CRE Darling: Investors Rush to Multifamily

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A recent webinar hosted by the Counselors of Real Estate and the Real Estate Executive Council, “Capital Flows in the Post-Pandemic World," addressed key questions including where investors are focusing their dollars now.

Moderator Sharon Ann M. Miller, president of Hillcrest Finance, pointed to three main takeaways from the discussion:

  1. It’s all about solutions. Every project and every market is different, so investors need to take an individual approach when making decisions.
  2. It’s all about the people. In every situation, the experience of the team and how long they’ve been working together makes a difference to project success.
  3. It’s all relative. Every property sector, every location and every individual property is not the same. Investors need to understand the life cycle of each of those elements when determining when and where to invest.

Significant capital has flown into real estate during the past two months, building on renewed investor enthusiasm for real estate that started to grow early in summer 2020, says Christy Fields, managing director and partner of Meketa Investment Group. Increased allocations to real estate are primarily coming from U.S. investors and from some Asian investors, says Fields.

Jilliene Helman, CEO and Founder of RealtyMogul, says most of her investors are high-net-worth individuals, typically with $2 million to $5 million in net worth who want to deploy capital into real estate as an alternative to their stocks and bonds.

“A lot of these investors tell us their stocks are doing so well that they feel under-allocated with alternatives,” says Helman. “There’s a tremendous interest in real estate, so we’re cautiously optimistic. We’re still bullish on multifamily. Even though pricing has moved up and cap rates are compressed, there are still opportunities there.”

The multifamily market has been a “tale of more than two cities,” says Tammy Jones, CEO and Co-Founder of Basis Investment Group. She points to densification in numerous middle-market cities, especially in the Southeast, as centers for suburban densification.

“So much capital is being invested in multifamily, which is the darling of investors, but we need to be careful because cap rates are so compressed,” says Jones. “There was an oversupply in luxury multifamily, but I see a tremendous opportunity for workforce housing and affordable housing. More investor capital is going to middle-market housing now rather than luxury housing.”

Equity and debt equally appealing for investors

While RealtyMogul primarily invests in joint venture equity, Jones says Basis’ investors are equally interested in equity and debt in their search for yield.

“A lot of creativity is required now,” says Jones. “We have lots of equity investments and our pipeline is robust, but we need to do aggressive underwriting and be extremely selective.”

Fields says opportunities can be found across all property sectors, but that each deal is unique.

“For instance, there are some great submarkets that offer office and retail opportunities, even though those are the among the least popular property types for investors now,” says Fields. “Small, nimble companies can be more focused and find the right opportunity at the right time.”

Lessons learned from 2020

Jones says the pandemic-induced economic crisis was far different from the great recession.

“This time, everyone has been collaborative,” says Jones. “We provided rescue equity instead of forbearance and focused on operations. It’s been transformative because we’ve already gotten most of the reserve capital back. We’ve learned that transparency and communication work.”

Fields says her company met with people first to deeply understand their needs and then secondarily came up with a strategy to manage challenges.

“I still feel that there’s some vulnerability, especially as we see how some legislation plays out, but we’re seeing recovery in cash flows and recovering in values,” says Fields.

Aside from the pandemic, the intense wildfires, floods and hurricanes were on the minds of the panelists.

“We need to incorporate climate change and sustainability in our underwriting,” says Jones. “Real estate is a tangible asset that faces real risk from floods and fires that need to be addressed.”

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