Value-Add, Core, New Development and Making it Pencil

LOS ANGELES—The 2019 outlook for multifamily developers and investors hoping to capitalize on multifamily assets remains strong. So said panelists during the “Behind the Deal: Transaction Talks with Marc Renard” session at the GlobeSt. APARTMENTS conference.

Renard, EVP of the capital markets group for Cushman & Wakefield, lead the diverse panel to analyze the common factors and trends associated with mergers and acquisitions activity in 2019 and what to expect in 2020 and according to Renard, from an industry standpoint on a relative basis, real estate is a compelling opportunity. “If investors are looking for current yield in diversification and total return, it is still a shining asset class.”

When panelist Dean Rostovsky, managing director and acquisitions officer at Clarion Partners, “prepares to take the field” as Renard put it, he looks not where rates are going or how many jobs might be added this month or this quarter. Rostovsky looks at how he is going to pick up one more yard on the transaction he has been working on for three months and how he will get the guy across the table over to his side.

Maria Stamolis, co-head of real estate investments and director of asset management at Canyon, said she is thinking about his investors and what her company is tasked to do for them. “My focus is on making sure our team is motivated to deploy the money in the best way. The challenges to address have become more complicated and require more attention.”

What panelist Swarup Katuri, SVP of investments of real estate at Brookfield Asset Management, is thinking about when he has his morning coffee is buying various assets and how his company can create as much value as it can. “You have to pick the right spots and create value.”

When looking at investing in core, panelist Peter Cassiano, managing director of Invesco, said that for value-add apartments, when you start in coastal markets at an NOI yield that is in the 3s or lower versus buying a core asset that has a 4 on it, “you are starting from a hole you have to dig out of.”

Rotovsky also addressed value-add versus a core brand new deal and said his company looks at if the absolute location is hard to replicate, and then with some work and repositioning in a tight yield, sees if there is runway in the long term. “We will still look at them to have an asset that we think is great over time that we couldn’t necessarily go out and buy in core form.”

Katuri plays everything from opportunistic to core plus and the company’s opportunity fund has seen a lot less investing in its value-add and opportunistic strategies in multifamily. “There are a lot more core plus.”

Stamolis points out that her company has different buckets of capital as well, for new development versus buying existing and building to core. “Where we have done a lot of work is the debt strategy supporting build to core,” she said. “We underwrite the transaction as if we are going to be the owner.”

She continues that they always look at it with the same lens. “We are not making portfolio plays generally speaking. Value add is the most compelling for us. We keep low leverage on those assets but I think being aligned with operators who have the day to day knowledge has been a success for us. We still see opportunities in that space going forward.”

Invesco’s Cassiano is doing new development very selectively and also talked a bit about pricing, durable income streams and construction costs. “We have been more focused recently on suburban, garden that have urban attributes like walkable amenities and transit. We try to hit a 20-25% margin to make it pencil which is not easy right now.”