Strong sales of multi-family investments in the Southern States; Gain more interest in the Midwest
Multi-family investing has benefited from the uncertainties of the past year, but will 2021 transaction volumes be used to assess likely outcomes for 2022? CEOs Todd Stofflet and Jason Stevens of the Walker & Dunlop Chicago office take a look at 2021 and what this year’s trends indicate for the direction of the industry.
REBusiness: What have you seen regarding the multifamily investment activity this year?
Stofflet: At the start of the pandemic, we saw a lot of investment pull out of retail and office space, focusing more on industry and multi-family. In 2021, the multi-family sector is doing very well and many new investors have entered the multi-family market. If you talk to some of our colleagues from the South East and the “Smile States” they will tell you that the volume of transactions has never been higher and that the amount of capital seeking these opportunities has never been higher. never been so important. Across the country, it has been a very strong year for the sector.
REBusiness: Do you think 2021 will be a record year in terms of sales?
Stevens: If our pipeline is a barometer for this, the answer is “absolutely”, but that will depend on the market. What you will find is that sales in urban areas will be below historical averages, but suburban markets will set sales volume records. From a nationwide perspective, multifamily in general will experience record sales. We have never had more groups with more money dedicated to finding multi-family opportunities.
REBusiness: What types of companies / investors do you see involved in the market?
Stofflet: Obviously it depends on the market, but for the most part all the institutions (Blackstone, Starwood Capital Group, etc.) are involved and they have a lot of money to buy assets. Whether institutions buy on their own or as part of some kind of joint venture, they are certainly among the more aggressive buyers.
In the secondary markets, we have seen very active regional and local investors as some of the institutional money does not play in the secondary and tertiary markets. This has allowed the family office and union members to become a bit more aggressive and to make acquisitions.
Stevens: With multi-family being a buzzword, regional and local investors are urged to fundraise now for multi-family investment. It has never been easier for the country club money and the trustees to do this.
REBusiness: What types of properties arouse the most interest?
Stofflet: There is certainly money for all types of products. Institutions have raised a lot of money for all types of products, whether shiny, high rise in the city center or value added in the suburbs. Cap rates have compressed so much that they are roughly even between core, core plus, and value added. Therefore, groups that may have spent a lot of time in value addition are starting to look to core and core-plus because they get the same returns and don’t have to do as much. job.
REBusiness: What are the dissuasive elements for those who invest in the multi-family?
Stofflet: Competetion. There is certainly frustration in the investment community regarding the competitiveness of the transactions that are in the market. We see multiple rounds of offers, sealed auctions and firm cash deposits in most marketing campaigns. We expect more of the same in 2022 as the groups try to withdraw money.
Stevens: Unsurprisingly, it’s taxes. On the expense side, taxes and insurance significantly affect values. Buyers look to markets and submarkets where the tax burden is less onerous.
REBusiness: For which regions or markets do you see a lot of interest at the moment?
Stevens: We’re seeing a lot of interest in the smile states, but we’re also starting to see some rebound here in the Midwest. There are many groups that are tired of competing with dozens of other companies with fierce competition, sealed offers and 3% cap rates. They are starting to look for returns in the Midwest. Depending on which Midwestern market you find yourself in, you’re probably looking at cap rates of 4.5%.
People are starting to understand that the Midwest has resisted COVID extremely well. Collections are over 94 percent across the region, occupancy rates are high, and concessions are low.
We’re starting to see some groups pivot as a result. For example, we currently have a deal in Kalamazoo, Michigan that involves fresh money from a Western investment group making the decision to move some of their money to the Midwest. This is likely one of many Midwestern properties that they will acquire over the next couple of years as they have historically invested in the Pacific Northwest and Southwest. They decided to come to markets where natural resources, including water, are a little more abundant.
Many investors are looking for the yield opportunities that the Midwest has to offer.
REBusiness: What is the availability of capital for investors?
Stofflet: The agencies are always very aggressive in the debt that they take on debt. Bridge financing has never been more attractive, given the interest-only periods and the location of treasury bills.
There is currently an unpaid amount of capital available. For the most part – as long as the asset is doing well and there is a program and a strong person behind it – I think the capital is very excited.
REBusiness: What impact has COVID had on investor and lender concerns about occupancy? Have any of these concerns come true?
Stofflet: In the short term, many of these concerns have materialized. There certainly has been pause. Most investors were waiting to see if people were going to pay rent. Agencies have demanded that a mortgage reserve be put in place for COVID-related issues.
Earlier in the year we were a little worried about the end of the year. But with occupancy and collection rates that remain strong and agencies that believe that multi-family is a stable area for getting into debt, I think we’ve been very successful.
Stevens: Very few of the rental listings we’ve analyzed have some sort of built-in COVID relief fund for people with open balances. For the most part, the fiscal conservatism of the Midwest has held true in this regard: In the Midwest, people choose to pay their rent before buying their groceries.
As we mentioned, this has led to strong collections throughout the pandemic. We haven’t seen those deep debt trenches and open collections that we’ve seen in a lot of other markets.
Stofflet: It is important to say, there has been an impact on the rent. Whether from the point of view of the concession or the reduction of rents in order to maintain occupancy thanks to COVID (especially in urban centers), we have seen it well. There were assets that were probably 30 to 40 cents off their market rent thanks to COVID. But as we saw in the September / October rents, the swaps are between 20-25%, in most of these assets. We went back to the type of net effective rent we were seeing before COVID. The has been a disturbance, but it was really just a hiccup.
REBusiness: What interest do you see in single-family rental (SFR) and construction for rent (BFR) products?
Stevens: In the Midwest, our Copper Bay SFR portfolio is SFR’s first major portfolio in the region. We are evaluating the interest and types of buyers who are looking for this type of property. It was a change in the investment process to really focus on the tenant who wants a single point of entry into their home. We’ve seen that this townhouse product, this “product that goes from the garage to your living room”, has really had a lot of appeal compared to the multiple touch points in conventional assets.
REBusiness: By 2022, what opportunities do you see for multi-family investors?
Stofflet: I think it will remain very difficult to buy in the Smile States, especially the Southeast, due to the incredible competition there.
We see an opportunity in the Midwest as we continue to see real rental growth. Kalamazoo, for example, had the highest rental growth in the Midwest this year.
I think if people are looking for a return in 2022, they will look to Columbus, Indianapolis, and Chicago. I think this is where you will find some performance and probably a little less competition.
Stevens: A lot of investors are looking at what they call “immigration” markets – Charlotte, for example. But Chicago itself is an “immigration” market. And the people who arrive and replace those who leave are generally younger and richer. We are a rising mobile market, although this is not universally understood.
Stofflet: I think you will also soon see a resurgence of the urban core. I think people have spent enough time realizing that for the population centers in the United States, there was not the mass exodus that was highlighted in the media. For the most part, the large markets have good control over deliveries and new constructions. In the future, I think it is very interesting to buy in urban centers, and we will see more volume of transactions outside these large population centers than in the last two or three years.
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