Trends Watch: Multifamily Housing
May 06, 2021
By Elana Margulies-Snyderman
EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.
This week, Elana talks with Frank Forte, Managing Partner, Lucern Capital Partners.
What is your outlook for investing in multifamily housing?
Our outlook for multifamily housing remains bright. Even pre-COVID-19, lifestyles were changing with people preferring a flexible, experience-based lifestyle over the lifestyles of the baby boomer generation. There are significant structural imbalances in wage and income growth that further support demand for rental housing in America. For example, millennials, which represent a large percentage of renters, have had some of the slowest wealth accumulation out of any generation as a result of the impact of not only the great recession, but now the COVID-19 pandemic. Most either cannot afford a down payment for a house or are locked out of the housing market, whether by supply/demand imbalances, mortgage qualification, affordability or other reasons. As a result, most will be renters for longer. Gen Z is already beginning to show a preference for flexible lifestyle arrangements and will further support this trend.
What are the greatest opportunities you see and why?
There are always opportunities to be creative and generate risk-adjusted yield for our investors. Our favorite opportunity right now is a conversion of an extended-stay hotel in the Charlotte MSA to multifamily housing. There will be minimal (relatively speaking) conversion costs, and the project will be hugely accretive as a result of the natural arbitrage between hospitality valuation and multifamily valuation. On a broader basis, we believe the Sun Belt has some of the greatest opportunities right now. The out-migration from higher cost, higher tax states in the Northeast is real and has been happening for some time. The net beneficiary of these migration patterns are states in the Sun Belt who benefit from lower cost of living and lower tax regimes. The weather is also better which drives a higher quality of life and satisfaction. Our favorite Sun Belt market is Charlotte. It's an amazing, cosmopolitan city with world-class amenities. Since the start of the pandemic, 100 people per day are moving to Charlotte from other cities.
What are the greatest challenges you face and why?
The greatest challenge we face right now is the size and growth of our national debt. We need Congress to come together to put this country back on track towards reducing our national debt and ensuring we do not saddle future generations with this burden. Our spending as a nation continues to become increasingly irresponsible and no one has more to lose than the middle class. We need a strong middle class in this country and a system that rewards hard, honest work and a path to the American Dream.
What keeps you up at night?
You cannot help but wonder if there will be a reckoning with strategies that are focused on acquiring core assets at extremely low cap rates and how those may look in five-to-ten years. Part of what we do as value-added investors is increase our effective equity cushion and generate value through projects that are accretive to each project. In this way, our cash flow streams are consistently growing and widening the gap between our operations and prevailing cap rates. This helps to insulate from any upward move in interest rates or capitalization rates that could negatively impact valuation over time. When you buy core properties at very low capitalization rates with no room for value creation outside of standard market rent growth, you hitch your proverbial wagon to the performance of the market rather than your execution. A small shift in interest rates or capitalization rates could have a large impact on your terminal value and your project's performance.
The views and opinions expressed above are of the interviewee only, and do not/are not intended to reflect the views of EisnerAmper.