Ari Rastegar has only good things to say about Austin’s future.
“The fundamentals of this city are spectacular,” the developer said at an event The Real Deal and Rastegar Capital put on in Downtown Austin in October. “400 people a day are moving to the city. If you do the math on that, over the course of four to five years we’re adding the entire city of Pittsburgh.”
In a wide-ranging discussion with TRD’s Hannah Kramer, Rastegar balanced his long-term optimism with a healthy dose of realism about the short-term challenges facing the real estate industry.
“We did 16 major multifamily deals during COVID. Some of those are the best deals we ever did. Some of them were the dumbest deals we ever did,” he said. “We were buying three caps thinking that there was still going to be growth. Today, that same property we paid 8 million bucks for is maybe worth four.”
The lack of buyers at reasonable prices is making foreclosure another outlet to dispose of properties, which is unique to this down cycle.
“When they do not trade at reasonable prices,” said Rastegar, “the lenders will then work with the owners in a more efficient and realistic manner.”
With multifamily, even the worst deals have a silver lining; while Austin might be oversupplied today, a lack of new deliveries on the horizon is poised to send rents through the roof. It’s the logic behind Rastegar’s investment in Kyle, a town that the developer is in the process of transforming from a small farming community into a thriving master-planned community.
Office real estate presents more fundamental concerns. At the root of the issue, said Rastegar, is a negative feedback loop of falling prices and “vulturistic” offers, which has created a “circulatory” blockage in the market.
“People read that office is in trouble, so they think they can over-negotiate,” he told the crowd. “If I have a property that is $50 million and I really want to get to $52 million but would really get rid of it for $45 million, I’m getting offers for $12 million.”
The result is an arterial blockage in the real estate market that has made lenders wary of foreclosing, a scenario that cannot last forever given how many of the loans behind these buildings are “super leveraged.”
“‘Extend and pretend’ only lasts so long, and I think we’re in the final stages of that phenomenon,” said the native Texan. “There’s $1.2 trillion of bad office loans right now that are hitting a wall. When there’s a T in front of it, it’s above my pay grade.”
Still, these choppy waters mask the potential on the horizon.
“You don’t have to sell that Austin is going to make it,” concluded Rastegar. “It’s just a function of when.”
Attendees at the event agreed with Rastegar’s sunny outlook, especially when it came to strong demand bolstering Austin’s residential market.
“That influx Ari talked about has been happening for over 20 years,” said Melissa Webb, President of Brokerage, Texas, at Douglas Elliman. “It’s a fun, young city. It’s a wonderful place to raise children. It’s a great city to find jobs. It checks all the boxes.”
To learn more about Rastegar Capital’s portfolio in Austin and beyond, visit their website.