With 2018 in full swing and the economy on a roller coaster, real estate investors are unsure of where to turn when allocating capital. Savvy apartment owners looking to renovate their properties and developers breaking ground need to analyze 2017’s most popular markets to best position their projects this year for potential funding.
Follow the Growth
Due to oversupply in some markets and a lack of affordable units in others, multifamily investment volume saw a decline in 2017. Predictions this year indicate there will be more renters than homeowners because of rising interest rates and a reduction in tax benefits for homeowners.
Renting is no longer seen as a temporary housing situation, and many people decide to rent for the added flexibility and reduced maintenance it affords. To appeal to these “lifers” and millennials, make sure your amenities cater to these demographics and that you update your older product to their standards.
The multifamily sector currently stands at a crossroads between affordability and a surplus of demand in several markets, but it’s still a valuable sector for investors to consider in the coming months, so developers seeking financing should be prepared to highlight how their product serves a need that others in the area do not.
A major priority for my firm, UC Funds, this year is investing in micro units in major cities. We’ve recently teamed up with a best-in-class investor and developer in Santa Monica, Calif., on a project involving this type of asset, which lets white-collar, entry-level executives find housing where they want to live at prices they can afford.
Developers looking to diversify their portfolio may want to target micro units. Most middle-class workers are being priced out of gateway cities, especially on the coasts. As all developers know, land is at a premium in these cities, and those that want to get the most bang for their buck can see a return on building micro units on these smaller urban parcels. Even home builders are getting into the tiny-home craze, as any lover of HGTV knows.
Diversify for Success
The multifamily sector is advantageous because people have to live somewhere. That will never change. As a result, UC Funds sees multifamily as an asset class insulated from a lot of downside risk. Multifamily will remain attractive to investors because they can’t go wrong. (Office, on the other hand, is facing a seismic shift as more employees choose to work remotely. Soon, office space won’t be necessary for most workers.)
While concentrating assets in a few select sectors and markets is wise, it’s also important to maintain a diversified portfolio. Luckily, most geographic regions are in an expansion phase, and it can be safer to move outside of your immediate geographic region.
From a financing standpoint, lenders want to lend when we know an apartment building will continue to retain full occupancy. This is most easily achieved when the property is located near employment hubs, and, this year, employment will concentrate in the industrial sector. Last year saw record growth in online shopping. As e-commerce continues to evolve, industry will grow and will need workers, who in turn will need housing.
Focus on Secondary Markets
At UC Funds, we’ve diversified into secondary markets because there, institutional capital is less than in gateway cities. Secondary cities offer solid loan-to-value ratios for investments and better yields overall, with less demand chasing commercial assets.
We’ve been investing in secondary cities such as Houston, Pittsburgh, Brooklyn, Oakland, and Kansas City recently. Valuation firm Integra Realty Resources has identified the small markets Pittsburgh, Salt Lake City, Stamford (Conn.), Portland (Ore.), and San Antonio as the top five markets by year-over-year transaction-growth rates.
This is good news for apartment owners, as financiers are flocking to new cities and there are now more sources of funding available. In years past, multifamily owners had to rely exclusively on local banks, which have gotten more discriminatory in their lending practices. Alternatively, gateway cities such as New York and Washington, D.C., have been overbought and oversaturated with capital investment and development.
UC Funds’ recent grand opening of East 9 at Pickwick Plaza in Kansas City, Mo., illustrates the benefit of investing within a secondary city. Our team worked diligently to structure a first mortgage loan fitting such a large-scale redevelopment. With a $57 million capital stack, we were able to cover the redevelopment of four buildings that take up an entire city block and will revitalize the area.
Another notable deal illustrating the value of secondary markets is our investment of $20 million preferred equity for the ground-up construction of RiZe at Opus Park, with a total deal capitalization of approximately $73 million. RiZe, located in Minnetonka, Minn., will be converted into a 322-unit, Class A multifamily asset with premier amenity packages.
In addition, UC Funds provided a $10.8 million first mortgage loan for the conversion of an existing building in Dobbs Ferry, not far from Westchester, N.Y. The property is set to be converted into 18 luxury condos.
All in all, 2018’s multifamily outlook appears promising. Homing in on multifamily—specifically rentals in secondary markets—will yield positive results for investors.
