Hamilton Zanze, a San Francisco-based real estate investment company, owns and operates nearly 125 apartment communities with almost 22,000 units across 27 markets, primarily in the West, Southwest, Southeast, East, and Mountain regions.

MFE recently caught up with CEO Kurt Houtkooper to hear his take on how the multifamily industry will fare in the year ahead, why investment sales are likely to pick up, and what Hamilton Zanze’s plans are for 2024.

As we sit here in the early part of 2024, what is your take on how the apartment industry is likely to perform this year in terms of operating fundamentals?

Overall, I think rent growth and occupancy rates will remain relatively soft this year as the industry works through the recent surge in new deliveries.

However, I believe operating fundamentals should begin to improve toward the end of next year. Developers now are having a hard time getting the financing they need to build apartment communities, and so the delivery of new units will likely begin to drop off. Once the current oversupply is absorbed, rents can be expected to increase starting in late 2025 and continue across 2026 and 2027. Another factor that will bolster occupancy in the years ahead is the fact that buying a home is likely to remain too expensive for many Americans, which will keep them in the renter pool.

Looking to the medium to long term, we at Hamilton Zanze are optimistic about the operational upside of the apartment sector.

What do you think the pace of investment sales will be over the next 12 months?

They should increase in 2024 after a very slow 2023.

Broadly speaking, large banks have more stable balance sheets, and that has them ready to selectively deploy more debt to relationship-based borrowers. Similarly, when it comes to equity, institutional investors should be willing to reenter the apartment marketplace in the second half of 2024 after spending 2023 on the sidelines, and potential buyers should be reassured by more certainty in interest rates.

What are Hamilton Zanze's goals and plans for 2024?

Like so many other multifamily investment firms, our transaction volume slowed in 2023. We were extremely selective in our pursuit of apartment communities, and we purchased only three properties. Two of the communities we acquired—located in Deer Valley in Arizona and Hendersonville, Tennessee—presented opportunities to add value and, just as important, are located in submarkets that are experiencing significant capital investment and economic development. We are confident the resulting job growth in these areas will drive the performance of our properties and increase our net operating income over time.

This year, with more debt and equity capital expected in the marketplace, we will likely have a more active transaction pace. But we will continue to be highly strategic and thoughtful in our acquisitions in order to serve our investors well.

We pursued apartment assets in metropolitan statistical areas centered around job growth and infrastructure improvements at a significant discount to replacement cost. These opportunities arose as owners were forced to sell due to redemption concerns and debt issues. We think these pride-of-ownership assets are positioned for long-term growth in desirable locations.

Specifically, we believe certain distressed and underperforming assets in San Francisco and Los Angeles could present promising acquisition opportunities. Our research has shown that people are moving back to the intown areas in these metros, in part because more people are returning to the office after the pandemic. Buying apartment properties at a discount that are in these intown areas and are positioned to benefit from current trends, such as suburban to urban migration, strikes us as a very sound strategy.

And we’ll have more to say about this later this year, but we’re excited that this spring will bring the launch of our new HZ Evergreen Fund, an investment vehicle designed to deliver greater diversification, stability, appreciation, and liquidity to investors. Our team has worked tirelessly to lay the groundwork for this fund, and it will be our flagship product.

Rising expenses are an issue across the apartment industry. How has Hamilton Zanze been impacted by this trend?

Like all owners and operators, we faced a substantial increase in our total expenses last year. We expect our expenses to rise again this year but likely at a more moderate pace as inflation is brought under control.

We have seen a surge in insurance costs, and we expect them to increase by another 20% to 25% this year. At HZ, we prioritize risk management, and, instead of scaling back on coverage to counter rising premiums as others might do, we pursue best-in-class coverage at a reasonable value by layering coverage from various insurers.

Where do you think the industry will see opportunities in the coming year?

Distressed assets could present acquisition opportunities for stable and well-capitalized owners. Over the years, many multifamily firms purchased assets using floating-rate debt, only to find themselves unable to service the debt when interest rates ballooned.

At Hamilton Zanze, a very small number of our loans—only six of 92—feature floating-rate debt, positioning us to go on offense this year if the right acquisition opportunities present themselves.

With a surge of multifamily units coming online, how will Hamilton Zanze properties differentiate themselves from the competition?

With all of the new units coming online, we are putting a heavy emphasis on resident retention. Our portfolio already had a 55% renewal rate, which compares favorably to the market, but we’re leaning in on retention even more.

We’re working to make our properties even more appealing places to live by improving our amenities and common areas, implementing green initiatives that appeal to residents’ desire for sustainable living, and seeking to reduce utility costs. We also believe these efforts will help us attract new residents as well as retain our current ones.

What industry issue is keeping you up at night?

There are unquestionably issues facing the industry, but collectively we can face them head on and with the same resolve that has gotten us through similar economic environments. Owners and operators will have to navigate the impacts of the rise in new construction, and we will all need to keep a keen eye on the economy, inflation, and interest rates to best position ourselves for the long term.

Overall, I and the Hamilton Zanze leadership team are bullish on the long-term prospects and overall health of the multifamily industry. I remain optimistic about the road ahead.

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