HOW INSTITUTIONAL INVESTORS VIEW APARTMENTS TODAY
By Brennen Degner
Original Article:
DB Capital’s Brennen Degner provides insights from CRE’s largest investors.
Navigating the multifamily real estate landscape through the discerning eyes of institutional players offers a varied spectrum of insights and evolving strategies. Our detailed analysis of feedback from over 30 prominent institutional joint venture partners sheds light on the contemporary narratives defining the market. What we found is that the majority of those surveyed have adjusted their yield objectives, to converge around a yield on cost above 6.75 percent. This shift arises from the perfect financial storm created by rising interest rates, unprecedented insurance premiums and other OpEx, and a tempering rental market. These elements together exert pressure on property valuations, necessitating investors to recalibrate and rethink their strategies.
READ FULL ARTICLE HERE
At DB Capital, we’ve always believed that the foundation of successful real estate investment lies in having an intimate understanding of the markets in which we operate. From our earliest days, we recognized the value of a local presence and made it a core principle of our investment strategy. As we’ve grown over the years, we’ve structured our organization around this principle, employing senior-level acquisitions and asset management professionals in the markets we cover. In light of the recent challenges faced by the real estate landscape, our commitment to local knowledge has proven to be more critical than ever.
Navigating today’s real estate environment is akin to sailing through turbulent waters. The past year and a half has brought forth significant headwinds, creating an atmosphere of uncertainty. In this climate, our intimate understanding of local markets has emerged as a lifeline. Here’s why:
- Swiftly Changing Dynamics: Real estate markets are not static; they evolve continuously. From shifts in supply and demand fundamentals to unforeseen external factors, the ability to adapt swiftly is paramount. Our local team members, deeply embedded in their respective markets, provide us with real-time insights into these changes. This agility allows us to adjust our strategies promptly, maximizing opportunities and mitigating risks.
- No Room for Missteps: The days when capital markets could bail out operational missteps are behind us. Investors can no longer rely on external financial support to cover gaps in performance. Instead, success hinges on the precision of our operations. Our local teams play a pivotal role in ensuring that our assets are managed efficiently and effectively, leaving no room for errors.
- Feedback Loop: Our local team members serve as the eyes and ears on the ground, forming a crucial feedback loop. They are in constant communication with local stakeholders, from brokers and property managers to regulatory authorities. This ongoing dialogue provides us with invaluable information, helping us make informed decisions that drive investment success.
I
n essence, our local presence is not just about having boots on the ground; it’s about having a finger on the pulse of each market we invest in. It’s about being attuned to the nuances, the opportunities, and the challenges that define these markets. Our commitment to local knowledge isn’t a mere strategy; it’s a philosophy that guides our every move.
As we navigate these uncharted waters, our dedication to local presence remains unwavering. It’s what sets DB Capital apart in an increasingly complex and competitive real estate landscape. With a team deeply rooted in the markets we serve, we look ahead with confidence, knowing that our local knowledge will continue to be the compass that steers us toward success.
We are thrilled to share some fantastic news with our entire team! We have just received an incredible testimonial from one of our valued employees, Darren Hulick,
In their testimonial, Darren highlighted the exceptional experiences they have had while working at DB Capital. They praised our supportive work environment, the strong sense of camaraderie among colleagues, and the opportunities for professional growth that we offer.
It’s truly heartening to see the impact of our collective efforts reflected in the words of our team members. Such testimonials not only motivate us all to keep striving for excellence but also showcase the positive culture we’ve built together. Thank you, Darren!
Employee Testimonial – Darren Hulick
“As I start my fifth year at DB Capital Management, it’s awesome to look back at the past four years and all that we have accomplished, navigating through some very interesting and dynamic markets.
We have acquired 3,500+ units across multiple states, including Texas, Colorado, Utah, Nevada, and Oregon, which is a testament to the collective effort and expertise of everyone at DB Capital.
Darren Hulick
During this time, we have experienced the ebb and flow of the market, witnessing both unprecedented rent growth and formidable challenges on the expense side, particularly in areas like insurance and labor markets. Additionally, the financial landscape has been anything but boring, as we have encountered historically low interest rates as well as the most aggressive interest rate increases seen in over four decades. Yet, through it all, we have remained steadfast in our commitment to sound investment practices, guided by our steady and disciplined approach.
As I reflect on the past, I am very excited for the years that lie ahead. I believe that the best is yet to come for DB Capital, and I am eager to continue this journey as we embrace new opportunities and challenges in the ever-evolving real estate market. Here’s to many more years of growth, achievements, and shared success.”
DB Capital Management has closed on the recapitalization of Ascent at Union Square, a 139-unit garden style apartment complex located in Provo, UT. Over the past two years, DB Capital invested in a multimillion-dollar capital improvement plan repositioning the 1990’s vintage property to compete with newer product in the area. Enhancements included the renovation of unit interiors, a new two-story on-site fitness center, upgrades to the pool and barbecue area, new landscaping and a complete refresh of the building exterior. Despite the challenging market, we were able to achieve investor returns that were considerably ahead of original projections. Given the current market conditions, it made more sense to recapitalize and stay in the asset rather than sell into a depressed market, especially given very strong property performance. We wanted to continue our ownership of the property because of what we see as superior long-term growth prospects, a view which is shared by our new partner.
