One of the nation’s largest privately owned multifamily firms, Fogelman operates a $4.5 billion real estate portfolio that includes over 110 apartment communities totaling more than 30,000 residences across 13 states in the Southeast, Southwest, and Midwest. MFE caught up with Mike Aiken, senior vice president of investments at Fogelman, to hear his highlights from 2023 and his forecast for the year ahead.
What do you expect to be different than 2023 on the investment front?
Class A transactions were the most liquid asset class in 2023 due to a “flight to quality” approach from investors and the wider “bid-ask spread” in the value-add space.
While we expect that trend to mostly continue into 2024, a greater share of the Class A to B product will likely transact as much of the bridge debt used in 2021 (a record year for transactions) matures and owners are faced with a decision of whether to exit at less than ideal returns or inject additional capital into some investments to refinance into new loans. Lastly, expect significant distress in the Class C space—net operating income at many of these properties has eroded to a point where the assets are worth less than the debt, and there will be limited clean/easy ways to solve that problem for lenders and borrowers.
What were the highlights of Fogelman’s transaction activity in 2023?
We successfully exited three investments totaling $200 million, with leveraged deal-level internal rates of return ranging between 21% and 39%. While we did not view [last] year as an opportune time to be a very active seller, we were able to selectively post some very favorable outcomes for our partners and investors.
What will Fogelman be looking for in deals in 2024?
Given the various uncertainties facing multifamily in the near term, a margin of safety in going-in cash flow will continue to be one of our top priorities. The negative leverage dynamic in the market in 2023 prevented us from being more active on the buy-side this year, as going-in cash-on-cash yields remained too tight for our appetite. The potential combination of more deal volume and declining interest rates (if you believe the yield curve) should increase the number of opportunities.
What are the hot and not markets on your list?
It’s all about new supply deliveries for the next 12 to 18 months that will drive the “hot versus not” markets in the near term. Some of the Midwest markets, including Kansas City, Missouri, should remain outperformers due to a stronger balance of supply versus demand, while the “growth” markets like Charlotte, North Carolina, and Austin, Texas, will likely be soft. However, submarkets within each metropolitan statistical area will behave differently, and the margin of difference will likely increase in 2024.
What multifamily issues are keeping you up at night?
A lot. There are more headwinds facing multifamily fundamentals in 2024 than at any time in recent history. In challenging environments, strong operators and investment managers shine and outperform the peer set by wider margins than in “upcycles.” The most daunting issues facing multifamily are record supply deliveries heading into a slowing economy, bad debt/fraudulent applications, and property insurance expenses.
What makes you hopeful for the coming year?
Buyer reputation matters again, which will benefit the groups with longer track records of performing and available capital. With execution risk in transactions being relatively high currently, groups like Fogelman should be positioned to be awarded opportunities they would not be otherwise in the strongest part of the economic cycle.
Latest read or binge watch?
Book: “Predator’s Ball,” an old classic about the Michael Milken junk bond days. Show: “Righteous Gemstones”—anything lighthearted is good for mental health these days.
New year’s resolution?
Have an uneventful year outside of business.