Q4 2022 Quarterly Report

It would be much easier to tune out the incessant recession chatter if we all weren’t surrounded by screens and the 24 hours news cycle wasn’t singularly focused on commanding our attention with fear laden headlines, yet this is the world we find ourselves in. While we at Axia Partners believe the coming recession will be of the milder variety, there is no denying the combination of inflation, the Fed’s prescriptive rate hikes, and the resulting slowdown in economic and transaction activity will have a variety of impacts on the commercial real estate industry.

The effects of monetary policy typically take 8-12 months to work their way into the system so we are truly at the early stages of understanding the impact of the Fed’s rate hikes and quantitative tightening measures. Fortunately, many indicators already point to inflation drivers coming back down to earth and, for now, the labor market appears to be holding strong. Going forward the impacts of a drastically reduced broad money supply and constrained affordability will be the real tests of economic resiliency in the US.

Axia Capital Fund I benefits from having acquired assets throughout 2021, prior to weakness and iliquidity appearing in commercial real estate markets. The phenomena of low transaction volume, stalling project pipelines, and weakening rent growth and demand in once hot markets can, on the whole, be seen as potential benefits to this fund’s portfolio in regard to strategic disposition of assets in the future. While the current environment presents challenges to acquiring assets at attractive valuations, we anticipate these conditions to soften and reverse by the time we target selling the portfolio of improved and repositioned assets. With relatively cheap fixed debt and diversification in stable markets, we believe our continued focus on heavy capital improvements will enable us to complete and deliver highly desirable and well performing assets into a receptive market once the dust settles. Again, we’d like to emphasize that our conservative underwriting around exit cap rates, rent growth, occupancy, and expense growth has proven prescient as we avoided the deals and markets in which opportunities looked great on paper, but now appear anemic as the overly bullish assumptions on which these deals were based deteriorate.

As we have in previous quarterly reports, property specific updates along with a high-level fund overview will be outlined in the following section. We have also included a more thorough update on the status of our historic redevelopment project in Deland, FL. You will also find a summary of current market observations at the end of this report, which aims to offer a pulse on the commercial real estate market in general and our target asset types in particular.

Portfolio Updates

The Putnam Redevelopment (Deland, FL)

The one asset in our portfolio that has been most negatively impacted by the evolving economic environment is the renovation and conversion of the historic Putnam Hotel into a class A apartment product. The asset was acquired in Q4 of 2021 at a competitive price of $2.35M, assembling two parcels in order to obtain sufficient land for parking. Much of 2022 was spent progressing the conversion, designing architectural and engineering plans, securing building permits and historical commission approval, and completing preliminary demolition and site prep. This deal was attractive due to the site’s prime location (directly across from city hall in the heart of Deland) and the various incentives tied to the development, including a 10 year property tax abatement and grandfathered zoning and impact fee variances.


Read more about the latest Putnam Redevelopment

A drastic and unforeseen rise in construction costs coupled with the complexity of restoring an historical building resulted in project budgets growing significantly. The inflated budget still penciled based on projected rents and recent sales comps provided by a third-party feasibility study conducted based on the top tier product we had designed. As market conditions worsened and interest rates rose, the revised risk profile of the conversion exceeded our tolerance levels for the Axia Capital Fund and the decision was made to halt progress on the project prior to construction commencing (fortuitous timing). We have moved forward with marketing the project for sale, with the potential for public private partnership and an assemblage deal on which we are coordinating with the County. We had a Seller under contract in Q4 of 2022 at an attractive price, however, the deal ultimately fell through as that group too decided to pull back on new projects citing an uncertain economic outlook.