Get the latest DB Capital News
Sign up with your email address to receive news and updates.
|
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
With the exception of winter 2021/2022, all of the markets we are in historically have some level of seasonality. For various reasons across multiple markets (most common reason seems to be supply deliveries) we saw a very slow and prolonged winter leasing season this year. We went through a large-scale management change over the same time period which I don’t think did us any favors in backfilling the locations that were slow to lease. In my experience, when changing management platforms, operations tend to get slightly worse for a short period before they get better.
Now I don’t want to jinx ourselves, but it appears in looking at the data over the last 4-6 weeks, we might be back. We are seeing incredibly strong leasing statistics across our entire portfolio. Assets where we had to implement move-in incentives and reduced rates have filled up at a rapid pace and allowed us to pivot back to leasing from a position of strength rather than weakness. We have assets in the portfolio that have secured more leases/applications in the last two weeks than they did in the entire first quarter of 2023. This snap back has been exciting to watch and has resulted in building onsite team morale and confidence which then perpetuates additional leasing momentum.
The biggest question we are monitoring internally is whether or not we expect to continue to see this trend throughout the remainder of the year. We are seeing a heightened level of construction deliveries across most of our markets and continue to monitor how those deliveries will impact rents and concessions in the near future. Based on current operations and the data we are seeing we expect to see continued near term concessions and flat rents in our rent by lifestyle choice assets. For the most part, any of our rent by necessity targeted assets have held strong and in most cases we are seeing strong occupancy and rent growth. Growth has moderated substantially in that profile, but we are still seeing stability.
Given the goal of the Fed is to combat inflation through a softening in the labor market, we will see if this trend continues with potential increases in the unemployment rate. Our thesis has been, and the data generally supports, that our targeted B quality assets tend to hold up better in times of labor market contractions. We typically see decreased desire for families to stretch into the newest nicest product.
As always I would love to hear what you are seeing, especially if notably different than the feedback above. Feel free to reach out to me directly to share notes!
MULTIFAMILY PROS REACT TO INTEREST RATE PAUSE
Original Article:
Fed Chair Jerome Powell said during a press conference last week that policymakers suspended rate hikes to take time for assessing the impact from 14 months of monetary tightening. Rate increases usually require a year or more to restrain economic growth, the job market and price pressures.
Jordon Emmott, co-founder of New York City-based brokerage firm Global Real Estate Advisors, was surprised by the announcement.
“I believe we are still likely to see one to two additional rate hikes between now and the end of the year,” he said. “This news, however, is certainly a breath of fresh air for buyers who have property under contract. Closing becomes extremely challenging when interest rates are rising. The economics can get out of balance in a hurry, which is what we have been fighting through the past 18 months.”
But outside of that, the news was generally greeted with shrugs from apartment owners and brokers.
“I don’t see the recent pause as having a material impact on the current environment just yet,” said Brennen Degner, managing partner and CEO of Denver-based apartment owner DB Capital Management. “The pause is a step in the right direction but the general narrative around there being the potential for one to two more hikes still creates the same uncertainty as existed before the pause announcement.”
The rate pause won’t influence multifamily sales or financing, according to John F. Rodiles, national sales manager of Costa Mesa, California-based investment advisory firm The Mogharebi Group.
“Any hike would have amounted to a small increase of the now 5.00% to 5.25% rate,” he said. “We don’t see client sentiment improving or activity started based on this news.”
Even though there is a pause, for now, the possibility of future rate increases clouds the market for some. “While the Fed pausing rate hikes would have typically been positive, commentary around future rate hikes contributes to overall uncertainty and causes a level of anxiety in the market,” said Mark Fogelman, president of Memphis-based owner and manager Fogelman.
Until that happens, there won’t be true stability in the market, according to Emmott.
“The true impact will not be felt until the Fed says, with vindication, that inflation has been tamed and they are finished raising rates,” he said. “At that point, buyers will be able to confidently tailor business plans around economic policy, and demand will rise.”
CFO Dive Senior Reporter Jim Tyson contributed to this report.
READ FULL ARTICLE HERE
MULTIFAMILY SALES VOLUME SLIPS ACROSS TEXAS
Despite the property type’s status as a preferred product among commercial investors, the fallout from greater economic disruption is working its way through the system.
By Taylor Williams
Original Article:
Article Overview:
Summit at Henderson Pass in San Antonio, TX
The first half of 2023 has seen muted multifamily investment sales activity in major Texas markets. The impact of inflation and interest rate hikes has negatively affected the market, resulting in reduced deal volume. In the first quarter, the number of multifamily transactions declined compared to the previous year in Dallas, Houston, and Austin. While prices in Dallas decreased, both Houston and Austin saw price increases per unit. The overall commercial deal volume in the US also experienced a significant decrease. Sellers are less motivated to transact in the short term, leading to a wide bid-ask spread and tightened borrowing standards. However, experts anticipate that as market realities become more evident and pain points manifest, deal volume may increase in the second half of the year. Owners facing loan maturities and seeking refinancing options may choose to list their properties. Bridge loans have been in high demand, providing flexibility to investors in light of interest rate fluctuations. Sellers who have owned properties for several years and experienced significant rent growth may decide to sell and capitalize on profitable opportunities. Attractive debt structures could also incentivize sellers to enter the market.
