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InterFace Panel: Multifamily Remains Smart Investment, But Good Deals are Harder to Find

From left to right, Colin Gillis of Passco Cos. LLC, Brooks Castellaw of CF Real Estate Services, Paul Berry (moderator) of CBRE, James Kane of Starwood Capital Group and Jim Street of PGIM Real Estate spoke during the "Investment Market Update" panel at InterFace Multifamily Southeast on Nov. 28.

From left to right, Colin Gillis of Passco Cos. LLC, Brooks Castellaw of CF Real Estate Services, Paul Berry (moderator) of CBRE, James Kane of Starwood Capital Group and Jim Street of PGIM Real Estate spoke during the "Investment Market Update" panel at InterFace Multifamily Southeast on Nov. 28.

ATLANTA — Strong fundamentals have propelled the U.S. multifamily market forward in 2017 and leave it poised for a healthy 2018, but good deals are harder to come by in today’s market for investors, according to panelists at the eighth annual InterFace Multifamily Southeast.

The average cap rate for the multifamily sector in the third quarter registered at 4.3 percent, 12 basis points lower than the same period in 2016, and 15 basis points lower than 2015, according to JLL.

“Of the 22,000 units that we are going to close this year — mostly A-minus to B assets — the average cap rate is 4.8 percent, across roughly 45 different transactions,” said James Kane, senior vice president of asset management at Starwood Capital Group’s Atlanta office. “This is in top markets like Atlanta, Charlotte, Dallas, Houston, D.C., Denver, etc. — the suburban cornucopia of markets across the U.S.”

“With cap rate compression and the rise in interest rates since the Trump election, it’s made it increasingly hard for us to find yield in spaces we are comfortable with,” added Colin Gillis, vice president of acquisitions for the Southeast at Irvine, Calif.-based Passco Cos. LLC.

Although spreads are tightening as a whole, opportunities for higher yield deals are still present if investors can find the right location. “It’s really just a matter of mining the right transactions,” said Kane. “There is still a lot of leverage on the apartment side over other asset classes.”

Opportunities outside the urban core are proving to provide an attractive rate of return for many multifamily investors. Companies like Passco are finding prospects in secondary and even tertiary markets. This year, the firm has invested in markets including Lake Charles, La.; Mobile, Ala.; and Melbourne, Fla.

“We have had to take on completely new markets to be able to keep the sub-5 cap or better yields for our investors. In Lake Charles, we’re at a cap rate somewhere between 6.25 percent and 6.5 percent. In Mobile, it’s around 5.75 percent to 6 percent,” said Gillis. “In general, in those markets we are seeing about a 150 basis point spread above the primary markets like Atlanta, Charlotte and Raleigh.”

For multifamily investors that invest in suburban and tertiary markets, proximity to quality schools is an important factor.

“We have renters by necessity,” said Kane. “What keeps our residents there and gives them longevity are the schools.”

Proximity to highly rated schools gives multifamily owners more leverage when it comes to tenant retention and getting rent increases on renewals, as families want to stay within good public school systems.

“Being yield-driven and pushed out of the urban core, you would much rather land at a place that has a phenomenal school system because that is always going to drive traffic,” said Gillis. “It makes the location bulletproof in a lot of ways.”

Gillis and Kane were panelists at the “Investment Market Update” portion of the conference, held Tuesday, Nov. 28 at the Westin Buckhead in Atlanta. Hosted by InterFace Conference Group and Southeast Real Estate Business, the event drew more than 400 professionals in the multifamily real estate sector.

Paul Berry, vice chairman at CBRE, moderated the panel, which included Kane of Starwood Capital Group, Gillis of Passco; Jim Street, executive director of transactions at PGIM Real Estate’s Atlanta office; and Brooks Castellaw, partner at Atlanta-based developer and investor CF Real Estate Services.

Shifting Strategies

Olmsted Chamblee, located 13 miles north of downtown Atlanta, is located within walking distance of Whole Foods Market, MARTA station, a Children’s Healthcare of Atlanta hospital and biking trails.

Olmsted Chamblee, located 13 miles north of downtown Atlanta, is located within walking distance of Whole Foods Market, a MARTA station, a hospital and biking trails.

Private buyers are increasingly gaining market share in the U.S. multifamily market, rising from 60.5 percent to 62.2 percent year-over-year, according to third-quarter data from CBRE.

“As of Jan. 1, one-third of our three largest funds will be converted to a non-traded REIT,” said Street of PGIM. “We’re transitioning away from the non-discretionary, single-client funds to these non-traded REITS. This allows us to accept not only pension fund clients, but also high-net-worth individuals and off-shore capital.”

Starwood Capital Group is following a similar game plan. “Much like Jim and some others, we are looking pretty seriously at doing a non-traded REIT,” said Kane. “This will give us the opportunity to go back and do single-asset transactions.”

A move toward single-asset acquisitions (versus portfolio) is on the rise, according to CBRE. Sales of individual assets registered at $30.8 billion in the third quarter, a 17.3 percent increase from the prior year.

Demographic trends, economic growth and changing consumer preferences continue to drive the ship for multifamily. Over the last three months, job gains have averaged 162,000 and the unemployment rate is at a 17-year low, according to the Bureau of Labor Statistics (BLS). Additionally, the Commerce Department recently revised gross domestic product upward to 3.3 percent in the third quarter, a three-year high.

Millennials continue to dominate the rental class, but many apartment developers are beginning to shift their focus to baby boomers and empty nesters as they look to downsize and move to live-work-play environments.

For multifamily investors that deal in the urban core, walkability and access to public transportation are still the main drivers of renter enthusiasm. “Mass transit still rules in our world,” said Street of PGIM.

Access to transit and walkable amenities are also becoming increasingly important to suburban renters. Olmstead Chamblee, a new development roughly 13 miles north of downtown Atlanta, checks all of those boxes. “There’s a Whole Foods, MARTA and a Children’s Healthcare of Atlanta hospital across the street and bike trails across the way,” said Castellaw of CF Real Estate Services, the developer behind the project. “It’s doing very well.”

— Camren Skelton

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