Multifamily Investors Talk About the 'B' Word

MIAMI—Hundreds of commercial real estate professionals on Tuesday gathered at the Eden Roc Miami for the 3rd Annual RealShare Apartments East. The multifamily mood spanned from cautious to optimistic to downright “frothy.”

“I think the US is setting up for a period of stronger economic growth,” said Michael Cohen, director of advisory services at PPR, in his presentation, “Economic Outlook: The East Coast Apartment Market.” “Our outlook, which is based into that forecast, calls for stronger economic growth over the next 24 months with higher levels of job gains, all of which I think will provide a good cushion for the extremely high levels of apartment completions that we've seen for the next 36 months.”

After getting an economic briefing from Cohen, panelists gathered for an “Investment Forecast.” Active investors, including Gary Goodman, senior vice president of acquisitions at Passco Companies; Robert Kaplan, principal at Ackman Ziff; Barron Channer, CEO of BACH Real Estate; and Tom Bartelmo, president of Kislak, offered a regional forecast on the markets to watch on the East Coast. Jay Massirman, founder and president of Rivergate Companies, moderated the panel.

“Globally, there's a shortage of secure cash flow streams,” said Kaplan. “Real estate generally and apartments specifically offer very reliable cash flow streams relative to other investments. So when we talk about a bubble we talk about an unsustainable trend apparently outside all the parameters of reasonableness.”

From a global point of view, Kaplan said real estate investing—even with cap rates as low as they are—seems to be on sound footing and have sustainability when compared to alternative investments. Although rent growth is slowing in some markets, he said signs point to a stable period that is sustainable over the long-term.

That's one of the realities Channer, a Don Peebles protégé, is betting on. BACH is working to revitalize the historic Overtown district in Downtown Miami.

“No one is developing for the middle-income market in Downtown Miami,” Channer said. “I look at the middle-income market and it's the largest portion of our population.” Channer has adopted a public-private strategy to tap into land resources on which to develop Overtown Gateway, a $250 million multifamily project that could serve as the cornerstone of the area's revitalization.

Miami multifamily is a “little too prohibitive” for Kislak, Bartelmo admitted. He's investing in Tampa and Orlando multifamily because the pricing is more realistic for his firm's comfort zone.

“We see Tampa and Orlando as markets that haven't made the recovery the same way Miami has,” Bartelmo said. “They are on the upswing and we can still find deals where we can put some value add into them, find niches in the market that work for us, and ride the upswing.”

Goodman says the model for multifamily investors has shifted from Tenancy in Commons to Delaware Statutory Trusts. The latter emerged in 2004 when the IRS set up a vehicle for investors to qualify for a tax deferred exchange as beneficiaries of the trust. Fannie Mae is making loans to the trust, which Goodman called a complicated structure.

“Yields now are 6.5% to 7%,” Goodman said.“On a risk-adjusted basis, secondary markets are superior to what's going on in many of the largest cities. Where I am coming from in Southern California, we are seeing cap rates at sub-4 for the kinds of assets we're buying. That seems like a bad bet for us when you are borrowing for more than that and you have negative leverage. The reality is the interest is in the major markets.”

From a global point of view, Kaplan said real estate investing—even with cap rates as low as they are—seems to be on sound footing and have sustainability when compared to alternative investments. Although rent growth is slowing in some markets, he said signs point to a stable period that is sustainable over the long-term.

That's one of the realities Channer, a Don Peebles protégé, is betting on. BACH is working to revitalize the historic Overtown district in Downtown Miami.

“No one is developing for the middle-income market in Downtown Miami,” Channer said. “I look at the middle-income market and it's the largest portion of our population.” Channer has adopted a public-private strategy to tap into land resources on which to develop Overtown Gateway, a $250 million multifamily project that could serve as the cornerstone of the area's revitalization.

Miami multifamily is a “little too prohibitive” for Kislak, Bartelmo admitted. He's investing in Tampa and Orlando multifamily because the pricing is more realistic for his firm's comfort zone.

“We see Tampa and Orlando as markets that haven't made the recovery the same way Miami has,” Bartelmo said. “They are on the upswing and we can still find deals where we can put some value add into them, find niches in the market that work for us, and ride the upswing.”

Goodman says the model for multifamily investors has shifted from Tenancy in Commons to Delaware Statutory Trusts. The latter emerged in 2004 when the IRS set up a vehicle for investors to qualify for a tax deferred exchange as beneficiaries of the trust. Fannie Mae is making loans to the trust, which Goodman called a complicated structure.

“Yields now are 6.5% to 7%,” Goodman said.“On a risk-adjusted basis, secondary markets are superior to what's going on in many of the largest cities. Where I am coming from in Southern California, we are seeing cap rates at sub-4 for the kinds of assets we're buying. That seems like a bad bet for us when you are borrowing for more than that and you have negative leverage. The reality is the interest is in the major markets.”