Street Smart Success

Every fortune 500 company plus thousands of others place employees in corporate housing. From a landlord perspective, the rents that are paid for these properties vastly exceed long-term rentals and have less wear and tear. Angela Healy, CEO and owner of Avenue West Managed Corporate Housing, places corporate employees in fully furnished residential condos and manages the whole process for the owners. These condos are great investments for Real Estate investors who are looking for truly passive income. Avenue West also is a franchisor that offers a great opportunity for individuals looking to start their own business and benefit from the multibillion-dollar corporate housing industry.

Both residential and commercial occupancy rates and rents are contracting in many places and the government remains committed to taming inflation. Additionally, taxes, insurance, and other expenses are increasing. For operators with loans coming due over the next couple years, the combination of less revenue and increased operating and borrowing costs, may make refinancing nearly impossible. As a result, a lot of landlords who acquired properties at record high rents and record low cap rates will be forced to sell at heavily discounted prices. Justin Sloan, President of Sloan Capital, is deploying capital into non-Real Estate, cash flowing, debt free assets. Justin has recently bought the franchise rights to an incredibly successful fruit bowl franchise concept in Texas and Iowa.

With so much disruption in the capital markets, lending today has gotten increasingly complex and difficult to navigate. In order to be successful in the current environment, sponsors need to be more resourceful and creative than at any other time in recent history to get deals funded. In the near term, a lot of distress in the market will provide great opportunities for operators and investors. Adam Finkle, Principal of Tower Capital, is a Phoenix-based mortgage advisor who advises clients across all asset classes on how to best navigate and optimize against the current lending landscape.

The key to success in any Real Estate venture is conservative underwriting. In a super competitive environment, it’s easy to convince yourself to believe unrealistic assumptions in order to bid high enough to win a deal. This can cause major heartache when surprises occur, and the market doesn’t fully cooperate. Zamir Kazi, founder of ZMR Capital, has acquired 33 large multifamily properties over the past few years with private equity. Although Private Equity partners can be more demanding of General Partners, Zamir has welcomed the partnership for the valuable input they provide and the healthy accountability they require.

There’s a need for 7 million more affordable apartment units in the country, but the cost of new construction is so high that it’s hard to build new apartments and rent them out at affordable rents. That’s why municipalities provide tax credits to builders so they can bring these units to market at rents tenants can afford. Lee Harris is President and CEO of Cohen Esrey, a 50 plus year old company that builds affordable apartment buildings in many markets in the U.S. to help fill the insatiable need for affordable housing. Cohen Esrey also acquires existing market rate apartments in growing markets in the Southeast and Midwest. Cohen Esrey operates over 12,000 apartments in the country.  

In multifamily apartments, you’re dealing with a lot of people, so a lot of things can happen every day. That’s why property management is the key to being successful, and no one cares about your baby as much as you do. When you’re acquiring properties in different markets with different property management companies, asset management can become especially difficult.  In the value-add space, you also have the extra layer of construction, which adds even more complexity and potential challenges to the project. Brendan Chisholm, founding member of BKC Holding, is focused on acquiring distressed and value-add multifamily and mixed-use communities with asymmetric risk-return profiles.

Even though interest rates have risen dramatically over the past year, most apartment owners have not adjusted their expectations downwards when it comes to lowering the prices of their assets. This delta in the bid-ask of prices has contributed to a 50%-70% slow-down of transactions over the past several months. Lending standards have also gotten more onerous, so it’s making it more difficult to secure financing for buyers. Caleb Johnson, Founder of Red Sea Capital, has specialized in multifamily over the past few years and is continuing to source deals, but is starting to evaluate other asset classes where the prices are more favorable to achieving solid returns for his investors. 

With most existing multifamily properties still priced too high to generate decent cash flow, many operators are turning to ground up development to generate more attractive returns. When these projects go according to plan, investors can get all of their money back or even more upon permanent financing, and achieve an infinite return thereafter. Sam Bates, Founder of Bates Capital Group, has transitioned out of the acquisition of existing properties to exclusively focus on ground up construction. Sam develops in secondary and tertiary markets spreading out from the sprawling Dallas/Ft Worth market where land is still relatively cheap.

By ruthlessly managing expenses, you can make C Class properties profitable, but there are ongoing challenges and risks. Even after you’ve stabilized the properties, there are continual maintenance issues and expenses you can’t accurately predict. Issues with outdated plumbing and electrical systems plus other issues erode net operating income. In addition, the possibility of further inflation and unemployment combined with rising expenses pose further risk. Jason Biak, Partner of Compounding Capital Group, has done a great job optimizing C Class assets despite these challenges in the Cincinnati market. Jason also anticipates prices on B class properties to gradually come down over the next several months. 

Prices on older buildings can look attractive but you get what you pay for. The biggest challenge with older properties is being able to project expenses. Properties from the 1960’s 70’s, and early 80’s tend to have a lot of deferred maintenance, especially the plumbing systems. Maintaining and replacing old plumbing is very expensive and can negatively impact the financial performance of the property. Lee Yoder, Founder and CEO of Threefold Real Estate, has done a great job acquiring and managing Class C properties in Southwest Ohio but has had to learn some expensive lessons along the way.