BOCA RATON, FL—In terms of multifamily investment activity and trends, this is the most interesting market most industry players have seen in quite some time. So said Daryl Carter, chairman and CEO of Avanath Capital Management, at the NMHC Apartment Strategies Conference, held here immediately preceding the organization’s annual meeting this week.
Carter was the moderator of “The View from Investors,” where decision makers from some of the biggest multifamily investment firms shared their views on the market. Speakers included Kees Bruggen, managing director of Stonebridge Investments; Terri Herubin, portfolio manager for Cornerstone Real Estate Advisers LLC; Michael Katz, co-CEO of Sterling American Property Inc.; and Ella Shaw Neyland, president of Steadfast Income REIT.
All the panelists concurred that conditions have certainly changed, and that’s meant having to alter their take on the market. From Bruggen’s point of view—his firm is a Dutch company investing in variety of markets nationwide—the “world from a foreign investor standpoint has changed.” Namely, there are opportunities opening up in Europe, which means more money is flowing to local markets as investors look more to their home markets, and in niche plays.
Still, the US is still viewed as one of the most stable markets in the world. For Middle Eastern investors in particular, the unrest in that area of the country is a driver behind their desire for a safe haven. Being already heavily invested in the United Kingdom, they look to the US for diversification. While “doing business between those two cultures is very different,” noted Bruggen, “it’s only going to become more active.”
Katz, meanwhile, broke it down into three components. “Real estate is a simple business with three aspects to it: market, financing and management,” he said. “We can control the last two, but cannot control the market.” For that reason, he noted, most of Sterling American’s investments the past few years were not in New York City, which is very market driven. But he indicated a desire to return to the Big Apple, “back to our roots.”
The return, however, will be on the firm’s own terms, as opposed to through a fund structure, where there are over a hundred different investors, each with its own investment criteria. “We’re going to go to New York City and start playing again,” Katz stated. “We’ll do new construction condos, conversions and office space.” He pointed out that while a market like New York has 4% cap rates with returns penciling in at 9% or 9.5%, “we’re going to do much better. There’s only 2% multifamily vacancy in New York, so people need to live somewhere.”
Steadfast, which launched a new $1.1-billion Apartment REIT last month, takes a slightly different path. To get returns, the firm targeted the central Corridor of the US. Said Neyland, “The demographics for that part of America have been off the charts compared to the coasts. That’s where the jobs are being created.”
That job growth is driven by volume, she added, which then trickles down to small businesses, which are also major job creators. “The majority of our markets have recovered the job losses they suffered during the recession,” Neyland pointed out, noting that Texas also accounted for 30% of all job growth in the US last year.
There’s also been a shift in mindset among the population. “Millennials don’t want to own a house; they’d prefer to rent and have the lifestyle and flexibility to move, if necessary. Baby boomers, too, are making lifestyle changes,” she noted. Steadfast has been having particular luck in achieving good returns by buying and fixing up high class B product in stabilized suburban markets.
With a projected construction of 300,000 units this year—about on par with the historical pre-crash average—Carter asked if anyone was concerned about overbuilding in certain markets.
Cornerstone, which has $42 billion in assets under management, has already faced some new supply in some of its markets, noted Herubin, who oversees the firm’s core open-end fund, about a third of which is in multifamily, both debt and equity. Although the supply has been considerable, she said, “we’re not worried about it as long as we buy well.”
Who is worried about the new supply are investors. “Supply is a big issue for our investors and it’s an issue we’re constantly responding to,” she said. “It’s more worrisome in markets like Las Vegas and Phoenix than it is in, say, Austin, but it’s very much on a submarket basis. If supply is going to affect anything, it’s going to be in rent growth—more competition slows the pace of rent growth. We believe in research.
“Multifamily in a core, diversified fund preserves cash,” Herubin stressed. “It’s an important source of income, but the way we can ensure cash flow is to buy where we can raise rents—be it because of job growth or buying undermanaged assets. At the end of the day, it’s what we have to do.”
With about a million new residents expected in New York, Katz isn’t concerned, either. He expects many of those people to likely end up in submarkets in the outer boroughs, where there are buildings going up left and right.
Steadfast doesn’t worry about it, either. “Roughly half of the new construction is in a half a dozen cities, and it’s not really in the markets we’re in,” said Neyland. “I think we’re in a period right now where the concept of overbuilding is a little overblown.”
So what about interest rates? A potential increase of 100 basis points would do little to hurt these experts’ businesses, but it would impact the price at which they buy or sell product.
As for when that may happen, the results were mixed. Katz only has plans to sell the assets he acquires for the firm’s fund business. “Outside of the fund business, we’re going to hold until we drop,” he stated.
Herubin, for one, said the lack of rent growth would be a major driver for Cornerstone to sell. “You sell when you can’t raise rents anymore. So you’re up against income, or homeownership, or can’t make any improvements anymore. Or when you find someone else who thinks they can raise rents, even if we couldn’t.”
And Neyland noted that dispositions aren’t on her mind, for now. “We sell when we can’t get the return we want for our investors anymore,” she said. Steadfast has purchased over $1.5 billion in apartments over the past two years. “We were in the acquisitions mode, and now we’re entering into the operations mode.”
The key to all the speakers’ businesses is attracting investors, and they do a good job of it, if their performance is any indication. With apartments continuing to be a dominant, well-performing investment product, they expect their track records to continue.