameters. Because as an investor, I’m gonna borrow as much money as I can to make the deals work. I’m gonna do everything I can to wheel and deal. But at the end of the day, the ultimate thing is who gets hurt tail in. That’s the problem.

Dylan Silver (04:50)
Now, when we talk about distress in in the multifamily space, there’s a variety of types of distress. There’s vacancies, there’s just poorly run properties, there’s the property itself and physical deterioration, there’s changing market conditions. You know, maybe you have lots of properties coming on market or a changing job market. Are you seeing any one specific kind of distress?

Darius Ross (05:14)
Basically in the retail industry, you’re seeing stores being shut down. You know, all praise be to Mr. Bezos with Amazon. He is eating the lunch from Sears back in the day in Kmart to now the normal mom-and-pop retailers. In addition to the fact the malls are now just vacant. They’re ghost towns. You’re seeing companies literally lay off hundreds of thousands of people, but nobody’s talking about this. And then in the same token, you’re seeing abandoned cities that are happening. So basically you’re seeing the impact being felt across the board.

And politically speaking, nobody’s talking about it. And so as a result, when you walk through these cities and you drive through the cities and you see the number of homeless people, it’s giving you an idea that this is changing very rapidly, but quietly. Nobody’s discussing it.

Dylan Silver (06:44)
Yeah, there does seem to be an element of almost suspended disbelief, right? ‘Cause we’re all living in it in real time and it doesn’t feel like two thousand and eight or or past recessions. It’s almost a a split fork recession, because you feel it if you’re having, you know, paint going check to check and having difficulty cash flowing your life. But for a lot of people you’re able to ride the wave of appreciation so heavily that you don’t feel it, right? And it’s a conundrum.

Darius Ross (07:11)
I think one the biggest things of it is I’m recommending to all investors be cash heavy. Do not be heavily in debt because when the debt comes due, the banks ultimately speaking are going to have to do what I call the bail-in. For the first time in history, there’s going to be a bail-in, and that bail-in is going to be transitional because the depositor is going take the hit versus the taxpayers versus anyone else. So basically, right now we’re looking at a whole different type of say recession/slash depression.

It’s going to hit hard and heavy, and all of a sudden on a Sunday night, we’re going to wake up to what happened with Lehman Brothers and all the rest of them. Boom, boom, boom, boom. The dominoes start falling, and all of a sudden you have a nightmare. You can see it coming. I mean, I’ve been saying for years we’re looking at hundreds and thousands, if not millions, of jobs lost. And we’re going to look at that Resolution Trust once again. The extend and pretend is going to end and it’s going to end badly.

Dylan Silver (08:03)
Now when we talk specifically about navigating through this as a value-add multifamily investor, I’ve seen a couple different camps and it feels like this is changing. it’s feels like a lot of people are on the sidelines waiting for the dust to settle and it feels like maybe things are settling. Right now we’ve seen interest rates drop, but not precipitously. But then also now it’s about to be, you know, we’re more than halfway through 2026. 2027 is, you know, it feels like

around the corner in some ways. And so you have some of this debt that’s gonna be called due, especially on these multifamily properties. And this is going to create an opportunity for folks to potentially purchase these properties that will be distressed at that point if they’re not distressed already now. Do you see this as an opportunity in that sense?

Darius Ross (08:52)
Let me give you an idea what the reality is. There’s a quadrillion dollars of dry powder. And for those that don’t understand what dry powder is, money that’s sitting on the sidelines from sovereign wealth funds, from pension funds, from family office, etc. It’s not sitting on the sidelines for no reason. We got Warren Buffett sitting on eight hundred billion dollars. That’s telling you something. They’re not getting in the market. They’re waiting for the moment when this thing becomes crisis time and you can take advantage of the CMBS’s collateralized mortgage obligation. There’s

Over a half a trillion dollars sitting waiting to go wrong in 2027, 2028, 2029. This is going to be the moment of opportunity.

