Earlier today we attended an Apartment Conference put on by the Real Estate Journal. Here are some of the highlights: 

Investors & Developers:

  • Want to do deals but they don’t pencil
  • We have to be way more selective and our perspective is much longer meaning the project needs to have a compelling Sub-Market Location Story
  • Development Return on Costs: high 5s-6%, equals low 5s when institutional owners look at it. 5.6-5.8% Return on Costs. 
  • Interest Reserves are Way Up
  • Land costs need to come down
  • Development deals with some subsidy i.e. TIF is very meaningful, can get un-trended yield on costs to 6%; private REIT, family offices want this still
  • Need to use longer hold time horizon
  • No one expected rates to go up so high and so fast
  • Smart Family offices are hoarding cash right now waiting to jump in
  • Following Uhaul move data for opportunities – what cities/states are there more one way truck rentals
  • We are looking for Development Friendly communities 
  • You can’t control the market
  • Follow the demographics. The only thing you can control is location and basis.

Investment Sales Brokers

  • Rent Controls hurt transaction volume now and in the future
  • Suburbs are still healthy, no rent control discussions. Easier to sell in Subs vs City, for this reason.
  • Rent Control: conversation takes out 25% of buyers. They commonly say; “Why would I take a position in Minneapolis – I’ll look like an idiot of it goes into place”
  • Generally, national investors have the feeling that MSP is a desirable “slow & steady” market 
  • Negative Leverage: lower cap rates than interest rates, meaning cash is the best return

Opportunity Spotting:

  • Look at infrastructure and total basis. How does what you could buy compare to what you could build and for how much. 
  • Look at projects with Refi/Recap Risk
  • Deals with transferable/assumable debt will do well
  • Watch Office Market for deals – 1 in 20 Office Buildings could be converted to Resi
  • Good opportunity to buy from Institutions over first 6 months of 2023 
  • Anyone with a fund maturity staring them down (has to make a move)

Construction:

  • Construction pricing is flat
  • Prefabricated exterior materials, shipped pre-glazed can lead to quicker install, lower street closure times. But it needs to be part of the design consideration – not a good idea after the building is designed. Building exterior window locations should be done in consideration of these modular/prefabricated elements
  • Volumetric Modular construction will continue to gain ground

Financing:

  • Loan proceeds sized to a takeout that is more similar to todays rates – which lowers the 
  • Lots of long-term borrowers were good with Freddie/Fannie 10 year fixed with 30 year amortization
  • Interest Only eg “I/O” has been readily available – 10 years even with a higher rate
  • 35 year amortization with Freddie & Fannie (1.6 spreads, 10 year I/O, 5.5% coupon, 65% leverage)
  • Every Life Insurance Co has increased their allocations – spreads 1.55-1.60 – 55-60% leverage 
  • Underwritten; 50% LTC, because of conservative take out rate …
  • Need Grants & TIF

Amenities:

  • Post COVID, micro units are less desirable
  • Useable amenity spaces are higher priority
    • Sundries, dry-market, near fitness 
    • Yoga, Barre, Pelaton
    • Wellness, Wellness, Wellness
    • Work from Home: Think about it, Renters were home 20% of the time – now it’s 80% of the time so the demands on Work from Home amenities are much higher than they were before – work space, coffee, WiFi, printers … AND … we as managers are their coworkers. 
  • Renters placing a higher premium on sound transfer between units 

Management & Customer Service:

  • Rent growth was 8% on in-place renewals – Meaning – do whatever you can to keep your existing tenants, that is where the most rent growth will occur
  • New replacement tenant leases were flat (urban was actually flat and suburban was actually 13%). 
  • Class A renters look at 6-16 properties before they make a decision, meaning customer service and real time pricing visibility and reaction is paramount

Unit Mix:

  • In-line, split two-bedroom, struggle to lease the most (850-900sf)
  • 1,100sf, 2 Bedrooms do really well
  • Well appointed 3 bedrooms for 45+ renter are of need, they’ll pay the rent 
  • One bedroom plus dens are doing better

Until next time,

Brian + Ben

Monarch CRE


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