The runway is still long for multifamily real estate in the current cycle as investors and developers continue to pour money into the space. The apartment industry took center stage during the ninth-annual InterFace Multifamily Southeast conference on Tuesday, Nov. 27. Produced by InterFace Conference Group, the full-day event drew more than 400 multifamily real estate professionals from around the Southeast.
The conference, held at The Whitley hotel in Atlanta’s Buckhead district, featured panel discussions on a variety of topics, including finance, investment sales, new development and operations, and highlighted the region’s most active markets. While attendees were able to glean numerous takeaways from the event’s more than 50 speakers, the following are six key trends that apartment professionals are monitoring heading into the new year.
1.) Investment to remain robust in 2019
During the conference’s state of the market panel, Josh Champion of Carroll Organization and Jim Street of PGIM Real Estate said that their firms were net buyers in 2018 and plan to be net buyers again next year. Coincidentally, within an hour after the panel concluded their companies announced a $600 million joint venture acquisition of three multifamily portfolios.
“Real estate is still a favored asset class, and multifamily is still the darling child,” said Champion. “Eighteen to 24 months ago capital went elsewhere, but it’s been coming back the last six months. The growing middle class has kept apartment fundamentals strong.”
Multifamily sales volume has been strong in recent months. Third-quarter sales volume ($48.3 billion) increased more than 33 percent from the previous quarter and more than 14 percent from third-quarter 2017, according to Real Capital Analytics (RCA). Cap rates have also compressed to 5.4 percent in the third quarter, the lowest rate since RCA began tracking the statistic in 2001.
All five panelists predicted a dip in investment sales volume in 2019, yet a majority of speakers during the event indicated that their firms plan to be net buyers next year, including Clay Allen of Harbor Group International and Matt Ferrari of TruAmerica Multifamily.
The ninth-annual InterFace Multifamily Southeast drew more than 400 multifamily real estate professionals from around the Southeast.
“We’re not afraid to sell if we’ve done what we want to do with our asset, but we’re in a growth mode right now,” said Allen during the Florida Market Update panel held in the afternoon.
“Our goal for 2019 is $900 million to $1 billion in acquisitions, with 50 percent coming from the West Coast and 50 percent from the East Coast,” said Ferrari.
2.) Agency lenders still on a roll
Fannie Mae and Freddie Mac are on pace for a record year in loan production in 2018, according to Jeff Erxleben, executive vice president with NorthMarq Capital, who moderated the debt and equity capital markets panel. Fannie Mae’s loan production in 2017 was $67.1 billion compared with $73.2 billion for Freddie Mac.
The two agencies combined account for over 50 percent of the debt financing market in the multifamily sector. “Depending on which agency you talk to, they both say they are going to beat the other one in terms of volume, and that depends on the day,” said Erxleben.
It’s a fun time to be a lender or a borrower, emphasized Chad Hagwood, senior managing director and Southeast regional manager at Hunt Real Estate Capital. “I see that the agencies continue to fight tooth and nail for deals, whether it’s acquisitions or refinancings. Fannie and Freddie are as competitive as I’ve ever seen them in my 20-year history in the business. Really, for the right deal, the right sponsor, they are going at it. And I will continue to see that happen, I believe, for the balance of the year and certainly for the foreseeable future in 2019.”
Charlie Williams, senior vice president and Southeast regional manager for KeyBank, said there has been a noticeable shift away from floating-rate to fixed-rate debt among borrowers. “We’re seeing significantly more fixed-rate debt over say the past six months because people are nervous with the run-up in Treasuries and the Fed raising rates.”
The 10-year Treasury yield, which began the year at 2.46 percent, now hovers around 3 percent, leading many borrowers to opt for fixed-rate financing and “put things to bed,” said Williams.
3.) Cost savings are paramount on all levels
With regard to apartment construction, the conversation was all about ways to lower costs. Construction costs are increasing 4 to 5 percent per year, according to Keith Stocker, director of business development for Prescient, who firmly believes that the role of offsite construction will only continue to increase in the future.
On the resident side, an acceptance of smaller units is occurring because of costs, said Joann McInnis, vice president of client services for Carlyn & Co. Interiors + Design.
“The young target audience is no longer going to be able to afford the units that we’re designing and building if we can’t find figure out a way to make those units work within their budgets,” McInnis said during the design and build panel. “What’s more, smaller unit sizes demand more creative and shared amenity spaces.”
On the owner side, landlords and developers are keeping an ever-watchful eye on property taxes since they have a direct effect on their bottom line.
