Investing Across Sun Belt Markets: Q&A
- May 15, 2020
With a portfolio of more than 5,000 units throughout the U.S., Houston-based Sun Holdings Group is particularly focused on investing in Texas and Georgia. According to Yardi Matrix data, more than half of the company’s holdings are across these states.
Sun Holdings’ Managing Partner Ido Blatt discusses what makes these markets attractive and what investors should do to better manage the current economic disruption. The company recently acquired a 330-unit community in San Antonio amid strained market conditions. Blatt touches on the risks of investing in multifamily assets and why he considers San Antonio more resilient than other metros.
What led you to invest in the Sun Belt and do you plan on expanding to other markets?
Blatt: We gravitate towards the Sun Belt markets due to affordability and job growth, strong economics and warmer weather. Texas has shown a tremendous amount of population growth and job growth in the past few years, which translates into strong apartment demand. However, the main challenge in Texas is the relatively low barriers to entry, which results in elevated supply levels. Additionally, since real estate taxes are higher than other states, coupled with the metro being a non-disclosure state—this combination adds more uncertainty and risk for investors. We continue to look at other states across the Sun Belt markets, specifically Florida and the Carolinas, which often demonstrate strong apartment fundamentals.
What are the risks of investing in these trying times?
Blatt: There is a lot of uncertainty with regards to the duration of this crisis and its severity, which in turn makes financial underwriting much more difficult than in normal times. Having said that, as long-term owners, we remain bullish on multifamily as an asset class and even more so on San Antonio. San Antonio has already proven to be more resilient than others due to its steady workforce.
How should housing investors respond to the COVID-19 crisis?
Blatt: Investors should be cautious about transacting at yesterday’s prices and need to adjust downward their rents/occupancies and net operating income assumptions in their underwriting. However, there are still attractive deals out there, if executed at the right basis and allowing for longer-term investment horizons.
What special measures is SYNC Residential—SHG’s management arm—taking to ensure the protection and safety of its staff and residents during the crisis?
Blatt: We have daily staff meetings to debrief newly communicated policies and to ensure our staff is prepared to address resident concerns. We strongly enforce a social distancing protocol and limit amenity access to put our residents’ health first.
What steps do you intend to take for a smooth recovery?
Blatt: We will continue to work with residents on customized payment plans or rent deferments to soften any financial hardship they may be experiencing. Strengthening our relationship with our tenants will assist in renewals and limit our exposure. As investors, we hold off on distributions to our investors and make sure we have ample cash reserves as we need to be disciplined during this crisis.
How would you describe the state of the multifamily sector and how do you see it going forward?
Blatt: As long as the uncertainty sustains and we don’t have a clear path to recover from the pandemic and associated economic crisis, there is a wide range of opinions on values and disconnect between buyers and sellers. Long-term implications of the crisis are higher vacancy rates, stagnant-to-reducing rent levels and increasing delinquency.
Once certainty returns, transaction volume will increase, and the relatively stable income streams of the apartment sector and still relatively attractive yields will lure the surplus of liquidity and create a healthy, competitive landscape.