So any of those investors that are looking to take advantage, the next five years are gonna be it because we’re not gonna return to normality before twenty thirty five.

Dylan Silver (09:39)
Let’s talk about asset classes or I shouldn’t say asset classes, but grades within the multifamily value add space. So you have, you know, everything from A to D, right? And when you look at the biggest opportunity. It felt like for a while there was just so much A-class multifamily housing going up, and people felt, well, we can’t lose money with this. And then in many places, I’m a Texas realtor. Austin is kind of the biggest problem child here. You had so much development and overdevelopment that now there there’s a serious problem. With vacancies, they’re even having to give massive concessions to tenants.

Do you see that A-class assets in the Sun Belt are now like a bad idea effectively? And would you go for more maybe workforce or affordable housing opportunities, or is it still okay to be involved in these A-class assets?

Darius Ross (11:08)
A-class assets are definitely going to be the prime choice of an investor if you want to turn around and take advantage of bargains. Because everything can’t be A Chicago, New York, Los Angeles, Detroit, Miami, too many of Okay. B C D are just gonna be prime opportunity. But the A’s are gonna be a situation where you’re gonna have lot of conversions. Multifamily conversions from office. So office is going to become less office and more multifamily because there’s more young people, millennials, they’re starting to spend more time in the inner city. So this is gonna be the key.

How do you convert office buildings to residential and so forth? And in the same token, how do you make a conversion that’s affordable and that doesn’t kill the pockets? Because at some point in time we have to understand these young people can’t pay two or three thousand dollars a month in rents. You know, they’re tripling up. In some cases, there’s ten people in one apartment, it’s a two bedroom.

Dylan Silver (11:57)
You know, I see this all the time. And one of the things that’s interesting about it is there’s this dichotomy where you have a lot of young people who’d like to

be homeowners, but then they can’t qualify, especially because of some of the safeguards that were put in place post 2008. Like, you know, you don’t have no-doc loans. You have the Dodd-Frank Act in place, so you have to go through a lot of hoops now in order to qualify for a home. But then if you can’t qualify in order to get into some of these A-class communities, you still need like triple the rent. You need to have stellar credit. And they want you to effectively have a only a slightly lower bar in many cases than you would have needed to

have a home. So people are kind of throwing their hands up in the air and saying, Man, this system is against me.

Darius Ross (12:42)
See, here’s the funny thing about the NINAs. I mean, now they don’t call them NINAs anymore. They’re no doc, no incomes. I mean, you used to be able to go in there with the no pulse, just be breathing and you got a loan. But see, what’s happened now is they call them non-qualifying. They’ve cleaned it up a little bit. So now you have these non-qualifying lenders that are now overextended. And so the issue of the hour is that you’re going to have a situation going into this that there’s going to be a certain area where these young people are going to have to turn around and be able to be the next market. Because who’s going to buy this stuff?

You know, the other older people like myself, I’m sixty-one. We’re getting rid of homes. We’re going into situations where assisted living, we’re going into smaller homes. Who’s gonna get rid of them? So basically we’re gonna have to walk away with no equity or sell the house at below value. So we’re gonna have to come to a concession point where young people are gonna have to be in a situation where they’re gonna have to either A get approved under some strange circumstances or again back to the NINA No Doc income scenario, or as older people we’re just gonna have a bunch of houses that are sitting in ghost cities.

Dylan Silver (13:42)
You know, these are great points. You we talk about the appreciation of these homes, but there is gonna come a point where the rubber’s gonna hit the road and a lot of people will start moving out of these homes. Who comes in to buy them? There is an argument that, you know, well you’ll have the ability for these homes to be to be kind of swallowed up by the urban sprawl of cities. So I’m in North Jersey, you could say North Jersey could be swallowed up by New York City. But then to you to your point, who will qualify for these homes under the new standards, right?

