The multifamily market's current rhetoric is a swirling cycle of good, bad, and ugly. There still is a housing shortage, rents are declining, capital has dried up, and the Federal Reserve is still raising rates. As an investor, how do you navigate these circumstances? The team at Rockval spoke with Bobby Larsen, Principal of Vanamor Investments, to get his insight on the current market conditions. Larsen has over 16 years of multifamily experience, initially starting his career at PIMCO and eventually moving to MG Properties Group. As the Director of Acquisitions at MG Properties, Larsen helped grow their portfolio from $500 to $4.5 billion AUM during his seven-year tenure.
During his time on the institutional side, he realized that once a firm became large enough, they transition into asset allocators contrary to the middle market, pursuing hidden gems and actual value-add opportunities with higher returns. This led him to form Vanamor in 2017, focusing strictly on the middle market value-add multifamily space.
"Once you're in the institutional side, there's still good returns out there, but you're essentially buying from a long line of other sponsors that have owned that property and gone through their own value-add strategy."
Implementing the principles he learned on the institutional side has allowed him to maintain an efficient investment process yielding his firm an average 31% annual return. According to Larsen, his team underwrites thousands of properties a year, offers 10% of those, and goes to contract on less than 1%. Being active in their targeted markets and developing a deep understanding of their performance is essential to quality returns. Vanamor is also very hands-on with its property managers to minimize operational costs and increase efficiency. For example, prop-tech has helped leasing efficiency; implementing self-guided and virtual tours has eliminated the need for multiple leasing agents and provides a unique experience for prospects.
Vanamor identifies assets in secondary markets with robust population and employment drivers from primary markets like San Francisco, LA, and New York. Currently, their main focus is San Diego, Phoenix, Tampa, and Dallas. All of which have experienced positive migration and employment growth directly from the primary markets. Recently Vanamor expanded its team, bringing on two investment professionals focused on the Dallas and San Antonio markets. Although these markets experienced amplified growth through the pandemic, they have been established receptacles for businesses and people migrating from the primary markets for years.
The well-known "California Exodus" refers to the negative net migration from the Golden State to Arizona, Texas, or Oregon. Most of the residents leaving are seeking a lower cost of living, especially San Francisco residents. According to Larsen, San Diego is the first choice for many California residents seeking change. Even though San Diego is slightly more affordable than San Francisco, the cost of living is still 47% higher than the national average. As a result, this attracts high-wage earners; the city's average household income is $108,864. The city is recognized for being a global leader in Bio-tech and Life-Sciences. San Deigo's Life Sciences industry contributes over $30 billion annually to the local economy and employs over 61,000 people; industry employment has grown by 20 percent over the last five years.
The stable job growth and high demand for rentals have continued to support higher rents; rates have increased 4.9% YOY to an average rate of $2,658 as of Q4 2022. Occupancy levels are at 96%, and according to a report by DS News, over 50% of renters renewed their leases this year. On average, it takes 34 days to fill a vacant apartment, with 13 prospects applying for the space. Larsen also mentioned the lack of new supply coming to the market, high construction costs, and limited land availability in San Diego has limited development. As a result, only a handful of significant multifamily projects are planned or currently under construction.
From 2016 - 2020, around 64,000 Californians moved to Arizona annually, roughly 40,000 of whom moved to the Phoenix MSA. The migration was exasperated during the pandemic, with the MSA's population growth of over 1.5% in 2021 and 2022. Phoenix is 30% more affordable than Los Angeles and had a 3% increase in job growth last year. Greater Phoenix saw its annual gross domestic product (GDP) climb 7.7 percent since 2019, more than twice the national average for the same period. As a result of the population and economic boom, the MSA's rent growth was one of the most dramatic in the country. At the peak of the multifamily market, May 2021-2022, the YOY rent increase reached 36%. Since then, the market has reversed and has taken a significant step back, posting a 2.77% yearly increase for Q4 2022. Even though the Phoenix market is seen as the leader of rent deceleration, Larsen is still very bullish on the long-term economic fundamentals.
Another market that has seen positive net migration from a primary market is Tampa; last year, 65,000 New Yorkers moved to Florida. As a result, Tampa's population has grown by 3.84% since 2020, and according to the Bureau of Labor Statistics, employment growth is expected to be 3.1% through 2024. Between July 2021 - July 2022, Tampa gained 76,000 jobs, with the majority in transportation and utilities. Larsen is particularly interested in Tampa because of the supply constraints. The area's flood and wetland zones significantly hinder available land for future development. As of Q4 2022, the MSA recorded a vacancy rate of 5.3% and a 2.1% YOY rent growth.
Looking at the securitized cap rates graphs above, we notice that Phoenix had the highest increase in securitized cap rates in the previous two quarters. The median securitized cap rate rose 131 basis points for the Phoenix MSA, compared to 28 basis points in Tampa and 41 basis points in San Diego. This can be due to the significant deceleration of rent growth this market is undergoing. There has been a large amount of supply coming online, and the threat of long-term inflation has renters reconsidering their housing costs. On the other hand, Tampa's multifamily market has seen the least amount of price depreciation and maintains a strong investment demand. According to Yardi Matrix, "in the first three-quarters of the last year, $4.2 billion in rental assets changed hands, a significant uptick from the $3 billion transaction volume recorded over the same period in 2021." Although some of these markets have gotten too hot too fast, the population and economic boom of these metros is an indication of sustained long-term growth.
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