On December 26th we received distressing news that the structural integrity of the building had deteriorated, and our engineers concluded the best course of action would be to demolish the building (we are still investigating the causes, as this building has stood for 100 years without issue). There are benefits to the site’s value as a blank canvas, as demolition was previously not an option due to the building’s historic significance. We are working with the City to structure development incentives and grandfathering of variances in order to maximize the attractiveness of this site from a sale perspective. The negative impact of this project on the Axia Capital Fund currently is that the capital invested in this project (roughly $4m total) has not produced positive cash flow and the disposition value will likely be impaired. There is no debt on the project, so nothing is forcing our hand other than the desire to get this capital back to work for our investors. We are pursuing all avenues to maximize the value of this property for our investors.


Cambridge Apartments (Cookeville, TN)

The Cambridge Apartments continue to outperform our original expectations regarding target rent for both renovated and unrenovated units. 


Read more about the Cambridge Apartments

Occupancy and therefore Net Operating Income at this property have been suppressed as we took 30+ units offline to complete full renovations before the expiration of our loan’s improvement funding portion, however, we have recently negotiated an extension of this period. With more time on the clock to fund unit improvements from the project’s loan we will be able to increase occupancy as the renovations are completed, which will increase the property’s cash flow through the remainder to the improvements. It has also been proven that this property can achieve the same above-target rental rates on units with a reduced improvement scope and thus we have decided to scale back the extent of the remaining interior value-add. This, coupled with the extended timeline on our loan terms has resulted in a need for less equity capital committed to this project, as reflected in the reduction to the “Net Improvement Equity” figure for this property. While more units were taken offline than we would typically target due to perceived timing constraints, this property is and will be one of our strongest performers once occupancy is normalized in the coming months. Property performance will be further enhanced by the utility bill back system enacted in January, in which residents will pay for a portion of utility expenses previously borne by ownership.

Indian Creek Apartments (Kansas City, MO)

The value-add improvement program at Indian Creek continues to progress smoothly. The property has maintained 90% occupancy while units are steadily improved as leases turn over with no forced vacancies.

Read more about the Indian Creek Apartments

This has enabled us to increase NOI quarter over quarter as newly renovated units are leased out at upgraded rates. As you can see in the table, NOI has increased meaningfully at a near equal level of occupancy quarter over quarter. Seasonality has reduced our ability to aggressively target higher rates on new leases, however, the more active Spring season may provide an opportunity for us to capture further revenue increases. Completion of exterior visual upgrades and enhancements to the property have had a marked impact on aesthetic quality and investment into common area amenities should make this a desirable apartment option come pool/BBQ season.

Heritage Cove RV Resort (Saxton, PA)

Heritage Cove operates on a seasonal basis so Q4 results are expectedly muted. The in-season drew to a close in October which explains the drop off in revenue, net operating income, and occupancy for the park throughout the end of the year.

Read more about Heritage Cove

During off-season months our aim is to continue progressing capital improvement projects on the property while enhancing RV site amenities and the park’s facilities. Our to-date upgrades have been very well received and our efforts around the park’s marketing and web presence have greatly expanded the reach and engagement of our guest base.

Lakeview Cove RV Park (Duchesne, UT)

The performance of our Lakeview asset has been proof of the value inherent in improving management and operations on a property. Without expanding the property’s site capacity, we have still been able to achieve a near 10x increase in annualized NOI from the time of acquisition.

Read more about Lakeview Cove

The benefits of both long-term site rentals and our ability to operate the park throughout all four seasons is evident in the Q4 occupancy, down only 4% as of 12/31/22 from the prior quarter. Given the substantial operational and financial improvements accomplished on this asset we are now in a position where early disposition can be considered, freeing up capital for redeployment or reallocation within the portfolio.

Storages R Us (Kalama, WA)

Storages R Us has performed well through Q4, a period typically slow for self-storage businesses. As of the previous Q3 report we had implemented a rate increase across the board, on both in-place and street rates, and through the winter months this rent bump has been absorbed well.

Read more about Storages R Us

The rent increase and imposition of a tenant insurance program resulted in an increase in quarter over quarter NOI of $8,600, which on an annualized basis suggests a nearly $700k increase in disposition value at a 5% cap. These are back of the envelope figures, but still demonstrate the power incremental improvements in NOI can have on potential exit value. Expansion progress has been slower than anticipated due to topographical complexities, however, this project is progressing well and continues to be an excellent recession resilient component to the portfolio.