Darius Ross (14:12)
Well see, that’s the thing. We’re gonna go back to a point in time where we’re gonna have the go eighties once again. And what that basically means is these no-doc lenders, these non-qualifying mortgage companies are going to come back in full swing. Twenty thirty-five, twenty forty, they’re gonna be back again. And we’re gonna go back to the same cycle, same scenario, and by twenty fifty we’ll be back at the same process of a bunch of houses sitting that young people bought they couldn’t afford in the same process. This cycle continues every ten to fifteen years.

Dylan Silver (14:41)
When we talk specifically about affordable housing, there seems to be so many different ways to look at this. If you look at the East Coast, it’s even more challenging ’cause then you have land being an issue. If you’re in the Sun Belt where I spent a lot of time as a Texas realtor, it’s still an issue. There’s some alternative solutions such as tiny homes and land home packages and this type of thing. But it also feels like, you know, if your apartments are

two thousand dollars that that doesn’t even really seem like much of a a solution, does it, if you’re renting for two grand a month.

Darius Ross (15:54)
Well see here’s the problem. In order for you to rent a two grand a month, let’s say in New York City, it’s forty times income. How many young people are making eighty thousand to one hundred and fifty thousand dollars right out of college? It’s unrealistic. Most of the employers we’re trying to get these employees at the cheapest dollar possible. So I’m looking at maybe I’ll offer you sixty. Well, how do you afford an apartment at forty times income? It’s not gonna happen. So the realtors are selling them a dollar in a dream. It doesn’t make any sense.

Dylan Silver (16:19)
Yeah, and the hoops that people then have to jump through. It’s like as a realtor, of course I interface with a lot of lenders and lenders will say, Okay, well who in your family can, you know, give you a big down payment, basically? And the brazenness of people to ask this is shocking. But then as someone I also help folks with apartment locating, I’ve seen, you know, apartments basically say, Well, who can co-sign for you? And you think, Well, I’ve got a college degree, I just spent all this time in my education, I’m employed, and I still can’t

Find an apartment, this is madness.

Darius Ross (16:50)
Well, here’s a reality check whether you say when the rubber hits the road yet. I’m a parent. I got two youngsters, you know, 30 something and thirty, almost forty. Am I gonna turn around and risk my future and give a guarantee of say, I’ll put up a surety bond of say forty thousand dollars for an apartment? Hell no. I’m not doing it because I got eighty thousand dollars outstanding. That eighty thousand dollars is part of my retirement, my future. So you’re not having it. So now parents are now saying, okay, double up with your friends. You’re on your own.

Figure it out. So now they’re moving back home, which now is compromising the empty nest central. So there are a lot of dynamics that are happening here.

Dylan Silver (17:28)
You know, one of the interesting things about these cultural shifts is it did feel like, and I haven’t talked about this on the show, it felt like for a long period of time, and I think this is changing, that you know, you’re eighteen years old, you kind of leave. And that that felt distinctly American. Like regardless of where you are in the country, that was a shared experience. And now because it is more and more challenging, especially in the parentheses, the coast, California and the East Coast, to purchase homes, we’re now seeing that delayed even further. I wanna say the average age of homeownership

is if it’s not if it’s not fifties, it’s forties, right? And so we look at that and you say, okay, well that’s, you know, family years. Your twenties to your thirties, so those are the years where you could be starting families. So now we’re seeing the whole landscape of who are homeowners and communities changing.

Darius Ross (18:16)
Well, taking another step further, you have families that are now extended families, where you have mom and dad, you have a husband and a wife, which are the kids, you have another husband and wife, and they got multiple kids all in one house. Now that’s making a whole another dynamics. You even have kids that are in senior facilities with their parents, with their significant others. So this family interaction is getting out of hand because now you’ve got decades, generations, and not one house.