Article Excerpt:
Of course, investment strategies can and do vary tremendously from group to group, and some investors are taking a more cautious approach when it comes to negative leverage. Brennen Degner, CEO of DB Capital, a Denver- based multifamily investment firm that is active in Texas, elaborates. “If the expectation is for future market rent growth alone to pull us out of negative leverage, then we won’t do the deal,” he says. “If there is a value-add business plan where we see a clear opportunity to generate positive leverage through revenue generation that is more than just expectations of rent growth, then we can get comfortable with negative leverage.
READ FULL ARTICLE HERE
The DB Capital Team is thrilled to welcome Steven Kinzie to our company as Regional Vice President of our Central Texas market. Steven brings over 10 years of invaluable experience in the institutional asset management and investment spaces. With a stellar track record in our industry, Steven has held prestigious titles such as Director of Asset Management and Senior Director of Investments at American Campus Communities — the largest developer, owner, and operator of student housing in the country, and a key component of Blackstone’s BREIT.
Steven Kinzie – Regional Vice President Austin | TX
During his tenure, Steven played a pivotal role in sourcing, underwriting, and closing acquisitions and developments. His expertise contributed to the successful management of an impressive portfolio numbering over 150 assets. His dedication to excellence and his passion for the industry make him a remarkably apt and able addition to our DB Capital Team.
Beyond his professional accomplishments, Steven is a proud Texas native and an active member of Austin’s vibrant outdoor recreation community. His adventurous spirit promises to bring fresh perspectives to our workplace that will foster even more collaboration and creativity among us.
Join us in extending a warm welcome to Steven as he embarks on this exciting new chapter for DB Capital. We are surely looking forward to his contributions and the positive impact he will undoubtedly have within our organization , and upon our industry as a whole.
With such a shallow deal pipeline to start off the first quarter of 2023 it has provided a unique opportunity for us to slow down and assess the landscape for where we see potential opportunities in the next 12 to 24 months. I have to admit, the current set of lenses is the blurriest we have looked through in a while. Sentiment continues to change on a daily (sometimes hourly) basis and we have found it difficult to channel and moderate the pessimism when underwriting new opportunities. On the limited deals we are chasing I would compare our underwriting to the old adage “death by a thousand cuts.” No matter what the multifamily market looks like it is tough to make anything pencil when you have a pessimistic view around every variable in your forecast.
With that said, there are great opportunities in any market. Sometimes it just takes more patience and persistence to turn them up. Currently, we are finding interesting opportunities in the form of recapitalizing existing deals with new JV partners. The assets we see an ability to optimize this strategy around generally have three characteristics: were purchased mid 2021 or prior; are in submarkets where rent growth outperformed our expectations (to no surprise all of our markets); and are far enough into their value-add plan that NOI has started to stabilize so we can trade at an attractive in-place yield. Since we already know the assets inside and out and have full transparency over operations, we see these as the best risk adjusted opportunities in today’s environment. Given that values peaked so far beyond initial expectations when the deals were purchased, the recapitalization presents a great opportunity to still provide outsized returns and liquidity for existing investors. Meanwhile, for incoming LPs, the recapitalization can provide attractive risk-adjusted returns and a reduced basis to yesterday’s pricing but with a proven business plan.
On the new acquisition side of our business we are generally still seeing a moderate to high level of competition and demand for the limited stock available in the pipeline. We see the best opportunities (again to no surprise) in submarkets that have seen more muted new construction deliveries over the past two quarters. In general, this continues to be suburban submarkets that cater to a moderate income demographic. Hot spots for new construction like core locations in Austin, Downtown Salt Lake City, and northern Denver have become much more challenging to underwrite. Regardless of the market in today’s environment we still have to solve three challenging variables: debt volatility; challenges in predicting the path of exit cap rates and; the impacts of impending recession on demand. You also have to play the game of timing velocity and magnitude of ramping up and burning off a considerable amount of rental concessions. With that said, as we look further into the end of 2023 and 2024, we strongly feel that there will be a flood of new acquisition opportunities as debt originated in late 2020 to early 2022 begins its path to maturity (this seems to be the opinion of the majority in the conversations I’ve been having lately). So, for now we are remaining very patient and highly selective as we keep our powder dry to execute on that thesis.
In summary, we continue to be long term believers in value-added multifamily in meticulously selected high growth submarkets, however, to be an active participant in the market right now takes a heightened level of attention to detail and persistence. At the end of the day, patience right now may be the best virtue.
If you have read this far please feel free to reach out and let me know if you are seeing the same or any other interesting opportunities, I am always happy to share notes as we learn together.
Thanks for the read and happy deal hunting!