June 19, 2018
Commercial real estate leaders are set to gather on June 26th in Los Angeles for Connect Apartments. Leading up to the conference, we spoke with Passco Companies’ Gary Goodman, SVP, Multifamily Acquisitions. He shared insights into the trends fueling the multifamily investment sector today, the challenges and opportunities, as well as some deal examples in our latest 3 CRE Q&A.
Q: What are the biggest trends driving multifamily investment?
A: Capital is chasing yield, which means more multifamily investors are flocking to secondary and tertiary markets more than ever before, where yields historically have been higher.
Additionally, cap rates are not rising with interest rates as some investors anticipated. Cap rates continue to remain low, and may potentially decrease further due to the amount of capital available.
For example, we’re seeing multifamily properties in tertiary markets with cap rates of 5%, that are comparable to assets in primary markets at rates of 4%. Historically, value add properties have been the most sought after, but because there is so much competition for this product, many private capital sponsors are turning to newer properties located in secondary or even tertiary markets.
Q: What opportunities and challenges are you currently seeing in the sector?
A: A primary challenge is that competition for multifamily properties is increasing significantly, even in smaller secondary and tertiary markets.
For example, we are finding that we now compete with upwards of 10 buyers to acquire in tertiary markets, whereas 10-15 years ago there was virtually no competition.
Increasing interest rates have created another challenge. With increasing prices, lenders are forced to reduce loan proceeds due to debt service coverage. We are seeing loans at 55% loan-to-cost that just 6-12 months ago would have been at 65%. This requires sponsors to raise more equity to close deals.
At Passco, we’ve strategically positioned ourselves to acquire properties all cash on our balance sheet, which gives us a favorable advantage when competing with buyers who require financing to close acquisitions.
We are seeing more opportunities to invest in a variety of diverse markets across the country, where there are restrictions on new multifamily development. While this creates more competition for available properties, it increases potential for future growth and ROI.
Q: Any recent deal examples?
A: We’ve been bullish on emerging secondary and tertiary for several years. Many of our recent acquisitions demonstrate the importance of deep experience in these markets and specific multifamily product types, as well as broker, developer, and finance relationships.
For example, we recently acquired a 360-unit apartment community, which we will rebrand as Longitude 82°, in the high-growth tertiary market of Sarasota, FL, a state where we currently own nine properties totaling more than 2,700 units. We were represented in the transaction by JBM Institutional Multifamily Advisors, who we’ve worked with to acquire four properties within just the last two years.
For comments, questions or concerns, please contact Dennis Kaiser