That makes no sense. And people are starting to rub each other the wrong way. So now this is like a whole another cultural aspect. And then here the parents saying to themselves, How do I get you out of the house? I thought you were gone at twenty-something when college. Now you’re back at 30 something with somebody else. And that’s another

Dylan Silver (19:00)
You know, this is this is something that’s interesting because a as someone who’s traveled myself, you look at a lot of places in the world and there is generational housing and it’s kind of something that’s very intrinsic to their bond and their identity. And we’ve effectively isolated ourselves to some degree, self-imposed, and we were able to do it for a while, and economically that seems to be no longer feasible. I do want to pivot here though, Darius, and ask you about some of the things that I’ve seen, which I’ve seen it in Texas, I’ve seen it a little bit less so

in the East Coast, but I’ve heard of it also happening in California, although I can’t verify this. I’ve heard people doing ADUs, accessory dwelling units like mother-in-law suites. Are you seeing this as a as a viable solution here or because of zoning and building constraints that this is left more of a niche and probably gonna be not widely adopted?

Darius Ross (19:50)
It is. I mean, I can tell you right here in Maine. I’m in Maine today and I’m working on buying some property here and building house here. You see on one parcel of land, maybe an acre, you might see three or four homes on one acre. They’re generations in one house. Okay. When I say one house, under one domain. So that’s a normal thing. throughout the Northeast, New Hampshire, Rhode Island, you’re starting to see it. Everybody’s starting to come back home because it’s like, hey, mom and dad’s got a piece of land. I’ll pull a trailer out there, I’ll pull a manufactured home, I’ll pull something out there and prop it up. I’ll work with it.

Because these mortgage payments, two or three thousand dollars a month. These apartment payments, three or four thousand dollars a month. Right. Kids can’t handle it. The jobs aren’t

Dylan Silver (20:29)
The jobs aren’t there. I I wanna ask you about Maine, because I mentioned to you in the green room, I’ve been to Maine once and I had a great experience there. A lot of times when we look at some of these states that are very scenic, we tend to look at them as opportunities to maybe, you know, spend a a summer or a winter or what have you. But now because some of these areas are are becoming cost prohibitive, people are now looking at, you know, maybe do I move to a Sun Belt state? You know, what’s the cost of

land like in in Maine. Is this having an impact in Mainers itself?

Darius Ross (21:03)
Well, here’s what’s funny. When Canada got struck with this whole thing with Mr. Trump and Canada and how that was playing out and how Canadians stopped coming across the border, now there’s a lot more land for sale. So now land prices now have begun to shift and differentiate. So what was high land prices now have come down, and now you’re seeing more people coming out of, you know, the New England area buying in Maine. So you’re seeing more people from that area, especially after COVID. So what you’re seeing now, the average price of land is between fifteen hundred and twenty three hundred dollars.

per you know acre. But that’s a beautiful thing because you can come up here, you can build a house. There are a lot less restrictions on building and so forth. So it’s becoming a paradise for people that are like, well, it’s either the cold or the cost. Nah, they’ll take the cold.

Dylan Silver (21:47)
That’s true. That’s true. You can’t have Florida weather and you know avoid the Florida, the Florida pricing. You know, one of the things that’s been interesting here recently is we have started to see people be more open to even begrudgingly relocating, whether that’s for cost of life, for jobs, for family, for everything, really. Do you think that a lot of these areas, especially on the East Coast, are going to see a shifting?

cultural identity where you might have had, you know, very much neighborhoods that were you could say Italian American neighborhoods on the East Coast. And then you’ll say, okay, well, these neighborhoods are going to be changing ’cause now they’re in the nexus of New York City and basically anyone who is within driving distance to New York City, it’s going to be living there. That could be doctors and more you know, all different types of folks and not just folks who grew up and were raised there.

Darius Ross (22:41)
I’ll give you good example. we’ll look at upstate New York. At one point in time, upstate New York had a smaller minority slash Black Hispanic population. Now there are huge pockets of Blacks and minorities and Hispanics in places like Goshen, Monticello, Albany, Rochester, Buffalo. That’s all changed. So now people are flooding there because they’re leaving New York City. I can’t afford it. Literally they’re saying I can’t afford there was a guy years back that kept saying the rent’s too damn high.

