The Solomon Organization has maintained its long-standing focus on Midwestern multifamily markets, despite the significant population growth in Sunbelt cities like Austin since the onset of the pandemic. This strategic consistency underscores the company's commitment to its established regional expertise, even as other areas of the country experience demographic shifts and increased real estate activity.
Zach Solomon, the company's managing director and principal, who will be a speaker at GlobeSt.'s multifamily conference this Spring, in New York City, spoke about the more stable fundamentals in the Midwestern markets, including renter affordability and less volatile supply.
Some of the New Jersey-based firm's top markets in the region include Michigan, Cleveland, Cincinnati, and Milwaukee. While they may not be magnets for migration, they've been working for the company.
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"We've had a lot of success [in those markets]," he said.
"The rent-to-income ratio is very low, it gives us comfort. It makes us feel like the folks that are renting in our apartment complexes can afford to live there and will give us a greater likelihood of being able to drive rents."
HIGH RISK, HIGH REWARD IN THE SUNBELT
Meanwhile, it's the opposite in Sunbelt markets like Austin, which hosts stronger population growth but could offer more volatility for landlords.
"In a lot of those cities we view as unaffordable, the supply is so dynamic that oftentimes there's a huge lag, and being able to fill those apartments up and drive rents," he said.
"So oftentimes we've been priced out of those markets."
However, it does not avoid some of those high-growth Sunbelt markets completely. According to Solomon, his firm has large portfolios in the Carolinas. He admits those areas run the risk of oversupply and higher vacancies, but there's more upside with more institutional capital in those areas. However, The Solomon Organization has spent most of its time making acquisitions in the Midwest in the past 10 years.
In addition, The Solomon Organization does not operate in urban cities and in no other asset classes other than multifamily. Its portfolio of roughly 75 communities and 22,000 apartments are located in suburban areas.
INTEREST RATES HAVING MINIMAL IMPACT ON COMPANY
Despite the reduced number of transactions in the market, Solomon says that the elevated interest rate environment has not significantly impacted the company's operations. As a result, the firm finds itself in a position where it doesn't need to alter its strategic approach.
The investment firm mainly enters long-term financing deals, typically in the range of 10-15 years. As a result, Solomon said in the next 36 months the amount of debt expiration it has is "de minimise." In other words, the firm is locked into lower rates.
"We tend to get ahead of the game and take the interest rate risk out of it, and we have an investor base that is okay with that," he explained.
"We have the ability to buy deals no matter what the cycle is, no matter where rates are. We have the ability to be patient and do deals that we view as viable, not just for buying now, but for the long term. So, it enables us to take, a view on how we view the real estate business today."
SELLERS' AND BUYERS' EXPECTATIONS STARTING TO ALIGN
For the overall state of CRE in the short term, Solomon is optimistic despite the continued slowdown of deals. One positive trend he has been noticing is the gap between the bid-ask spread in the market has "slightly" narrowed, meaning sellers' expectations are starting to get closer to where buyers are.
While uncertainties remain with inflation, Solomon's instinct tells him that interest rates will drop in the short term again.
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