In Mike Madsen’s almost 20 years in the real estate business, he has seen the lending market shift overnight on two occasions.

The first was in the spring of 2020 when COVID-19 shut down the economy. The second time was two years later when the Federal Reserve began raising interest rates.

“It was like a lightswitch going off overnight,” said Madsen, vice president of acquisitions and economics at Salt Lake City, Utah–based apartment owner and manager RealSource Properties. “All of a sudden, they started pulling all their levers and the market shifted so fast.”

After the interest rate-induced flip last March, Madsen remains confident the sales market can snap back just as quickly. “With how healthy the multifamily fundamentals are, that could reverse,” he said. “We recognize that there's a record amount of capital waiting to deploy and waiting to get a discount.”

RealSource, which has 18 communities totaling 5,138 units in Colorado, Texas and the Southeast, is among the companies waiting to make buys. However, the market for the flow of properties that it covets has virtually disappeared. “We're big value-add players,” Madsen said. “We're always looking to deliver higher returns.”

Here, Madsen talks with Multifamily Dive about the current deal environment, when sales will snap back and the company’s target markets.

This interview has been edited for brevity and clarity.

MULTIFAMILY DIVE: Are you seeing any deals right now?

MIKE MADSEN: We comb through a lot of deals. Obviously, there's a huge spread between the bid and the ask. 

What we're finding is the deals getting done right now are done through relationships. A lot of times, sellers will be hesitant to go to market and broadcast, worried that they may not get their strike price. So they'll go to a broker, and they'll say, “Hey, why don't you just take this to your 10 best buyers that can perform?” So we see a lot of deals happening that way. Not all of them are getting done.

Is RealSource under contract to buy any properties?

We're not under contract with anything right now. We’re being extremely picky. Having a lot of capital to deploy, we're not necessarily waiting and trying to time it right at the very bottom. We think the second and third quarters are going to be good times to put things under contract. We may see some of the 10-year rates settle down a little bit. 

It's not a seller's market. It's not a buyer’s market, but we're positioning ourselves to really take advantage if it goes to a buyer’s market because that window can be pretty short.

When the transaction market picks up, how do you think it will play out? 

In 2020, private individual investors were the first ones to jump back in. But it could be a herd mentality this time where all of a sudden people see someone else close and we could get back to a pretty competitive market. 

We see this as more of a market freeze. Are values really down 25%? Well, when you've got maturing debt, then today's prices could be down somewhere between 15% and 25% from the peak, depending on the market. But I think people are confident that the market will be higher in 12 months and certainly in 24 months than it is today. That's why you don't see many people selling right now.

How do you choose your markets?

We focus a lot on the state level. There are a lot of policies set at the state level. There are a few states that have multiple RealSource target markets. We like the Carolinas. We like Ohio right now. Then, Florida and Texas are places that everybody likes and everybody sees growing. 

It's not necessarily always one region. It's not always just the Sun Belt. There are some markets in the Sun Belt that we're trying to buy into and some that we're staying away from.

Are you evaluating any technologies to help centralize on-site activities?

We're always looking at new ideas and technologies to improve property operations. The interesting one to us right now is AI on the leasing side. AI does a really good job of finding people's questions, getting them answers, doing follow-up through text messaging and things like that. So that's the interesting one for us. 

You always need somebody to answer certain questions or give tours. But going forward, it will be a tag team of technology and on-site staff. 

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