Jon Bell believes his company has found the right balance for success and he’s not willing to rock the boat in 2014.
Although Bell Partners recently shook up the company leadership and announced a few organizational changes—promoting Robert Slater to chief administrative officer and Gwynyth Coté to COO—the operating focus is still the same.
“It’s the discipline of sticking with what we do well,” Bell says.
Instead of blazing new trails, the Greensboro, N.C.–based company will cut a wider swath in markets where it already operates some of the more than 70,000 units at 251 properties in its portfolio. Particularly intriguing areas on Bell’s radar include Nashville, Tenn.; Atlanta; and select metros in Florida; Boston; Charlotte and Raleigh, N.C.; and Washington, D.C.
“While we are involved in more markets than that, currently we want to attempt to go deeper in these chosen markets in 2014,” Bell says.
Bell Partners had a busy year on the investment front in 2013, buying 2,286 units as of early November. The company selectively and deliberately closed on acquisitions while, a little more swiftly, parting with other communities in its portfolio, selling 1,203 units. The firm will likely widen this strategy next year: As cap rates continue to drop across the nation, Bell expects to see even more of a seller’s market materialize in 2014.
“We plan to be an aggressive seller and a very cautious buyer,” he says.
Many of the markets in which Bell is hoping to double-down are secondary metros somewhat insulated from the bidding wars driving up prices in core, 24/7 coastal markets.
But it’s not just the domestic REITs and institutional investors duking it out on the transaction market. Foreign investors, too, are expected to play a large role in shaping next year’s dealmaking environment. And while cross-border investors have always favored high-barrier coastal cities, many are now finding better opportunities outside of large metros, according to Brian Murdy, national director of Encino, Calif.–based Marcus & Millichap’s Institutional Property Advisors.
“They’re going to keep driving prices there and the capital is going to stay strong,” he says. “But opportunity may be in suburban markets, the non–24-hour markets. I think there will be significant opportunities to buy there and get a premium off cap rates.”
Foreign investors are increasingly asking Chicago-based Jones Lang LaSalle (JLL) to introduce them to the American multifamily market in large, coastal cities such as New York and Washington, D.C. But that may just be the first step in a journey that eventually leads to secondary markets and up-and-coming areas, such as less-heralded parts of Texas or Florida, says Jubeen Vaghefi, international director in JLL’s capital markets group.
“In a lot of instances, they come over here and develop relationships with local operators and local investment firms,” he says. “And as those relationships evolve, they start to get into markets they weren’t aware of.”
Yet, there’s plenty of runway left in those markets that many fear are now being overbuilt, such as Charlotte, N.C.; Washington, D.C.; or Austin, Texas. Vaghefi dismisses the concerns, noting the demand in the so-called at-risk markets will meet the supply coming on line.
He warns not to write off the Lone Star State, especially.
“Texas is seeing a lot of development, but it’s one of the states leading the country in population growth and employment growth,” Vaghefi says.
Murdy believes Washington, D.C., and Austin, Texas, will also be able to support continued development due to job growth, and he doesn’t predict much of a slowdown next year. “There may be opportunities for projects to get in late next year without a lot of competition,” he says. “There are a lot of unique situations occurring.”
Marc Padgett, a principal with builder Summit Contracting Group, feels good about the upcoming year.
Contracting is expected to continue to boom, a rising trajectory from the low point of the Great Recession. In 2008, Jacksonville, Fla.–based Summit had just five or six projects going. By the end of 2011, the company was taking on about 15 projects concurrently, and the pace of business has stayed around that level ever since. Summit has even had to turn business away, Padgett says.
Since most of its clients are repeat business, the company may be able to take on a few select extra projects in the upcoming year, but Summit is cautious with its commitments.
“We want to do a good job and not spread ourselves too thin,” Padgett says. “We are cautious not to grow too fast. I’m sure we will do a little more, but nothing too substantial.”
But while the pace of business is expected to be the same, the type of developments Padgett is working on have grown in scope. He expects the 15 or so projects starting in 2014 to be larger, on average.
“I think with multifamily being in such high demand, the equity requirements with the other REITs and people like that getting into the market—it’s all resulting in bigger jobs,” he says.
In lieu of developing from the ground up, Jon Bell believes there will be plenty of wiggle room at the property level for companies to boost their bottom line through value-add rehabs and renovations.
“We are very focused at the asset level,” he says. “What can we do at this specific property to push performance? Each property may have a little bit of a different strategy.”
As one of the largest renovators in the country—Bell ranked as the ninth-largest renovator on this year’s MFE Top 25 Renovators list, having rehabbed more than 2,600 units in 2012—the company will continue to add value to units during turnovers.
“There’s still some good pricing power on effectively renovated units,” Bell says.
But the cost of doing those rehabs, as well as new development, is likely to continue rising. The price of labor and materials has skyrocketed over the past 12 months, and many of the increases contractors saw this year are expected to roll over into 2014, Padgett says.
“Drywall [went up] a lot earlier in the year,” he says. “Lumber—it’s still a lot higher than it was a year ago. A lot of subcontractors have had price increases.”
Finding and retaining a well-skilled labor force will likely continue to pose problems for subcontractors next year.
“They seem to be jumping ship for 10 cents,” Padgett says. “It seems to be whoever has the biggest wallet is where they go.”
But given the state of the market for short-term debt, such as construction loans or bridge loans, money is no issue when it comes to finding funding to get a project going. And Padgett doesn’t expect it to slow down, either.
“I would say there’s a demand, and there’s certainly money to do it,” he says.
Experts note that finding a permanent-loan source shouldn’t be difficult in the upcoming year.
Five years ago, during the depths of the recession, Bell was working almost exclusively with Fannie Mae, Freddie Mac, and the Federal Housing Administration for debt financing. As the economy improved, more options emerged from the private sector, including banks and life insurance companies.
Bell will still work with the agencies in 2014, but only for about half of his company’s debt needs. And he wonders just how long those sources will remain available. The fate of the government-sponsored enterprises (GSEs) is on the radar for next year as federal leaders debate housing finance reform.
“We’re curious and we’re going to stay plugged into the agencies as much as we can,” Bell says. “As a defensive mechanism, though, we’re acquiring high-quality assets in good locations, and we should have good liquidity should Fannie and Freddie not be in the market in the next five to 10 years.”
Vaghefi notes that the GSEs won’t be the only debt player next year as life companies and other options step up the competition. And the market for commercial mortgage-backed securities (CMBS) debt has roared back to life and is looking for a piece of the action. He believes the transaction market will also continue to be robust next year.
“There is still plenty of debt capital out there for multifamily deals,” Vaghefi says. “There certainly is an expectation that the CMBS shops are going to be pretty active—it’s a very active asset class. They’re trying to be more of a player.”
As head of a brokerage firm, Murdy, too, hopes 2014 will be a bona fide seller’s market, but, realistically, he isn’t so sure.
“It’s going to be all a matter of perspective,” Murdy says. “There are going to be people who are looking to sell because they’re concerned about rising interest rates and cap rates.”
But overall, he predicts the transaction market will be pretty even.
“I think you’re going to see the markets neutralize,” he says. “We’ve had seven years of craziness. The markets were going through the sky, then fell for two years, and now, the past three years, you’re seeing growth in apartments.”
And Murdy doesn’t expect to see many large, history-making portfolio transactions next year, but he also notes that he’s no fortune teller.
“Expect the unexpected in 2014,” he says.