For over three decades, CAPREIT has been a vertically integrated owner and operator of multifamily housing. The company, based in North Bethesda, Maryland, owns and/or manages nearly 12,000 units across the nation, with a portfolio of affordable and market-rate housing.
CAPREIT also continues to focus on the value-add space and is making its move into the single-family build-to-rent (BTR) sector.
Chief investment officer Stephen A. Catarinella discusses the company’s entrance into the BTR segment and shares with Multifamily Executive his predictions for what’s to come for the industry for the remainder of the year.
What’s your take on how the multifamily industry has fared in 2024?
Catarinella: The multifamily industry in 2024 has been a tale of two markets of sorts to date (and could be a tale of three). The beginning of the year priced in multiple rate cuts by the Fed. This resulted in valuations and contracts for sale at prices that quickly became stale when the prognostication of rate cuts for the year took a nosedive in the spring.
The fallout felt from rising interest rates on transactions, especially those already under contract, was significant. Re-trades, buyers walking away, and sellers pulling back opportunities from the market became the norm. CAPREIT had the “fortune” of having a rate-lock deadline virtually simultaneous with CPI announcements and escalating tensions around the world. Rather than re-trading, CAPREIT took a haircut on our interest rate buydown, taking the long view of the multifamily market and maintaining our reputation as closers.
The summer has led to a somewhat looser multifamily transactional market. With pricing expectations having moderated and with lower actual and anticipated interest rates, more deals are getting done, and more offers are being made—helping sellers get closer to pricing they may have been hoping for. With an expected rate cut in September, and the uncertainty of a national election resolving in November, 2024 should finish strongly.
Give us a brief description of CAPREIT’s current portfolio.
Catarinella: CAPREIT currently owns and/or manages nearly 12,000 units across the United States. Geographically, the portfolio is focused mainly on secondary and tertiary markets in the Upper Midwest, Mid-Atlantic, and Southeast. CAPREIT is comprised of a steady team with a wide range of experience throughout the organization, which allows for a diversified approach to the portfolio.
The overall portfolio is nearly equally split between affordable housing and market-rate communities. On the affordable housing side, this includes low-income housing tax credit properties, as well as communities encumbered with Department of Housing and Urban Development (HUD) financing or otherwise participating in HUD or other state or local agency programs. CAPREIT’s market-rate communities primarily provide high-quality workforce housing to its residents through our extensive value-add execution. We round out our market-rate segment with several lease-ups, core-plus assets, and BTR communities.
What is CAPREIT’s current strategy regarding apartment community acquisitions and dispositions? Do you see that changing in the years to come?
Catarinella: CAPREIT will be net buyers in 2025. With a stable of active partners in the affordable housing and workforce housing spaces, CAPREIT will primarily focus there, in the markets we know and love, for the remainder of 2024 and throughout 2025. Having over 30 years of experience in the value-add space, CAPREIT will continue to operate there as well.
While these areas remain CAPREIT’s bread and butter, we recently closed on a BTR project in Greenville, South Carolina, and have several development opportunities in the pipeline. In the years to come, BTR and development projects will become larger parts of the portfolio, in an effort to create longer-term holds with limited deferred maintenance and greater operating efficiencies, located in targeted growth markets primarily in the Southeast.
CAPREIT is consistently valuing our assets on a deal-by-deal basis, while evaluating market conditions, operations pros and cons, debt constraints, partner preferences, and other factors to determine whether a property is ripe for sale, refinance, or recapitalization with fresh equity—none of which have been easy in the first half of 2024. While some assets are scheduled for sale in 2024 and 2025, such dispositions are due to partner fund life requirements or are opportunistic in nature.
Tell us what drew the company into the single-family rental (SFR) segment of the market, and what are CAPREIT’s future plans in this area?
Catarinella: CAPREIT is excited about the SFR sector, particularly purpose-built contiguous BTR, as we see that space being completely different from infill home rentals. Whether it is a standalone community or a specific designated section of a larger development, BTR single-family homes or townhouses are just another multifamily floor plan essentially, designed to meet specific demands of potential residents.
Today, there is an additional step between renting an apartment and buying your first home. With Americans getting married and starting families later and later in life, the need to “settle down” is delayed. Folks outgrow their apartments, though, and want more living space with a comfortable home-office option, integral garages, and maybe even a fenced-in yard—but with no maintenance and the flexibility you don’t have with a 30-year mortgage. BTR communities with professional property management fulfill this growing niche. Even with interest rates becoming more favorable to home buying than they have been recently, the demographics and demand for BTR single-family homes and townhomes is here to stay.
CAPREIT is completing a 120-unit standalone BTR project in Greenville, with several similar developments in the pipeline. Working with local, regional, and national builders in our target markets, CAPREIT endeavors to acquire BTR units at certificate of occupancy, taking on lease-up risk but not construction risk. Once fully stabilized, the goal is to refinance or capitalize with new equity and have a newly built, long-term asset. Over the next five years, the BTR sector could comprise up to 25% of the CAPREIT portfolio.
How would you describe the current state of the capital markets for multifamily?
Catarinella: In one word: frustrating. There have been many great buying opportunities in 2024 that we eventually had to pass on due to the capital markets. While in years past equity groups were looking for reasons to say “yes” to a deal, this past year it seemed more and more often that groups were finding that one box that was not all the way checked as a reason to turn down an otherwise outstanding project.
Whether an institutional player, private equity, or a family office, there were plenty of capital constraints this year. Redemptions, liquidity, fundraising difficulty, or just adhering to stricter deal parameters, the reasons to pass were there. This does seem to finally be loosening a bit, but we are not quite there yet. The debt market has certainly improved since the spring, but with spreads widening alongside the rate reductions, the impact on deal returns has not been as significant as hoped.
Looking to the future, what’s your prediction for how the apartment sector will perform for the second half of 2024 as well as for the longer term?
Catarinella: While uncertainty still is high, 2024 should finish strong. Interest rate relief is on its way (though already priced in), and the election will come and go. The sun will rise the next day on a multifamily industry that still has strong fundamentals and is an optimal place to invest. CAPREIT has several acquisitions, dispositions, and refinancings all scheduled to close prior to year-end, so we will be busy. But there will be opportunities to get deals under control this year, where perhaps sellers can get a price closer to their spring expectations, but they also are under more pressure to sell.
Over the longer term, the multifamily sector should remain strong, bolstered by the emerging BTR asset class as a means to reach more renters where they are and want to be.
While there certainly will be industry headwinds, such as rent control, there are reasonable ways to address rental price increases that protect residents and encourage investment in housing—as we are still drastically undersupplied as a nation.
The demand for high-quality housing is there, and the industry is prepared to build and renovate market-rate and affordable housing to meet this need.
