Why Investors Are Trading Into Multifamily

LOS ANGELES—Decron Properties has focused on retail and office properties in the past, but this year, the firm is shifting its strategy to increase its exposure to multifamily properties. That includes daily-needs anchored retail. The firm recently sold the Flamingo Maryland Shopping Center, a Target-anchored retail center near the Las Vegas Strip in Las Vegas, NV, for $17.5 million. It's just one example of the dispositions the firm is set to make this year. To find out more, we sat down with David Nagel, president and CEO of Decron Properties, for an exclusive interview.

Why have you decided to shift your portfolio concentration in multifamily?

David Nagel: Ten years ago, 40% of our portfolio was retail or office. We found that over time, due to technology and e-commerce, the retail and office buildings that we thought we were buying at 6% or 7% cap rates actually performed over time closer to 4-5% caps, and sometimes even less. Tenant relocations, bankruptcy of formerly blue chip retailer (such as linens n things and Barnes and nobles),  and e-Commerce chipped away at our cash flow and created inconsistent distributions. In contrast, multifamily communities remain stable and have had consistent rent growth.

GlobeSt.com: What multifamily product type are you diversifying to, and why?

Nagel: We are focusing on acquiring multifamily communities in locations that have three qualities: One, Jobs, communities in close proximity to jobs; two, schools, areas with great school districts; and three, supply, or urban in-fill areas with high barriers to entry and limited new supply.

In addition, we target properties in those locations that are old and tired and in need of renovation. Buying a brand new property and relying on market rent growth is not interesting to our investors or us. We focus on value add opportunities where through renovations we can deliver an affordable luxury product to residents. In these situations our cost basis tends to be 10%-20% less than if we build brand new and we therefore can charge rents that are 10-20% less than brand new product. It's all about delivering value to the resident. A “new” feel and look at a discount to brand new. Our renovated units look and feel very similar to brand new product and often have all the “bells and whistles” other than a 9' ceiling which is impossible to fix when buying 1980's or 1970's product.

GlobeSt.com: Which properties are you planning to sell and in which markets?

Nagel: We will continue to sell retail and office properties in secondary markets.

GlobeSt.com: What does your strategy say about the overall multifamily market? Do you think this will become a trend?

Nagel: In California where we still find tremendous job growth and a lack of housing supply to match the population growth generated by the new jobs, we think the multifamily market will continue to perform well over the next few years. As development becomes even harder in NIMBY locations where we are focused, our decision to focus on value add opportunities will pay off and be rewarded.

LOS ANGELES—Decron Properties has focused on retail and office properties in the past, but this year, the firm is shifting its strategy to increase its exposure to multifamily properties. That includes daily-needs anchored retail. The firm recently sold the Flamingo Maryland Shopping Center, a Target-anchored retail center near the Las Vegas Strip in Las Vegas, NV, for $17.5 million. It's just one example of the dispositions the firm is set to make this year. To find out more, we sat down with David Nagel, president and CEO of Decron Properties, for an exclusive interview.

Why have you decided to shift your portfolio concentration in multifamily?

David Nagel: Ten years ago, 40% of our portfolio was retail or office. We found that over time, due to technology and e-commerce, the retail and office buildings that we thought we were buying at 6% or 7% cap rates actually performed over time closer to 4-5% caps, and sometimes even less. Tenant relocations, bankruptcy of formerly blue chip retailer (such as linens n things and Barnes and nobles),  and e-Commerce chipped away at our cash flow and created inconsistent distributions. In contrast, multifamily communities remain stable and have had consistent rent growth.

GlobeSt.com: What multifamily product type are you diversifying to, and why?

Nagel: We are focusing on acquiring multifamily communities in locations that have three qualities: One, Jobs, communities in close proximity to jobs; two, schools, areas with great school districts; and three, supply, or urban in-fill areas with high barriers to entry and limited new supply.

In addition, we target properties in those locations that are old and tired and in need of renovation. Buying a brand new property and relying on market rent growth is not interesting to our investors or us. We focus on value add opportunities where through renovations we can deliver an affordable luxury product to residents. In these situations our cost basis tends to be 10%-20% less than if we build brand new and we therefore can charge rents that are 10-20% less than brand new product. It's all about delivering value to the resident. A “new” feel and look at a discount to brand new. Our renovated units look and feel very similar to brand new product and often have all the “bells and whistles” other than a 9' ceiling which is impossible to fix when buying 1980's or 1970's product.

GlobeSt.com: Which properties are you planning to sell and in which markets?

Nagel: We will continue to sell retail and office properties in secondary markets.

GlobeSt.com: What does your strategy say about the overall multifamily market? Do you think this will become a trend?

Nagel: In California where we still find tremendous job growth and a lack of housing supply to match the population growth generated by the new jobs, we think the multifamily market will continue to perform well over the next few years. As development becomes even harder in NIMBY locations where we are focused, our decision to focus on value add opportunities will pay off and be rewarded.