Portfolio Overview

Overall in Q4 the portfolio’s combined NOI decreased primarily as a result of our RV park assets’ seasonal slowdown and closure for the winter. Even with the reduced utilization at the RV parks and a relatively high percentage of units being held offline for renovation at the Cambridge Apartments the portfolio still produced roughly $500k in Gross Revenue and $140k in Net Operating Income for the quarter. Performance has been solid across operating assets throughout the ongoing period of heavy capital improvements and we should begin to see these properties experience an upswing in profitability over current levels as they enter the later stages of the value-add J-curve. As a result of our property and market selection we are not seeing the weakness in rents or occupancy affecting many other “pandemic growth” markets that ran hot over the past few years and are now cooling. While the setbacks experienced with the Putnam redevelopment are not ideal, we remain bullish on the rest of the Axia Capital Fund’s portfolio and are working diligently to navigate the complexities of the current market environment.

Market Observations

2022 Recap and Broad Market Overview

We find ourselves at an interesting crossroads where inflation is still running high and rates have been ratcheted up in an effort to combat said inflation. Monetary theorists would posit that the Fed’s actions to reduce the money supply should bring inflation back towards the desired threshold, however, the result is not instantaneous and thus we have the misfortune of teetering on the precarious edge between two phases of an economic cycle. Add to this the knock-on effects from blistering pandemic fueled demographic shifts and the resultant flood of cheap cash seeking to capitalize on market opportunities and we are left with an environment in which the post-pandemic pendulum has begun to ricochet the other direction.

The post-pandemic years leading up to 2022 saw record breaking sales activity in the commercial real estate space. Now, however, transaction volume has slowed to a trickle. The $156B in deals executed in Q4 2022 was the lowest for that quarter, which typically sees the highest volume of the year, since 2013. To put things in perspective, fourth quarter deal activity representing <25% of total annual transaction volume has only occurred 3 times in the past century – Q4 2022 being one of those instances. Large institutional sales activity is mostly to blame as deals in this space were down 64% from quarters prior, so the magnitude of the pullback may be slightly inflated, however, it is important to note the slowdown can be primarily attributed to Sellers pulling deals due to valuation changes.

The second half of 2022 also saw the pendulum begin to swing in the other direction for rent growth and demand. After many desirable pandemic growth markets experienced near zero vacancy across multi-family, industrial, and self-storage assets (sorry retail and office), driving rent growth through the roof, these same markets are now seeing rents move the other direction and vacancy creep up as a glut of new supply comes online. Of the 171,000 multi-family units absorbed in 2022, only 9,000 units were absorbed in Q4. As rent inflation priced many renters out of new Class A properties national vacancy rose to 6.2% from 4.9%.

Stalling rent growth, shrinking demand, and rising interest rates and construction costs have also put the brakes on new projects. As anyone trying to build or find construction labor in 2021 can attest, there was so much development activity that general contractors and subs were worth their weight in gold. Now, the momentum fueling the overstuffed new product pipeline seems to have frozen to a crawl. Of great importance is the fact that this curtailing of new development is NOT demand driven, but purely a product of project economics.

Last, but not least, pricing seems to have reversed course as well after industrial and multi-family assets printed double digit appreciation throughout 2019-2022. According to CoStar Analytics all property types, except for land, declined in price based on their repeat sales index.


Among multi-family assets rent growth held up well on an annualized basis as of year-end 2022 at 6.4%. While the 2023 outlook for rent growth from Yardi Matrix has been revised downward to 2.6% from 3.1%, this is not far off from historical averages. As noted previously, occupancy has declined somewhat, but is only 0.9% off the 2021 peak. New supply for delivery in 2023 is expected in the range of 440,000 units, or 3% of the national apartment stock, which should bump vacancy slightly higher. For reference, the last time >400,000 new units entered the market was in 1972. In terms of valuation, multi-family cap rates vary greatly from market to market as location is of such great importance, however the national average cap rate across property classes hung around 4.5% throughout 2022 and will likely creep higher in the later half of 2023.

