In the Heat of Austin’s Investment Landscape
- Oct 29, 2019
Austin, Texas, has seen exceptional performance over the last few years, with rent growth extending well beyond expectations despite robust deliveries. The metro’s diverse economy, which relies for the most part on advanced industries with low volatility, has fueled the upswing. Investors took notice and started scrutinizing Austin’s offerings.
Multi-Housing News discussed with Ari Rastegar, the CEO of Austin-based investment firm Rastegar Property Co., about investing in Texas’ top performing multifamily market, the potential downturn and the Opportunity Zones initiative.
Your company has acquired, earlier this year, two value-add communities in Austin. What criteria guided your choice?
Rastegar: We look for excellent locations, areas with strong organic rent growth and places people really want to be in. We have properties in Austin’s highest rent corridors. Both our recent properties in Austin are in high-demand areas, so we renovated them and were able to bring rental rates up significantly.
What role does sustainability play in your repositioning strategy? Tell us more about this.
Rastegar: We look to enhance these properties with smart technology and if there are ways to use sustainability features, we do. For example, we added NEST systems so people can control the air conditioning and unlock doors with an app, along with digital doorbells with cameras that bring new-age technology to older, vintage products. To be preemptive from a property management standpoint, we also added sensors to certain areas of the properties, which monitor possible leaks or issues with the building.
Rastegar Property has also acquired land lots this year. What are your plans with those sites?
Rastegar: In Austin, we acquired two iconic lots. One is a 1.8-acre site on South First Street, just outside of downtown. Here we plan to develop mixed-use projects with residential and commercial components. We still have RFPs out to local architecture firms and soon, we will announce the outcome. The other is a 1.2-acre lot on South Congress, south of Ben White, which we believe will be the highest metric growth corridor in Austin over the next five years.
In terms of housing affordability, Austin is progressively being compared with Palo Alto. How do you see this comparison?
Rastegar: I don’t think it’s a fair statement. California housing prices have become an epidemic with a massive affordability shortage. With Austin, even though prices have surged, compared to other primary markets—like New York and San Francisco—we are still well below, with more affordable options.
What are the biggest challenges in the multifamily investment sector today? How do you manage them?
Rastegar: Multifamily is a great hedge against inflation and a great way to protect capital. Many other smart folks see things this way, so the investment landscape became pretty competitive. This late in the cycle, acquisition yields start to compress more than usual, so investors need to be knowledgeable about investment strategies and understand risk and growth potential.
Therefore, at this point in the cycle, we stayed away from core-plus and core assets and focused on value-add opportunities. Moreover, even if pricing is driven up a little by competition, if you have a strong value-add component you can create value by escalating rents, which then leads to a more IRR-driven approach.
Although we are in the longest bull market in history, economic indicators point to a potential downturn. How long do you think the multifamily market will be able to maintain its stability?
Rastegar: I think that is right, we are in the longest bull market in history, but the problems we see are related to the trade war with China and the issues with the E.U., besides other global concerns. But when you look at inflation, it’s still relatively low and unemployment is relatively low, as well. So, there’s a lot of mixed signals and it’s hard to determine where we are exactly.
I will tell you one thing: History is no longer indicative of the future, as all these new variables that come into play with AI and computer-generated scenarios make it difficult to predict what the future holds. We must be smart and look forward instead of looking backward. With respect to multifamily, we see it as a strong, risk-adjusted alternative to public markets and stable for a variety of reasons, but mainly because Millennials are not buying houses as much.
How about the multifamily market in Austin?
Rastegar: It is on fire. So many people are moving in. The last census I read said around 180 people are moving to Austin in a day. In addition, many jobs and big corporations are now here, and even more are coming.
What is your opinion on the Opportunity Zones initiative?
Rastegar: I have mixed feelings. We bought an Opportunity Zone high-rise lot in Downtown Phoenix earlier this year, for which we are planning a mixed-use development. Downtown Phoenix has some of the highest organic rent growth of the multifamily sector in the U.S., and the office sector is growing tremendously. All around, it’s a great city and we are fortunate to be a part of it.
Opportunity Zones were meant to invigorate areas that didn’t have an economic stimulus and I don’t think the program did a good job at achieving that, but developers have been able to capitalize on opportunity zones in areas that they would already want to be investing in from a metric level. We don’t believe in investing in properties for tax benefits, but if we do, that is just gravy on top.
READ ALSO: Look Before You Leap Into Opportunity Zones
The Fed cut interest rates twice in seven weeks. What signals does this measure send to real estate investors?
Rastegar: As rates begin to drop, it’s time to be buying. It puts investors in a position to capitalize on cheap debt, which enables us to acquire more assets and maintain this booming real estate market. As rates stay low, we’re able to go after more properties, which furthers the bull market and keeps us in a growth economy, and as the economy continues to grow, opportunities continue to flourish.