MHN Interview: Steadfast Income REIT’s President on How Echo Boomers are Affecting the Apartment Market
Irvine, Calif.—Ella Shaw Neyland was recently promoted to president of Steadfast Income REIT Inc. MHN talked to Neyland about her new position and her thoughts on why echo boomers are the best thing to happen to the apartment market.
MHN: Congratulations on your new position!
Neyland: Thank you very much. I’m very pleased to be at Steadfast.
MHN: What are your plans as president? How will you distinguish yourself from your predecessors?
Neyland: The interesting thing about Steadfast is they really only acquired their first property in August 2010, so I think of it as a two-year-old company. In many respects I am the first president of Steadfast. So that’s good news and bad news that I don’t have a predecessor.
I know the reason that CEO Rod Emery brought me on—I’ve been on the board of Steadfast Income REIT for about a year prior to becoming president, and I served as an independent director and auditor. I really got to know the company during that period and got to know the executive team. I think the unique qualification I bring to Steadfast is basically 33 years of employment history in the real estate and finance world. This is Steadfast Companies’ first public company, and my background includes public company experience and a lot of apartment experience. I always view myself as having two hats—I have the public company hat, which to me is important because it’s the way you communicate to your investors, it’s the way you raise capital and it’s a structural regulatory environment that you operate in. My second hat is my real estate hat, which is really what drives the value of the company. I’ve been in apartments either as a lender or working for companies that own apartments, so I understand most of the dynamics that have affected the multifamily cycle over the last 33 years. I’ve seen tremendous volatility in interest rates, and I’ve seen the whole regulatory environment change. There’s been a lot of change, but one of the things that has stayed constant is that apartments are a core part of the real estate world—they’re less volatile, and most of America has always lived in apartments. I love apartments.
MHN: Drawing on your previous experience, and looking forward, what do you think are some of the trends that are going to come along regarding apartment REITs?
Neyland: As far as what’s happening in the REIT world, the traded REITs have had a tremendous run recently. They’ve managed to raise a lot of capital, either through secondary offerings or preferred debt. Like most things I’ve seen over the last 33 years, real estate comes in cycles. We maybe have seen a very strong market for a while, and I think it’s going to pull back a little bit.
In the non-traded REIT world that I’m in now, it’s a much smaller market. I think Steadfast has managed in a very short period of time to distinguish itself in the non-traded space because we have been executing our business plan in a pretty big way. This year alone we’ve acquired over a quarter of a billion dollars worth of properties, and we have a very robust acquisition pipeline. What we’re seeing is that because we’re buying in primary markets in secondary locations, and we’re buying them using very attractive spreads between going-in cap rates and the cost of debt, we have a lot of opportunities to look at properties. The trend for us is really strong because, looking at supply and demand, there’s a lot of supply of products out there. We probably look at about 200 opportunities a month—and those are all across the board, they’re luxury, affordable, etc.—and we’re acquiring about three or four apartment communities a month, so we’re acquiring about 1.5 to 2 percent of what we look at. I like a business where there is a big supply of product, because if a market has a lot of supply I can buy it at the right price and finance it at the right spread. There are more middle-market apartments for sale than high-end, luxury apartments.
I also want a big consumer demand. Look at the iPhones—more people want your product than you have in supply. On the demand side, the Steadfast business plan means that our apartment rents, which are in the low $900s a month, are below the average apartment rent in America. That also means my residents can make between $30,000 a year and $75,000 a year—which is most of America—and they can afford a Steadfast apartment. My demand pool of people is a lot larger than luxury apartments where people can afford an apartment that’s $2,500 a month. That’s just a result of our sluggish economy. But there is job growth in transportation, manufacturing, healthcare and the services industry, and that resident group finds the Steadfast apartment close to where they work. From a location standpoint we deliver value to them. I see our segment as having a lot of potential for growth in the next few years.
MHN: Do you think that’s trending in the industry now—transportation-oriented developments?
Neyland: I think that clearly in middle-market America, yes. And part of that is based on what I call “unfortunate circumstances”—when somebody leaves a home, which we’re seeing today because people are being foreclosed out of their houses. When you think about people losing their home, it’s really sad, and when you think of it happening on a nationwide-level, it’s huge. Every 1 percent drop in home ownership puts a million people into the renter pool. So you’re seeing that trend happen.
Secondly, I think there are other things that are driving people’s choices. And it is a choice today—not necessarily because you’ve been foreclosed out of your house—I think people are choosing apartment living. When I was with luxury apartment builders before, we used to say if you were paying $2,500 a month for rent you were doing it by choice, because who else would pay that kind of money? But I think you’re seeing today just a whole psychological shift, especially among the echo boomers. The echo boomers are seeing their parents lose their homes and lose their equity, and they’re suddenly saying, “Maybe owning a home isn’t what it’s supposed to be.” Apartment homes offer flexibility today. There was a recent study by economists that saw a correlation between cities that have high home ownership and high unemployment, and that goes to what I believe—that home ownership is dragging down job growth. We’ve got to get job growth to stimulate the economy. I think that as people choose apartment living, it will give them the ability to move for jobs.
The other thing is, regarding my generation versus my children’s generation, I remember you would get out of school and you would get money and buy a house. And then you’re house poor. Today, echo boomers are looking for quality of life, and they’re trying to manage their money. They know they have their rent payment, but that’s all they have to worry about. If the toilet breaks, if the roof needs fixing, if the landscaping needs work, they call us, and that responsibility is on us. What that does for them is if they get a raise or a bonus, they can go out and buy a car or take a vacation. Again, this is the type of thing that will help our economy.
MHN: I know a lot of this is cyclical. As echo boomers are getting apartments and saving up money, do you think people will start buying homes again and this will come back around?
Neyland: There will be some normalization. Homeownership got to be 69 percent, and now I think it’s about 64 or 65 percent. I think it’s going to get in the low 60s, and I think it’s going to normalize. Again, depending on where you are in life and how comfortable you are—and I think even people who are comfortable are nervous—this uncertainty will continue to drive people to apartments. My hope is—as an American citizen—that as we sluggishly get out of this economy, there’s more stabilization, more job creation and people feel a little better about where they are. Owning a home is a great thing to do. But today’s echo boomers are clearly driving demand for apartments, and even pent-up demand, because as they’re getting out of college they don’t necessarily go to an apartment right away. The pent-up demand is going to sustain the demand for apartment homes for a very long time.