Creating Solutions in Secondary Markets

CRA Chairman and CEO David Snyder explains the strategy behind his Louisville expansion.

Continental Realty Advisors (CRA), a Denver-based owner, manager and institutional fund sponsor of multifamily properties nationwide, expects to acquire over $1 billion in assets over the next few years. Founded in 1981, CRA has focused solely on investment in the multifamily sector and recently completed a $97,000,000 acquisition in Louisville, KY. This portfolio of apartment communities—located in the St. Matthews and Oxmoor areas of Louisville—includes Brookside Apartment Homes, Meadows Apartment Homes, Prospect Park Apartment Homes, and Oxmoor Apartment Homes. MHN Editorial Director Diana Mosher met with David W. Snyder, chairman & CEO, during the NMHC Annual Meeting in Boca Raton. Snyder shared the thinking behind CRA’s Louisville expansion, his multifamily outlook and his take-aways from the NMHC Annual Meeting.

Tell us about your Louisville acquisition and your interest in  secondary markets.

In 2011, we finished up approximately $140 million of acquisitions in Louisville. Our total investment there is around $175 million at this point and comprises 2,150 apartment units. Our most recent activity in Louisville was the purchase of a portfolio from an institutional owner which we purchased during the last quarter in 2011. This portfolio of apartment communities is a quality addition to Continental’s CRA-B1 Investment Fund. We’re pleased to continue our investment in secondary markets such as the Louisville, KY area which offer great opportunity. With this portfolio acquisition and our recent purchase of Jamestown at St. Matthews, our total investment in Louisville now exceeds $170,000,000. Our focus is to find opportunity—where and when we can—nationwide. Since we can close quickly on large-scale multifamily portfolio deals on an all-cash or loan assumption basis, the Louisville portfolio fits nicely in our investment strategy.

What attracted you to Louisville?

Our main reasons for being in Louisville were the economic improvement of the medical community, the distribution jobs there (and the improvement in that sector) and also the expansion of the General Electric Appliance Park.

What other markets are you currently investing in or are thinking about entering in the future?

We are moving forward with activity in many markets, primary to tertiary.  Chicago, Denver, Seattle, Portland, Orlando, Chattanooga, Nashville, Dallas, San Antonio, Phoenix, Charlotte, Birmingham, just to name a few.

What’s your investment strategy?

We really have a two-prong strategy. One is to correctly identify the demand for multifamily housing; and, secondly, to capitalize on—and be able to invest in—different distressed opportunities that are available in the market today. All of our investments are not distressed, but they do exhibit a high amount of demand characteristics for multifamily, in that everything we buy is in very close proximity to major employment sources and major retail sources.

[Also,] everything we buy has significant transportation support and the supply and demand ratio within the surrounding submarkets is generally in balance, or tipped in our favor, so there are significant demand factors for everything we buy; and then some of the properties we have bought do also have an element of distress. We have a significant amount of capital available. We’re able to recapitalize different ownership groups. We can buy out large notes and large portfolios, so it puts us in a very unique position in this market. We not only acquire properties that have some challenges, we also have the patience to put significant capital into those properties and take the time that’s required to create the solutions.

What interesting things did you hear during the NMHC event in Boca Raton? Did anything surprise you?

I think the most interesting take away from this event is that there is a lot of emphasis being put on population density driving the demand for multifamily. While we do agree that population density does drive demand for multifamily, we really believe that employment density is a more accurate driver for the sector, so we’re more concerned with some of the risks associated with that. There are a lot of people who are very positive right now about multifamily due to some of the population demand we’ve seen and good occupancy increases in markets across the country. But [we think] we’re really not going to see significant rent increases and significant rental demand increases until the job situation gets under control in the various major markets around the country and we really have true job growth.

In our industry we make money by meeting peoples’ needs. We create a science out of meeting their housing needs, and the economic changes in the U.S. today are changing those housing needs. A lot of the operators who attended the NMHC meeting are putting an extreme amount of effort into being sensitive to the residents and sensitive to making their apartment “complexes” into apartment “communities” where a renter would choose to live. I think it’s that sensitivity that will enable many of the [NMHC] members, who are great operators, to still have significant gains in their operations and show significant improvement to the bottom line.

What’s your multifamily outlook?

The forecast we have for the next 12 months is really one of surprises, and I think we’re going to see surprises in the performance of multifamily in various parts of the country. We’re very dependent on the international financial situation, and we can have some surprises from Europe and Asia and other parts of the world that are going to impact our sector’s activity—not only of our investors, but also the jobs situation in the U.S.

It probably sounds a little vague to say that our forecast is one of surprises, but what we mean by that is that we really feel we have to be very nimble and be able to react quickly. We’re going to see some contraction still in certain job sectors. We expect to see some significant expansion in other job sectors. We’re following medical very closely and expanding our holdings in areas that have high medical employment, but we will see contraction also, and we will have to react to that in 2012. It will be a year of surprise—and a year of change.

What is the single most daunting challenge facing multifamily investors today?

Real economic growth. Many investors are active in markets that have not shown adequate economic and job growth. These investors act on blind assumption that jobs will come. If jobs do not come, the local and state municipalities will have no choice but to raise the tax burden on the population and property owners. Reckless tax policy could have a devastating effect on property values. There is no substitute for job growth and we need to demand accountability from all levels of the political stack. It is hard for jobs to come back when company leaders have no faith in the politics of the country. We are in need of strong changes in Washington. Voter decisions made in 2012 will determine how rocky the recovery will be. We are prepared to react accordingly.

What’s the good news? Is there always a silver lining to be found by the opportunistic investor?

The opportunistic investor flourishes during times of change. Economic calamity and uncertainty generate economic change and economic change creates dislocations in asset value. The resulting dislocations are potential investment opportunities. We are seeing metropolitan areas of all sizes achieving different states of economic recovery. We are finding opportunity throughout the metropolitan stack. We have some exciting things happening in tertiary and secondary markets, along with good opportunities in primary markets (although many properties are being priced above investor reality in primary markets).

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