“We engage a tax consultant on every deal,” said Mike Levey, founder and owner of JEM Holdings LLC, during the Carolinas Market Update panel. “The first question we ask is, ‘When is the tax reassessment in that county?’ There’s one in [North Carolina’s] Mecklenberg County in 2019. We own nine properties in that county.”
4.) Tech to the rescue
During the apartment operations panel, speakers shared how their firms are leveraging new technology in order to boost property performance, retain tenants and attract new ones.
“Technology allows prospects to tour model units 24/7, even after office hours,” said Marcie Williams, president of third-party management firm RKW Residential. “We want to be ready for people to rent when they’re ready to rent.”
Smart home technology like keyless entry is a way managers and owners are differentiating their projects from the competition. Parcel deliverers and dog walkers are now able to access a resident’s apartment while the resident is away, and residents can grant entry using their smart phone.
Managers and owners are also using virtual reality to help boost preleasing during the construction phase, since oftentimes those projects don’t have model units available for physical tours.
Chris Burns, senior vice president of Lincoln Property, said his firm managed a tower in downtown Nashville for a developer that engaged a virtual reality provider based in Seattle to help prospects virtually tour the project.
New technology is also allowing apartment managers to help cut down on fraudulent renter activity. Owners have lost massive amounts of revenue due to residents not paying their rent and then having to front the bill for eviction processes. New scanners are helping managers catch fraudulent IDs on the front end to great success.
5.) Opportunity zones are icing on the cake
The newly implemented opportunity zones established in the 2017 Tax Cuts and Jobs Act were a frequent topic of discussion during the conference. The Opportunity Zone program is a federal tax initiative to encourage long-term capital investments in low-income communities, and multifamily developers and investors are central to the program.
Investors may defer tax or avoid a portion of the tax altogether if their income is treated as capital gain and reinvested back into the properties located within those tracts designated as “opportunity zones.” There are nearly 9,000 census tracts in the United States that are certified as opportunity zones.
U.S. Treasury Secretary Steven Mnuchin recently predicted that $100 billion in capital would be invested into opportunity zones. Several speakers say their firms have active investments within opportunity zones, but for most it’s been more happenstance than a deliberate decision.
“It hasn’t been a strategic focus for us to go find an opportunity in an opportunity zone. More often than not we had sites that made sense on their own merits, and then the opportunity zone came to us,” said Chad DuBeau, senior managing director of Mill Creek Residential Trust. “Sometimes we scratch our head on how it got to us, but we don’t complain. For us, it has to be a site we want to pursue on its own merits.”
The development panel at InterFace Multifamily Southeast included, from left, Chad DuBeau of Mill Creek Residential Trust; Ron Cameron of Colliers International (moderator); Kyle Brock of Crescent Communities; Colin Cavill of St. Clair Holdings; and Bennett Sands of Wood Partners.
“Tax considerations shouldn’t drive investment decisions,” said Norm Radow, CEO of The RADCO Cos., during the event’s closing panel that focused on the Atlanta market. Radow said his firm invested in a community that ended up being designated as an opportunity zone a week before closing. “We’re reticent to invest in an opportunity zone because of tax consideration alone.”
6.) Florida markets shining the brightest
During the opening state of the market panel, speakers said the Southeast markets they’re most interested in buying and developing in 2019 weren’t the typical Atlanta, Nashville, Charlotte or Washington, D.C.
“Our research guys tell us that Tampa and Orlando are the favored areas right now because of all the new jobs and the supply dynamics,” said Sam Moore, managing director of investment management at Greystar.
During the Florida Market Update, moderator Luke Wickham of CBRE opened the panel with a presentation highlighting the top markets in Central and North Florida.
“Orlando has led the U.S. for each of the past three years in terms of percentage job growth by a major metropolitan city, and is forecast to do repeat that feat for the next five years,” said Wickham.
CBRE also reports that Orlando was the No. 1 market in terms of percentage rent growth in the third quarter.
Downtown Tampa has been in the national spotlight because of the $3 billion Water Street Tampa development underway by Strategic Property Partners (SPP), a joint venture led by Tampa Bay Lightning owner Jeff Vinik and Bill Gate’s foundation Cascade Investment LLC. SPP recently broke ground last week on Water Street Tampa’s first residential building.
“Right now Tampa is the golden child,” said PGIM’s Street. “The question is, will Tampa be able to convert to a 24/7 city? It’s not a flash in the pan or a boom and bust city like the typical Southeastern markets that have gotten hot historically. The problem is it’s not a deep market like Atlanta or Charlotte.”
— Compiled by REBO staff