Expert Explains Why Current Trends Support Ground-Up, Multifamily Properties In Certain Sun Belt Areas And How Advisors Should Approach Clients’ Real Estate Investments
As advisors know, the concept that investments vary significantly is fundamental to the math of portfolio theory. Markets do not move as a monolith, and each investment must be analyzed distinctly. The same truth prevails in real estate, where the old saw says, “All real estate is local.”
Each local real estate market, building and plot of land must be evaluated on its own terms, accounting for condition, local zoning laws, access to services, metro trends and more. No advisor can simply invest a client “in real estate” any more than they can “in stocks,” so we spoke to a real estate expert about current trends and markets.
Bernie Wasserman is President of RIA Participant Capital Advisors, which has, in coordination with its development company affiliate Royal Palm Companies, developed more than 50 projects valued at over $4.7 billion. Participant is currently invested in over 15 projects, manages three funds with approximately $240 million in assets and recently launched two new investment vehicles.
We asked Wasserman about the recent adjustment in real estate markets, why he favors ground-up multifamily developments in certain areas in the Sun Belt, and how advisors should determine the best real estate investments for their clients.
WSR: Describe the adjustment phase currently happening in real estate and how this makes for a tough market environment. Why is multifamily housing coming out as the winner of the adjustment phase?
Wasserman: After a period of record valuation and rental growth, real estate markets are cooling across the country. This type of mean reversion is expected after a boom but what is interesting is that in certain markets in Texas and Florida the positive trends experienced during the pandemic have been more enduring. In these markets, certain structural shifts and their impact on real estate needs is expected to last longer.
In Florida, the commercial office and housing sectors are continuing to acclimate to lasting work-from-home and accelerating migration trends. These trends continue to drive demand for housing and office space. Thus, while elsewhere in the Sun Belt markets have cooled, in places like Florida’s major metros, demand remains strong.
Higher mortgage rates are driving would-be homeowners to the rental market, causing a shift from residential to multifamily. As a result, multifamily remains particularly attractive in Florida’s supply-constrained markets.
WSR: What about the fundamentals of the real estate market point to ground-up investments in the Sun Belt? Are there regions or types of real estate that advisors should avoid?
Wasserman: The fundamentals that investors should be concerned about are location, supply and demand. You can’t out-build a bad location. The Sun Belt, which is a broad area of over 20 states, remains the top region in the country but the states benefiting the most from migration are Texas and Florida, fueling the need for ground-up multifamily development in these states.
Well-located and managed ground-up development offers the greatest potential value creation of all real estate strategies. In the high demand markets of the Sun Belt where migration continues to outstrip local supply, development remains attractive despite higher costs of construction and debt.
In the case of multifamily where rents have grown substantially in recent years, the current base level of rent can make construction viable. These metros remain among the most competitive in the country with some of the highest occupancy and lease renewal rates.
Looking forward, Florida also has one the best rent growth outlooks with a recent forecast calling for a CAGR of 4%-6% over the next five years.
WSR: What is the best way for advisors to incorporate real estate into a long-term investment strategy for their clients? Which clients does this strategy serve best?
Wasserman: Publicly traded securities like REITs are common entry points for many advisors and their clients. These generally provide broad exposure and income and can be more bond-like in their reaction to market volatility caused by rising rates.
For those looking to take a long-term position and able to tolerate illiquidity, private equity real estate vehicles can be a more attractive option. These can generate attractive long-term returns, provide important portfolio diversification and due to their reduced correlation to publicly traded securities markets, can also dampen portfolio volatility.
There are different private equity real estate strategies. The core strategy provides access to stabilized, income-producing real estate while the value-add and opportunistic strategies are more growth oriented. Regardless of strategy, aligning manager expertise, market and property type selection to your own medium-term view is important given that private equity real estate strategies typically deploy and harvest capital over a five to eight year period.
Michael Madden, Contributing Editor & Research Analyst at Wealth Solutions Report, can be reached at mmadden@wealthsolutionsreport.com.
