(Save the date: RealShare Apartments East comes to the Hyatt Regency in Miami, FL, on February 26.)
NEW YORK CITY-With a good deal of foresight and a bit of luck, AREA Property Partners has had great success over the last few years. Ironically, the firm’s good fortune stemmed from a bearish outlook on the national CRE market, said CEO Richard Mack, who spoke about his company’s track record during the recently held UJA-Federation of New York‘s sixth annual Tycher Family Foundation Real Estate Industry Event.
“I’ve been given five minutes to talk to you about $14 billion in equity,” Mack joked while providing a window into the firm’s financial position. AREA has made its money by betting on the multifamily segment, he said, noting that the company isn’t an investor in New York, focusing instead on other parts of the country.
“The US is in a period of no—or slow—growth, which dominates our investment perspective,” Mack said. “We’ve bought about 30,000 units of multifamily in the last four years; we expected apartments to outperform other segments and we were right. In light of population growth and weak economic growth, multifamily seems like a good place to be.”
By contrast, office leasing is not a segment to count on right now, Mack noted. “In a low growth market,” he continued, “office leasing is weak and will continue to be.” The company’s lack of faith in the overall CRE market is based not just on the overall economy but also on a spike in pricing that Mack said is unjustified.
“Trophy assets have become overpriced,” he declared. “Cap rates in some gateway markets are under 4% for class A multifamily and just above 4% for some class A office space. In the last downturn, we didn’t have the financial instruments we have today, like REITs or the CMBS market. Those tools have cushioned us but they’ve created unsustainable pricing.” It’s at that level in multi-family too,” he says, “because there’s more capital chasing assets than there are assets to buy.”
Going forward, AREA’s success will depend on a bit of detective work and the truth behind a hunch Mack put forth.
“Our strategy is to find markets where there’s less capital chasing deals and where the fundamentals are strong,” he said. “People thing capital will chase out of the gateway markets into the major markets.” Mack considers New York, Boston, Washington, DC, San Francisco and Los Angeles gateway cities, he said, adding that Miami and Seattle are “on the cusp” of joining that list. Major markets, he noted, are cities such as Dallas, Houston and Chicago.