
Meet the challenge most multifamily owners, developers, builders, and contractors pray for: how to make the most of a hot market. Today, you don’t have to look far to find a hot multifamily market. In fact, you’re probably operating in one or more now.
But what exactly is a hot market? What are some particularly attractive hot multifamily markets? How should investors and developers approach hot-market opportunities?
One of the nation’s leading multifamily research directors recently sat down to share his insights and advice. Daniel Hogan, director of research for RED Capital Group, offers a number of cogent observations based on leading data analytic services, Environmental Systems Research Institute (ESRI)-based demographic data, and the firm’s proprietary econometric analysis using its $18 billion national servicing portfolio.
How do you define a hot market?
A hot market attracts large inflows of capital, population, talent, and economic activity. They’re characterized by rapid space supply-and-demand growth, rising property values, and strong investment sales volume.
Which are the leading hot markets?
The question is, which market isn’t hot?
All primary markets are experiencing strong population and economic growth and are attracting substantial capital inflows. Seattle and the Bay Area continue to be the most dynamic, but Boston, Southeast Florida, and Southern California are close behind.
Denver; Dallas-Fort Worth; Orlando, Fla.; Phoenix; Portland, Ore.; Sacramento, Calif.; and Tampa, Fla., remain very attractive development and acquisition markets. Quality Class B and even B+ assets in these markets can be acquired at 5% cap rates with IRRs in the mid-6% to 7% area. Interesting smaller markets include Reno, Nev.; Tacoma, Wash.; and Salt Lake City. For investors with a lower-risk appetite, we like low-volatility Baltimore; Columbus, Ohio; Philadelphia; and Pittsburgh.
What emerging hot markets do you like?
Rising stars include Madison, Wis.; Huntsville, Ala.; Knoxville, Tenn.; Eugene, Ore.; and Boise, Idaho. The Intermountain and Pacific Northwest Regions lead this category. However, examples are found in almost every state.
How should investors understand hot markets?
Be careful when underwriting hot-market transactions. Often, the performance data available for smaller markets are thin and less reliable. Selecting a good rent-comp group can be challenging, as there are fewer recent construction properties in the market and survey data may be suspect. Appropriate cap rates can be difficult to pin down in thinner markets as well.
Avoid being overly optimistic on pro forma rents in a frothy environment. Small and fast-growing markets are volatile by definition. Rent and NOI levels may decline as quickly as they rose. Craft your reserves and lease-up projections accordingly.
How do you advise clients in a hot market?
Keep a clear perspective. Engage a third-party service provider. The quality of your third-party vendors and their local market knowledge are critical. Don’t be penny wise and pound foolish.
What should an investor look for in a financing partner in a hot-market opportunity?
Top lenders, like RED, are skilled at finding ample opportunities in markets like these for acquisition and construction finance, supplemental and mezzanine debt, and affordable housing lending. There are many candidates to consider. However, we believe we have a better understanding of what’s going on in the Midwest, Southwest, Mid-Atlantic, and other areas where we have deep experience.