For now, transaction activity favors smaller deals in smaller markets for multi-family assets. We at Axia foresee a fertile acquisition environment arising in the second half of 2023 for multi-family deals once the Buyer-Seller gap in valuation narrows and a wave of expiring debt maturity and rate caps force properties onto the market at solid discounts.

RV Parks

RV Parks tend to fly under the radar when it comes to headlines and reports detailing the successes or failures of particular asset types, and for this we are thankful. Parks and campgrounds continue to be highly sought after recreational destinations, and those that can control expenses stand to benefit from good opportunities to grow revenue and keep occupancy high. In a survey conducted by RVShare 61% of participants plan to RV this year, up 13% from 2022. In this same survey 50% of participants expressed their preference for RV travel over all other forms and 98% of RVers said they do not plan to cancel their camping plans despite economic uncertainty. The RV community is very sticky and once someone has a good experience at a park or campground they tend to be repeat guests. Additionally, younger generations are now entering the RV demographic base in a meaningful way as remote work fits very well with the RV lifestyle. As a result of this continued and growing demand, 1/3 of privately owned campgrounds plan to expand their facilities in 2023 to accommodate increased demand and lengthy waitlists according to a study by the Dyrt.


Self-storage can be one of the most recession resilient assets due to its ability to meet needs in both economic expansions (more stuff) and downturns (less space for stuff), however, this asset type’s performance does correlate to some degree with that of the housing market. High mortgage rates and building costs have slowed the sale of new and existing homes and, as a result of less packing and moving, self-storage has seen street rates decline by 2.3% in Q4 2022. That decline can also largely be attributed to the natural seasonality experienced by self-storage facilities with demand tending to wane in winter months. While street rates may be down slightly, self-storage operators are able to achieve rate increases among in-place tenants as many self-storage renters would rather eat a 5-10% rate increase than move their stuff. New supply for delivery in 2023 is not insignificant at 3.6% of the national stock, which should negatively impact occupancy in some markets, however, much of this development is concentrated in areas of high demand so we do not expect the effects to be pervasive. Importantly, self-storage performance is primarily linked to multi-family fundamentals in the market served, and as such market selection will be key for anyone acquiring or operating self-storage facilities in 2023.

Wrap Up

We hope you find this Quarterly Report informative and thoughtful. We take great pride in having earned your trust and capital and it is our mission to continually earn our place as your investing partner.

As a reminder, the Axia Value Development Fund is currently accepting commitments and we are nearing the close on our first project within the fund. This fund will focus on a “barbelled” approach with opportunistic development on one end and existing cash-flowing value-add properties on the other. The fund’s targeted equity raise is $40M, which we plan to deploy both in the near-term on development projects and throughout the latter half of this year as price discovery creates opportunities to capture deep value. We are very excited and hope you will join us!

Investors interested in subscribing to and learning more about the Axia Value Development Fund are encouraged to reach out to or to contact any of the General Partners.

David Jangro

Portfolio Manager – Director of Investment

Before joining Axia, David developed real estate experience at Everbank/ TIAA CREF in the distressed MBS trading unit and on one of Colliers market-leading investment brokerage teams. David brings a decade of financial services experience, working at Credit Suisse and Goldman Sachs within their Wealth Management and Hedge Fund Strategies groups, and an MBA from Vanderbilt.

Parker Petersen

Director Of Finance

Parker started his career with Goldman Sachs within their tax strategy group. Parker then joined our Fund Manager, Adam Long, at the Millrock Investment Fund and its sister company Millcreek Commercial Properties as the deputy fund manager, where he underwrote the allocation of $50MM annually while overseeing more than 150 investment transactions.