Inflation has remained high. Mortgage rates have risen quickly, making homes less affordable for buyers. Home prices have started to fall, but inventories remain generally low as many prospective sellers are reluctant to drop prices.
It feels like we've been in this situation for quite a while now, and we've talked about it quite a bit. We've also talked about why we think now is a good time to be looking for multifamily deals and what we're looking for in those deals.
We know how to operate in current conditions now better than when things were so uncertain; when quantitative tightening began. Operationally, we understand how to account for higher rates and inflation. But, when looking for new deals, so much of it comes back to location. Markets with a strong economic base and tenant base that can weather the economic downturn better than most.
The latest Wall Street Journal/Realtor.com Emerging Housing Markets Index certainly seems to support our strategy. (The index identifies the top metro areas for home buyers seeking an appreciating housing market, a strong local economy and appealing lifestyle amenities.)
While the Index focuses on home purchases, there's a lot we can directionally take and apply to the multifamily market. There's a lot of crossover of people moving into these areas who aren't ready to buy just yet or can't afford to buy and will look to rentals with the amenities that are attractive to them.
One of the trends we feel will help multifamily in these markets is the trend in interstate home shopping. A recent Realtor.com study shows that buyers are looking across markets at a rate much higher than recent years. This is particularly a trend for people in more expensive metros like the Northeast and West Coast looking at less expensive markets. This trend is likely to be mirrored in the rental market; as rents have risen quickly in many major areas, renters may be looking at more affordable yet strong areas to move.
That's not to say people will end up in small markets or just want the cheapest places to live. Generally, home prices in large metros tend to be higher but many of the areas featured on the latest index are still on the larger side, they're just more affordable relative to the largest markets In fact, the trend here seems to be towards somewhat larger markets where job opportunities and networking can offer a hedge of sorts against economic uncertainty and a softening job market.
Unsurprisingly, quality of life also appears to weigh heavily on home buyer decision making. Many of the top regions allow easy access to national parks and other outdoor pursuits as well as universities and hospitals, live sports, theater, restaurants and music. These metros all offer the convenience and walkability of urban living combined with accessibility to outdoor pursuits.
Finally, some of the highly ranking metros, particularly those in Florida and Tennessee, have no state income taxes. That’s obviously attractive for those looking to control their costs.
This is why we continue to focus on similar criteria when we're considering deals. We want that strong tenant base; the tech workers, medical professionals, university employees and others who are willing and able to pay their rent on time and are willing to pay a little more for the amenities and locations they value. We want to be able to acquire properties where we can apply our value add strategy, improve the living situation and be able to support higher rents in line with comparable properties in the area.
This is why we feel that The Stonebrook Portfolio is a great opportunity. We feel the Research Triangle has all of the attributes buyers and renters are looking for. Raleigh cracked the top 10 on the WSJ/Realtor index. Durham-Chapel Hill fell a bit on the rankings but still came in at #40 while a number of nearby areas, such as Burlington, showed strong results. We feel that Stonebrook Mebane is well situated with a very strong tenant base from nearby Duke & UNC, hospital systems and Apple's upcoming East Coast HQ.
Secondly, while Atlanta doesn't make the list (it probably wouldn't qualify as an emerging market), we feel that there are the same advantages with Stonebrook Vinings. The property will benefit from our value added approach and is in a highly desirable submarket with easy access to many of the top employers and attractions in the area. The Atlanta economy supports an extremely strong job market, one that we feel will potentially hold up much better than other areas if we have an extended downturn.
It may be harder to find deals in large markets like Atlanta, but but if you stick to your fundamentals and are flexible with your business model you can still find profitable deals that will work for you.
Remember, renters and home buyers still have a lot of flexibility in the market - despite offices reopening, many employees still have remote or hybrid options, allowing households to search for lower cost areas that have the quality of life they want.
It's important to invest where people want to be and in properties where people will want to live; we've touched on it before but this is why we stay away from Class C properties and areas that aren't quite as desirable. They may look good on paper but they generally don't fit our business model.
· As inflation stays high and the job market begins to cool, people are looking for more affordable places to live.
· While the truly large metro areas could be pricing some out of the market, people still want the employer base, amenities and lifestyle that a large city can provide.
· Quality of life is important; access to outdoor activities, healthcare, education, restaurants and the arts are prominent attractions in most, if not all, of the top metros.
· In terms of multifamily specifically, the data lends support to our strategy of focusing on locations with a strong tenant base. While some of our returns may not equal what we've seen prior to the Fed tightening, we feel that this is a great time to invest in multifamily and that we'll see very strong returns, especially compared to some of the alternatives.
As we continue to keep our deal flow active, the tenant base and local economy will continue to have a heavy weighting when considering future deals. We'll continue to focus on deals where we can maintain rents and keep occupancy high, regardless of what is happening in the broader economy.
Be well, be strong, and keep pushing forward!
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About the Author
Ellie Perlman is the founder of Blue Lake Capital, a commercial real estate investment firm specializing in multifamily investing throughout the United States. At Blue Lake Capital, Ellie partners with both institutional and individual investors to grow their wealth by achieving double-digit returns by investing alongside her in exclusive multifamily deals they usually don't have access to.
A defining factor of Blue Lake Capital’s strategy is founded in utilizing machine learning/artificial intelligence throughout the course of all acquisitions and asset management. This advanced technology enables the company to produce accurate and data-driven forecasting for all assets on a market, property, and even tenant basis. In doing so, Blue Lake is able to lead commercial investments with the full capabilities of today’s technology.
Ellie is the host of REady2Scale, a podcast that highlights the assets, processes, and strategies for the multiple approaches to successful real estate investing.
She started her career as a commercial real estate lawyer, leading real estate transactions for one of Israel’s leading development companies. Later, as a property manager for Israel’s largest energy company, she oversaw properties worth over $100MM. Additionally, Ellie is an experienced entrepreneur who helped build and scale companies by improving their business operations.
Ellie holds a Masters in Law from Bar-Ilan University in Israel and an MBA from MIT Sloan School of Management.
You can read more about Blue Lake Capital and Ellie Perlman at www.bluelake-capital.com.