While Trophy and Core Plus and Luxury have been the buzzwords of late in the multifamily world, investors are now embracing an alternative school of thought: bigger is not always better. In fact, according to JLL Managing Director Christine Espenshade, smaller deals can lead to bigger and quicker returns.
Enter the sweet spot: middle market deals. These are deals typically characterized by their size (anywhere from $15-$30 million), quality (often value-add and Class B or even C) and location (often in secondary or suburban markets).
“Multifamily deals in the $15-30 million range have become increasingly attractive for a variety of reasons including their liquidity, changing demographic trends and the availability of financing,” said Espenshade.
Liquidity is king
One reason investors are targeting middle market assets is that they offer exceptional liquidity when compared to larger deals. While deals this size used to be the territory of private investors, the investment profile has started to shift.
“Even institutions that typically work on a larger scale have been more active in these types of deals,” said Espenshade. “Their clients are looking for liquidity, and the size of these deals means there is a much larger buyer pool.”
That was the case with Owings Park, a 174-unit value-add apartment complex in Owings Park, Maryland, sold by TIAA. One of the upsides of the deal, says Espenshade, was that renovations on a building of that size are much faster and simpler to implement. That means the turnaround is quicker and returns more immediate.
Follow the jobs
As with all real estate, demographic trends play a huge role in determining where an investor will place capital. But, as Senior Vice President and co-head of the firm’s Carolinas multifamily practice Andrea Howard explains, this is especially true in middle market multifamily investments.
“The Southeast, in particular, is seeing a huge uptick in middle market deals,” she says. “As states take a pro-business approach they attract more companies, which in turn spurs the region’s population growth and puts pressure on the supply pipeline. As housing prices rise, there is greater demand for more affordable product, which is often what these properties offer.”
Take the Raleigh-Durham area, for example. According to JLL research, the population has grown 46 percent since 2000 as professionals have flocked to the area’s expanding medical and technology industries. Howard’s team is a perfect indicator—selling more than $450 million in multifamily product in 2016, more than double than their sales in 2015. More than $75 million of their deal volume in the past two years came from deals that totaled less than $30 million.
Because these assets are often so liquid, investors are finding leeway to introduce capital into secondary markets that might not be accessible in higher price ranges.
“A lot of these deals are very market and even submarket specific,” said Espenshade. “If you are going to enter a secondary or tertiary market for the first time, it’s not going to be in the $100 million range.”
Taking it to the bank
While underwriting standards for construction lending have become more stringent, capital remains readily available for value-add multifamily projects, according to JLL Executive Vice President Mark Brandenburg.
“Freddie Mac and Fannie Mae are constantly involved in these kinds of deals as many of them fall into the affordable housing category and it is in the agencies’ charter that they must be provide that financing,” says Brandenburg. “We are also seeing local banks highly active in this space simply because of the size; they can afford to carry a $15-$30 million loan.”
Even life companies are dipping their toes into the middle market waters. For instance, Prudential provided an $18.3 million loan for the acquisition and rehabilitation of Lakes of Williamsberg, a value-add project in Grapevine, Texas.
“In many urban cores around the country, there simply isn’t capital or space available for new construction of high-end multifamily,” notes Jeff Price, JLL Managing Director. “Here in Dallas-Fort Worth, we have space but a slew of new product downtown and a surge in jobs in the suburbs have made outdated product valuable again thanks to its value-add potential.”