Multifamily Acquisitions in Emerging Markets
The multifamily market in the United States is still going strong, despite the large wave of new supply. Investors are adapting their strategies to accommodate the demographic and economic shifts that have led to an increased interest in secondary markets and cities that have showed a slower recovery after the recession. Even though oversupply might seem like an obstacle, experienced investors know how to use the challenge in their favor.
David Snyder, chairman & CEO of Continental Realty Advisors (CRA), discussed the company’s approach to multifamily acquisitions and zeroed in on several emerging markets.
Continental has several Las Vegas properties in its portfolio. What can you tell us about the Las Vegas multifamily market?
Snyder: There is still opportunity in Las Vegas. CRA currently holds four properties in the metro and we are actively looking to increase our presence. As far as economic and housing recovery, Las Vegas as a whole, has lagged many other primary and secondary markets in the nation. These economic fundamentals, however, are beginning to catch up with other metros in the nation. Las Vegas is a dynamic market broadening its economic scope to more than just gambling.
Opportunities for growth exist across the metro. A burgeoning health-care market, in particular, is beginning to develop. Projects such as the $1.5 billion Union Village Integrated Health Village project in Henderson, Nev., (in southeast Las Vegas) expects to create some 17,000 jobs over the next 10 years. CRA focuses on well-located properties adjacent to large medical expansions, transportation, retail access and properties within convenient proximity to large employment hubs. Attractive properties are found where this growing demand and affordable rent levels meet.
How do you see the performance of secondary markets in 2018?
Snyder: Current U.S. national average rent is $1,275, some $300 above peak rent highs seen in 2008. On the other hand, rents in markets such as Las Vegas average $954 in January, 6 percent higher than 2008 peak highs. Compare that to 32 percent for the national metro average, and markets like Las Vegas show room for growth. Private and institutional investors are turning to secondary markets for investment and development, looking for higher yield opportunities. Commercial investments can change neighborhoods, even entire submarkets in secondary markets. Our research and selective acquisitions are important to our success as secondary markets mature.
Investment strategies focusing more on secondary and tertiary markets show that there is still room for growth in this cycle. What are your thoughts on where we are in the real estate cycle?
Snyder: We are in the midst of a strong bull market, where supply is beginning to catch up with high-end demand. There is still a shortage of affordable housing in markets across the U.S. Single-family home sales due to foreclosures, one sign of stability in the economy, continue to drop at record rates. Economic growth, 4.1 percent unemployment and favorable tax policies are spurring real wage growth near 2 percent.
Under Trump’s new tax policy, those earning under $157,500 per year (or $315,000 for those filing jointly), will now pay 3-4 percent less taxes per year compared to 2017. Those individuals, representing a vast section of the U.S. population and renter pool have essentially received a 3-4 percent increase in take-home pay in 2018. These factors remain favorable for overall multifamily fundamentals, particularly for markets earlier in the growth cycle.
What are 2018’s hottest markets for multifamily investment?
Snyder: Markets such as Las Vegas, Phoenix, Jacksonville and Memphis have generally lagged in post-recession recovery compared to their peers. Earlier in the growth cycle, CRA expects to find select opportunity here in the coming years. Even with record new supply, robust economic and population growth markets such as Tampa, Orlando, Austin, Dallas and Denver cannot be ignored. Specific submarkets and micro-markets within these markets are an attractive focus for CRA. We expect performance in these markets will outpace many primary markets across the U.S. in the short- to mid-term cycle.
How will the wave of new supply impact multifamily investment?
Snyder: Record supply is coming online across the nation. The luxury housing market is overbuilt. Available affordable rental housing remains an issue. Due to higher costs of land, tightening of construction loan underwriting and preferred renter trends towards infill development, current construction trends have favored a glut of luxury multifamily construction. Despite this wave of construction, supply constraints still exist in Class B, C and workforce housing.
New supply, however, can be an advantage for CRA when identifying well-located Class B and C properties for our value-add programs. Our focus is maintaining lower affordable rents for a similar product to new supply within these high-demand locations. Our 35 plus years of experience shows that property management achieves rent growth through superior property marketing and management improvements governed by daily accountability and oversight.
What other factors are expected to impact real estate investment in 2018, and in what way?
Snyder: A constrained supply of existing homes was available for sale in December 2017. Just 1.5 million homes, an 11.4 percent decrease year over year. Tighter supply and a trend towards higher-end home building means a smaller portion of the constrained new single-family home supply is currently geared towards first-time home buyers. This further reduces competition, creating continued demand for rental housing as potential would-be home buyers are priced out of the market.
How will rising interest rates impact the multifamily market in 2018?
Snyder: U.S. unemployment reached 4.1 percent in January 2018, a level not seen since 2000. The Federal Reserve considers these levels “full employment,” and with inflation near 2 percent, interest rates are beginning to march higher. The federal funds target rate is 1.25 percent, up 75 basis points from a year ago. A continued move higher should benefit owning hard assets such as real estate in the near to midterm as the Fed era of easy money unwinds.
As rates increase, acquisitions of properties with low long-term, fixed-rate loan assumptions financing may become attractive investments. Purchasing opportunities may also exist in the near term as a temporary influx of sellers is expected when many seven- to 10-year property loans mature in markets across the country. This will allow buyers the chance to be more selective. This risk from a seller’s perspective emphasizes why CRA stresses mitigating risk with in-depth research, identifying well-located properties in the path of demand when purchasing a property. These are key components to maximizing returns, executing a business plan and specifically exiting successful multifamily investments.
Image courtesy of Continental Realty Advisors