State of the Market: "The Golden Age of Multifamily Ownership"
State of the Market: "The Golden Age of Multifamily Ownership"
Written by Michael Becker
Q4 2021 Newsletter
Those of you who have known me for any length of time have heard me discuss the great environment Multifamily Investors have been experiencing for over a decade. Over these past 10 years we have seen historically low interest rates, ever-increasing interest in Multifamily driving pricing higher, and very supportive demographics as the Millennial and Gen Z cohorts age into the rental housing market. Eighteen months ago, that environment was challenged when government-imposed lockdowns were pressed upon us. Fortunately, the housing market has proven to be very resilient and continued to thrive as the economy slowly reopened.
Upon reflection of the events I have lived through in my professional career, first as a Commercial Real Estate Banker and now as a Multifamily Operator, I have determined that we are currently living in the ”Golden Age of Multifamily Ownership.” Simply put, the conditions for Multifamily Owners have never been better. I try to appreciate that daily, as I know it won’t last forever. However, I remain bullish for the foreseeable future on the Investment Thesis we hold at SPI Advisory.
"The conditions for mutlifamily owners have never been better"
Let me discuss that a bit further . . .
SPI Advisory’s Investment Thesis is to purchase High-Quality assets in the Texas Multifamily market at a relatively low-cost basis compared to the rest of the market at that time. In other words, we buy the best value we see at the moment. We like 3 of the 4 major markets in the State of Texas: Austin, DFW, and San Antonio. Our decision not to participate in the Houston market is primarily due to the area’s consistent exposure to hurricanes & flooding. Additionally, Houston’s economy is less diverse than the other 3 markets as a result of their reliance on the Energy Industry.
Since buying our first Multifamily assets in 2013, we have transitioned from Class C & B assets to Class A. This is largely due to the CAP rate spread narrowing between the property Classes where, today, there is very little spread between Class A & Class C. From a Risk Adjusted Return standpoint, it doesn’t make sense to us to pay the same CAP rate for something built in the 1970’s as you can for something that is brand new.
SPI Advisory started this transition in 2016 when we bought our first A- deals. And, today we target A to A- deals, generally 20 years or newer. Objectively, I would say we were a bit early in the transition as the Class C & B deals have seen their CAP rates compress further and have seen a bit higher rental rate growth for the last few years relative to the Class A product. That has changed dramatically coming out of the COVID-induced lockdowns of 2020.
Looking at SPI’s portfolio for the last month, we saw 8% rent growth on our Renewals (tenant stays) and 20% on our New Leases (new tenant moves in). We are historically happy with 3% rent growth, so these levels are obscene. Keep in mind we generally are not doing any interior upgrades, so this isn’t us spending money to provide a better unit to lease; this is simply organic rent growth. This is far superior growth to what owners of Class B & C properties are seeing today.
Why is that the case? I recently read a post by Greg Willett, a Multifamily Economist, which made the case why Class A in the Sunbelt Markets are doing well (see his LinkedIn post here). A few key takeaways from his article were:
High-paying jobs are being created that lead to “top-tier apartment renters” and leasing success. Job categories with high pay are typically in the “Professional Services, Finance, tech-heavy Information categories.”
The places where high-paying jobs are being added in the country are “especially notable in select metros across the Sun Belt and the Mountain/Desert region.”
“Austin is the country’s star performer when it comes to high-paying job growth.” (Job count increase by 8.5% compared to pre-COVID February 2020 in the 3 categories referenced above.)
San Antonio is one of the cities with 5-6% growth in high-paying jobs since early 2020.
DFW has had a 2.6% growth in high-paying jobs since early 2020. However, the actual count of additions puts North Texas in the country’s top spot. And, “DFW’s existing job count - in total and in the high-paying categories specifically - is almost three times the Austin tally.”
All of this is very supportive of the SPI Advisory Investment Thesis. And, while there are no guarantees in life, we believe in our Investment Thesis for the foreseeable future. To all of our current investors, you should feel good about your current holdings. For those of you who have yet to invest, you aren’t too late. There appears to be plenty of runway ahead.
Cheers,
