ATLANTA — Increased job growth in major markets throughout the Southeast and lower borrowing costs have quelled fears of a 2020 recession, and multifamily investors are feeling confident going into the new year.
The Bureau of Labor Statistics recently reported that the U.S. economy generated 266,000 jobs in November and the unemployment rate fell 10 basis points to 3.5 percent. Healthy job growth in major population centers drives heightened demand for housing, particularly in the multifamily sector.
Speakers at France Media’s InterFace Multifamily Southeast conference shared their perspectives on the multifamily investment market of 2019 and their predictions for 2020. The conference, which took place Tuesday, Dec. 3 at The Whitley hotel in the Buckhead district of Atlanta, attracted 384 industry professionals.
“Multifamily is a pretty much tried-and-true section of the real estate investment market,” said Steven Shores, president and CEO of Pollack Shores. “We have very low volatility compared to other sectors, and if you’re trying to make an allocation between some sort of alternative asset versus cash or bond portfolio, we look pretty attractive from a risk-investment perspective.”
Shores noted that existing assets are trading at cap rates anywhere between 4 to 5 percent, depending on the location, and some value-add assets that look a little more like core-plus are trading at approximately 5 percent. Steven DeFrancis, chief executive officer at Cortland, reported value-add assets trading at similar rates of about 4 to 4.5 in favorable submarkets. The panel implied that cap rates in these areas are compressing, which speaks to higher sales prices on multifamily assets and bolsters investor confidence in the marketplace.
“There’s equity and debt capital freely flowing in and out of the space. The predictability and consistency of the cash flow helps investors feel more comfortable,” he said. “The well-located value-added assets are pretty expensive, so we’ve been buying newer stuff. Those cap rates are actually higher than the value-added cap rates and the deferred maintenance and execution risk.”
Where Are the Deals?
Several panelists mentioned that their firms are diversifying their portfolios to include alternative multifamily types, including upper-tier workforce housing and outer-suburban assets. This also speaks to the sector’s multifamily attractiveness to investors with less credit or cash.
“We’ve gotten into manufactured housing and student housing, which we haven’t done in 15 years,” said Street, referring to PGIM’s 2019 deals. “We’re trying to diversify our targets around the whole housing story. We have a spectrum of funds ranging from core, to core-plus to value-add, and overall there’s been a net inflow.”
Josh Champion, president of Atlanta-based Carroll Organization, said that his firm is also focusing on property appearance and retention ratios in the workforce housing space, targeting rents at $1,000 to $1,100.
“Those people don’t go out to eat for dinner, go to ball games or travel for work. They stay in their communities and cook there, eat there and socialize there,” said Champion. “We’ve taken an amenity community approach on the workforce housing, expanding the Wi-Fi, pool areas, computers and gyms. We’re also improving the interior and exterior, putting in washers and dryers and new flooring.”
Shores added that his firm is investing in mature neighborhoods and those in the process of gentrification.
“We think that is where we can pull demand toward us rather than build in the middle of it,” he said. “We can do that at a more affordable price point and get the benefits of that. Those residents may drive to work but when they get home, they want to be close to retail and entertainment things to do.”
The panelists reported generally favorable investment results in 2019 and predicted a similar pattern in 2020. But they seemed more conservative when moderator Paul Berry, vice chairman at CBRE, asked if they saw an end to the “good times” in sight, warning that things can change in an election year.
“There’s no doubt this has been a long cycle, but keep in mind we started at a really low point,” said DeFrancis. “We don’t really look at where are we in the cycle. We think more about the rate of job growth and net migration to the markets we’re in. As long as those hold, things are pretty good.”
— Alex Patton