With multifamily yields on both coasts stagnant, where is some of the smart money going?
To the middle.
More investors are expected to venture inland, seeking higher yields in areas where multifamily prices haven’t recovered as much as on the East and West Coasts.
For example, Camden Property Trust, an apartment real estate investment trust (REIT) based in Houston, purchased 3,700 units in Texas for more than $320 million and a cap rate above 6 percent.
“We’re looking for opportunities inland because that’s where the best deals are today,” says Richard J. Campo, chief executive officer and chairman of the board of trust managers at Camden Property Trust. “There definitely has been an uptick in activity in the middle. There are always the investors who never buy anyplace that isn’t a 24-hour city such as San Francisco and Los Angeles, or New York City and Washington, D.C. We’ve always been counter to that view. We like to go where the cap rates are higher.”
Campo notes that in today’s multifamily market, there is too much capital chasing too little product. “Cap rates on either coast are 4 or 4.25 percent,” he says. “In Texas and the middle part of country, we can get cap rates of 6 or 6.1 percent. When you look at going from a 4 percent cap rate to a 6 percent cap rate, it’s a 50 percent difference—200 basis points. I’d much rather buy in those areas than pay nosebleed prices on the coasts.”
Mark Stern, senior vice president of acquisitions at Chicago-based Waterton Associates LLC, an investment firm that owns and operates more than 15,000 apartments in 12 states, adds that competition for “saltwater” multifamily properties—those on either coast—has intensified. “REITs and larger institutional investors are driving prices up and cap rates down, so people are look to the middle of the country,” says Stern, a member of the ULI Multifamily Council (Silver). “REITs and institutional investors can pay more and can hold for over ten years. Others can’t.”
Waterton recently purchased the Mondial, a 141-unit condo development in Chicago’s River West neighborhood. “We like urban properties that are close to public transportation,” he adds. “Chicago has gotten very competitive, with the big pension fund advisers being aggressive, so we’re looking more in the Midwest and Southwest.”
Currently, adds Campo, there is a lot of institutional capital looking at Texas and the middle of the country because it is getting priced out of coastal markets. “We’re not the only ones buying,” he adds. “Pension funds are buying as are sovereign wealth funds,” he says. “If you look at the June employment numbers, Texas added half of all jobs created in last 12 months. What drives our business is people having jobs and being able to pay rent.”
Stern advises would-be investors to do their homework. “We like Minneapolis and own in Dallas and Austin. The Texas economy is very strong. But you’ve got to make sure you’re getting rewarded for going there. You need to get a higher yield to go into the middle of the country.”
Campo says potential investors should focus on high-value, high-quality properties. “Don’t get mesmerized by C and D properties,” he cautions. “Right now, there is some real danger in buying C and D developments, primarily because there are so many. Stick with the quality A and B properties.”
“Focus,” adds Stern. “Make sure you know what your strategy is and zero [in] on it. Don’t get distracted by a deal that seems too good to be true.”
Always look before leaping. “Stay away from the CMBS [commercial mortgage–backed securities] train wreck,” says Campo. “There are a lot of properties being offered as ‘good deals’ by lenders, but be cautious. Many are not the good deals they appear to be.”