Why Pathfinder Loves MF in These Cities

SAN DIEGO—Strong market dynamics, solid population and job growth and attractive housing fundamentals make mid-tier western cities appealing to Pathfinder Partners, senior managing director Mitch Siegler tells GlobeSt.com. We spoke with Siegler exclusively about the firm's investment strategy in these markets, including San Diego, Seattle and Denver, why they fit its investment criteria and what attracts the firm to each market.

GlobeSt.com: Why do you love apartments and housing in San Diego, Denver and Seattle?

Siegler: During the past 36 months, we've bought or sold thousands of apartments, condos, townhomes and single-family homes. Our team members have racked up hundreds of thousands of frequent-flyer miles, met with scores of brokers and property managers and read hundreds of market-research reports. We've condensed some of what we've learned, combined it with a few pearls from third-party research reports and distilled it all into an overview of three of our favorite markets—San Diego, Denver and Seattle—which all exhibit strong market dynamics, solid population and job growth and attractive housing fundamentals, which we expect to continue during the next several years.

GlobeSt.com: Why, specifically, are San Diego's long-term prospects so good?

Siegler: With a population of 3.25 million and 30,000 jobs forecast to be created annually in 2015 and 2016, San Diego remains one of the most sought-after housing markets in California. Apartment rents here have increased almost every year for the last 20 years. Rents rose 4.6% in 2013, near the long-term average of 5%, with further increases expected because new supply is limited and barriers to new development remain high. Resale listings are very low at just three months of supply, and the market has become more competitive, leading to increases in home prices. San Diego's long-term prospects are excellent because of solid job growth, limited apartment supply, low new-home supply and lack of available land for homebuilders.

GlobeSt.com: Can you explain why Denver has one of the healthiest economies in the US and discuss housing here?

Siegler: Fueled by a growing energy sector, significant government, healthcare and technology employment and an educated workforce, Denver has one of the healthiest economies in the US, according to the US Bureau of Economic Analysis. The housing fundamentals in Colorado's largest city—population 2.8 million with nearly 36,000 jobs created in the year ending June 2014—remain strong, with forecasted household, job and income growth during the next few years. According to Zillow Rent Index, apartment rents in Denver rose more than triple the US average in January 2015—10.2% vs. 3.3%. That number soared to 11.2% in March, according to Axiometrics. Apartment occupancy has increased in recent years and was at 94.3% in June 2014, and apartment rents should increase through 2017.

The “for-sale” market is also strong. New and resale home prices remain relatively low; this is expected to continue since mortgage rates are near historic lows, so homes are affordable. The combination of low levels of new and resale homes for sale and continued job and income growth supports future home-price increases and construction through 2017. Colorado's Rocky Mountain High is no small part the result of the phenomenal recreational activities: young professionals flock to the Mile-High City for skiing and snowboarding, hiking and biking and maybe a wee bit for legalized marijuana.

GlobeSt.com: Discuss robust job growth in Seattle and its impact on housing/multifamily.

Siegler: Housing fundamentals in the Emerald City, population 2.8 million with almost 46,000 jobs created in the year ending June 2014, remain favorable after considerable improvement in recent years as a result of blistering job growth (thanks to home-grown corporate stars like Amazon, Microsoft, Starbucks and Costco), improved affordability (2014 home prices are still at 2004 levels) and more demand for housing than supply. Market dynamics are also bullish for multifamily, according to JBREC, which says apartment occupancy rates are at the highest levels since 2000. Apartment rents increased 6.1% in 2014, according to Reis Inc., with further rent increases expected through 2017. The city's apartment occupancy rate was 95.6% in June 2014, way up from the 92% level in 2009. Sure, there are cranes as far as the eye can see, and multifamily permits are expected to peak at 11,000 this year before declining to 7,000 in 2017 (there's chatter about changing Seattle's official city bird from the great blue heron to the crane). However, scads of Seattle pundits tell us the employment-to-permits ratio, at 2.5 in June 2014, should fall to 1.7 by 2017 and is way above the historical level of 1.2, suggesting that the demand curve is still way above supply.

GlobeSt.com: Can you discuss Pathfinder's strategy when investing in multifamily? What other markets are you looking at now?

Siegler: One strategy we've favored is acquiring properties constructed with an eye toward “for sale” at “for-rent” prices, operating them as rentals for a period of time and having the option of exiting down the road either by selling a stabilized rental community or by marketing individual condo or townhome units, as market conditions warrant. During the past few years, we've scooped up more than 30 purpose-built condominium or townhome projects, comprising more than 1,300 units, many in San Diego, Denver and Seattle (and some in Phoenix, Portland and the Los Angeles and San Francisco areas—other go-to markets for us). In some cases, we completed the finish construction and then sold the units, hundreds in all, to homeowners. Since 2012, we've begun reverting many of these units to rentals, capitalizing on the strong demand for rental properties in our target markets and preserving the option of selling individual units down the road.

Most of the properties were acquired as distressed or opportunistic investments that have provided operational upside in the short term with the potential to raise rents to market and trim operating expenses. While these acquisitions may have been acquired at market-capitalization rates, we ultimately stabilized them at cap rates that are 100 to 50 bps higher. If interest rates and, thus, cap rates remain low, an attractive exit option could be to sell in bulk to an investor looking for a stabilized multifamily asset. As home prices continue to appreciate, we may also have the opportunity to sell individual units to homebuyers in a rising market.