For those who are concerned about an end to the good times for the multifamily sector, don’t fret yet. I spoke with Jim Schroder, CFO of Tribridge Residential, which has $1.3 billion of multifamily property under management in the U.S. Schroder said that while tenant traffic has gone down slightly, that doesn't mean that demand has gone down.
The main adjustment has been in trends for how people shop for apartments, he said. People used to put together a list and then go visit 8-10 different properties. Today, they try to do as much of that work as they can online, so the number of properties visited in-person is reduced to 3 or 4. So, demand in the form of “tenant traffic” is manifesting into more time spent doing online research such as chats, viewing online videos and photos and figuring out which amenities are in which properties and narrowing down the list from there.
Nick Fitzpatrick of Axiometrics told us that in 2015, annual effective rent growth increased 4.9% nationally. The demand in Tribridge’s markets has been “phenomenal”—trumping this already impressive number. In the Atlanta market, rental rate increases have been as high as 7% or 8%, and closer to 10 to 12% in Charlotte, where one property had a rental rate increase of 15%!
“Really it comes down to coming up with the right property that can ride off the coattails of the adjacent properties,” said Schroder. He gives this example: If you have a property with $1 rents next to a new development getting a $1.60, $1.70 rent, without doing anything, organic rent growth will most likely occur and could push the rate for your property up to $1.30.
TriBridge “invests up and down the risk spectrum,” which means they are always looking for the best risk adjusted returns. They’ve converted B properties to C properties, B properties to A properties, and they’ve even bought new communities before they were leased up.
I asked Schroder about the strategy behind this last type of investment and he summed it up as “staying ahead of the investment herd,” explaining that historically, the best value for that was converting B properties to A. But since everyone started doing that, those opportunities have been priced up.
Surprisingly, the new opportunity lies in new supply. “Everybody's developing and building new properties,” he said. Tribrige has maximized the relationships they have with their fellow developers by agreeing to buy a new development based on a certain threshold of leasing, say 30-40%, thereby taking on the inherent risk of a new development and allowing developers to lock in their profit. The old adage “with great risk comes great reward” comes to mind.
Naysayers point out oversupply and rising construction costs as concerns. Is Schroder worried about new supply? Not really. “From a macro standpoint, you can look at a few cities and say ‘we’re starting to get concerned about the supply coming online’ but then you really need to drill down to the submarkets,” he said, using Nashville as an example. Many institutional investors have said that you can’t invest in Nashville because there’s too much supply. “But if you dig deeper, you will see the new supply is almost all within either the Gulch or the Germantown neighborhood—two very attractive hot markets.”
In short, if you get granular in a submarket, you might be surprised at how many opportunities are hiding behind the new supply scare. As long as you know the specifics of the submarket, avoid areas with oversupply, and invest where demand is still strong, you will be successful.
What about rising construction costs? Schroder concedes, “The rise in construction cost is definitely one of the biggest factors that’s going to be limiting supply in the coming years for new development.” However, he suggests that high construction prices might actually keep the Boom/Bust cycle in check because developerssimply can’t keep building today.
“To be specific, developers have to factor in over 1% increase in construction costs per month. If you compound that, you're well over 13% in terms of annual costs escalations.” While the rise in construction costs are concerning, in a way they are beneficial, as it keeps the lid on new supply so to speak.
Tribridge is ahead of the curve again, having tied up a number of properties over the past few years in order to lock in a low land basis. New property values for land have increased substantially and in some cases doubled over the past year. So even though construction costs have escalated across the board, when new competitors come in they have a significantly higher land basis, which means Tribridge has the better bottom-line.
The moral of the multifamily story is stay ahead of the curve and find the silver lining.
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