Contrasting Markets: Gateway Cities vs. Secondary Locations
Dreamscape’s Eric Birnbaum on how demographic shifts continue to impact major cities, as well as secondary and tertiary markets in the U.S.
Eric Birnbaum, Founder & CEO, Dreamscape. Image courtesy of Dreamscape
Over the past couple of years, the shifting demographic trends and lifestyle changes brought both challenges and opportunities in the multifamily sector. While secondary and tertiary markets experienced a boom, gateway cities entered a slump in terms of rent growth.
Looking forward, Dreamscape Founder & CEO Eric Birnbaum bets on secondary and tertiary markets, but he also believes that major cities such as New York and Los Angeles are bound to regain their popularity. His company targets rental properties across select markets throughout the country. To understand how industry players are navigating this duality of the housing market, Multi-Housing News asked Birnbaum to share his views.
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How has the housing market evolved over the past year?
Birnbaum: While the housing market has definitely evolved over the past year, the evolution has varied across different geographies. For example, when the pandemic first hit, places like New York City, Los Angeles and San Francisco saw a definite decline in occupancy. As a result, rents decreased fairly dramatically. Once the delta variant started to abate, we saw a bit of migration back to the gateway markets and rents picked back up.
X Miami, a 589-unit property in Downtown Miami
Other cities that investors knew were burgeoning before the pandemic, such as Nashville, Tenn.; Austin, Texas; Miami, along with other cities across the Sun Belt, outperformed and continue to do so. As an example, we purchased a multifamily asset in Miami late last year, X Miami, it’s been staggering to see the rent growth that is occurring.
At the end of the day, people need a place to live, so it is a matter of identifying where individuals are settling. The question is: will those that relocated ultimately migrate back? I think some will and some won’t—but it’s just something that will take a bit of time to see.
Looking at this evolution with a long-term perspective, I believe that diverse, eclectic locations like New York City and Los Angeles will ultimately always persevere and snap back. It might just take more time than expected or anticipated.
Tell us about the most sought-after multifamily markets in the U.S. What makes these markets so appealing?
Birnbaum: I think you can split these markets into two major categories, the first involving major cities. Places like New York City and Los Angeles are epicenters of culture and diversity. They are constantly evolving and reinventing and drawing individuals from all over the place.
The second category is a bit less obvious and involves tertiary markets like Nashville, Tenn.; Austin, Texas; Tampa and Miami-Fort Lauderdale, Fla.; San Diego and Denver. While these markets have often been overlooked, many are maturing into 24-hour “gateway cities” that are starting to garner significant attention and become more institutionally acceptable.
What makes the housing sector an attractive investment option right now? How does it compare to other asset types?
Birnbaum: It’s no secret that over the past five to 10 years the multifamily market has evolved to be one of the best risk-adjusted verticals in real estate. However, that cat has been out of the bag and cap rates have compressed to such a point that it’s become bond-like returns—which has made it tougher to make money.
All of that said, markets that are underappreciated hopefully still have some value and meat on their bones, and companies like ours can find opportunities to make money. At the end of the day, the attractiveness of the housing market as an investment option depends on what type of return one is looking to make.
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Hospitality investments, for example, are riskier. Hotels are signing daily leases, so they have to be priced to a different return profile, yet can have a great return. Multifamily presents a far lower risk, as leases are annual, so the return profile appropriately reflects that. This is one of the core reasons that Dreamscape focuses on both the hospitality and multifamily sectors. We look for the arb in each vertical. Every year, the markets get more efficient, and the arb becomes harder to find, but thankfully we have been able to find our spots.
What are some of your strategies when it comes to investing in residential properties?
Image by Tobias Wilden on Unsplash
Birnbaum: Typically, we start with geography and look to identify where there has been real rent growth and where there is opportunity for more. It all comes down to basic supply and demand dynamics. Within those geographies, we then work to identify submarkets or neighborhoods where there will be asymmetric outperformance. At Dreamscape, we try to find the nooks and crannies of opportunities. It’s not easy.
What markets are you targeting in 2022 and why?
Birnbaum: We’re a national company but focused on a handful of growth markets like Miami, Nashville, Austin and Denver. We see the greatest potential for growth in these types of tertiary markets.
Are there any particular trends and challenges that will define the housing market in 2022?
Birnbaum: In my opinion, the biggest challenges currently defining the housing market in New York City and Los Angeles is the quality of life. Hopefully in New York, with a change in leadership, we will see the quality of life rebound and, as a result, this will trickle down to the housing market, making the city a place where people want to live.
A trend that we expect to take hold this year involves home sharing, which is something that we’ll be rolling out in Miami and potentially in Nashville. This concept works best where there is a large discrepancy between hotel average daily rates and housing rents. Home sharing then becomes a way to bridge this gap.