This is what’s happening. They can’t afford it. So they can go up there and they can buy it. But now here’s what’s tricky now. What’s tricky now is New York investors are now running to those markets because those apartment buildings are seven, eight hundred thousand dollars for a twenty-unit. Right. So they’re upping the prices. So it’s like cost ineffective in some cases. If you got there early, you’re okay now, different story.

Dylan Silver (23:29)
Six in one hand, half dozen in the other. when we look at the urban sprawl here, are you seeing corridors in New York, places that are now previously there might not have been much out there, but the urban sprawl is ever increasing. Are you seeing this impact?

Darius Ross (23:46)
Yeah. yeah. I mean Albany is a good example of that. Buffalo, Rochester. When you look over into Pennsylvania, Allentown has become huge. I mean they’ve got Eli Lilly coming in there soon now, and that whole area is becoming gonna be like huge. I mean, Allentown at one point in time is like, Allentown, I wanna go there. Not anymore. They are running there. You know, you see all these new developments, the PUDs and so forth. So they’re running, that’s one key area. You’re looking down a little further there between what used to be northern Delaware and that area.

huge amounts of you know conversion there. If you’re looking at northern New Jersey, southern New Jersey, same thing there. Sprawling. I mean you’re looking at the traffic patterns in New York City. An average day I say there’s fifty million people in New York City during the day and a hundred million at nighttime. It’s tremendous.

Dylan Silver (24:31)
Yeah, that’s a great point, you know, and what’s gonna happen with frankly the roads, right, when there’s that much commuting happening. There’s always been, but now even more so as it’s becoming more cost prohibitive. It’s hard to, you know, be a be a a a struggling college graduate and make it in New York City. You really can’t do it at all. It’s just basically people who can afford to live there and then you have some like Section 8 and affordable housing and that’s not always the best, right? I do wanna ask you though, because of the

experience that you have about a capital stack. When folks are looking at financing their deals, this is oftentimes one of the biggest bottlenecks that that folks have. And they’re deciding, well, should I syndicate, should I take on limited capital partners? Should I partner with a family office? And what are the approaches that I can do to raise capital? Without giving away all of the gold, what do you think is the solution set for folks who need capital?

Darius Ross (25:25)
For the first time in history, we’re gonna see a situation where if you are a capital raiser, family offices are going to be key. Sovereign wealth funds are gonna be key. the pension funds are gonna sit this one out unless they can get some great deals. So the number one thing of it is private capital is going to very important. But understand that’s key. They’re all gonna be looking at basically conservative numbers. You know, we’re not looking at the whole wild western.

For the next few years, there’s gonna be a lot of conservative information, a lot of conservative players that are gonna come on the market. So your Blackstones, your BlackRocks, the KKRs, and so forth, those are gonna be leading the game. The smaller players are gonna have to realize they’re gonna have to turn around and take a different position as to how they raise money and to who they raise money from. And one of the most important things is realizing that you’re gonna have to be very conservative as you’re asked. You know, maybe just maybe you might want to look at, you know, raising your own capital with among a few sources.

Limit who you actually have on the deck.

Dylan Silver (26:24)
We are coming up on time here, Darius. Any new projects or activities you’re working on these days, and also anything you’d like to mention directly to our audience?

Darius Ross (26:33)
Well, I have a new book out now. It’s *Mastering the TPS Syndrome* (Mastering the TPS Blueprint), which talks about the whole process of, you know, developing your whole mindset to be able to create wonderful opportunities and so forth. And other than that, the other thing is right now is that I’m actually spending more time trying to look at international projects Africa, Asia, and the Middle East and so forth and as well as Asia because those markets are gonna be huge.

Dylan Silver (26:55)
Darius, thank you so much for your time today. Thanks for joining us.

Darius Ross (26:59)
Fantastic. Thank you so much. I appreciate it.