Why the U.S. Multifamily Market Appeals to International Companies
- Dec 20, 2011
By Jessica Fiur, News Editor
Ontario, Canada—Now is a good time for international real estate companies to jump into the U.S. multifamily market. Because of the housing crisis, multifamily is booming, making it attractive for foreign investors. However, the Jaymor Group, and Ontario-based real estate company has been involved in the U.S. real estate market in Florida, Texas and North Carolina for over 20 years, long before international companies started jumping on the bandwagon. MHN talks to Fabrizio Lucchese, CEO and president, Jaymor Group, about the benefits of the U.S. multifamily market and why these new international companies don’t scare him.
MHN: What drew your Canadian company to the U.S. market?
Lucchese: I find the U.S. market is a lot more dynamic than the Canadian market—there’s a lot more deals that actually trade hands were in the U.S. In Canada, groups just hang on to assets for a very long time; large-scale portfolios just don’t get shaken loose in Canada. There’s also tax consequences in Canada that make it more difficult to hold on to an asset for a long period of time to dispose of it, rather than in the U.S. There are some scenarios where you can transfer on a tax rebate, like a 1031 rollover, so you weren’t penalized to sell an asset, and therefore assets do sell in the U.S. And obviously right now our space is full of opportunities.
MHN: How has the housing crisis in the U.S. affected you?
Lucchese: We’ve been in business for 20-something years in the U.S., even though we’re located here in Canada. Where the tire hits the ground [for us] is the U.S., we’re very involved is having our own subsidiary asset management company on the ground, but also having been in business 20-something years, we were buying and financing things at the peak of those markets, so we have some of those legacy properties you have to deal with as well too. It’s great to be focused on the opportunity on the buy side, but we have a lot of housekeeping to do on our own assets.
Unfortunately some of those lenders that we were working with were also in difficult scenarios themselves, which made it a lot more difficult and challenging to work through with them. We have had to work through some property debts with restructuring the debt or a discounted payoff, and unfortunately in some cases we weren’t able to come to terms with the bank so we just handed back the keys to them. Amongst doing a lot of that activity, we’re still quite bullish on the opportunity side. In fact, a year ago we launched a fund called Jaymor American Opportunity Partnership to take advantage of those opportunities on the ground.
MHN: So do you think you can continue being bullish, or do you think it will get harder?
Lucchese: The multifamily space is quite heated right now. We find that there’s a lot of money in the marketplace. We’re not really seeing any new construction starts on the multifamily side, and it’s certainly a place where we’re starting to see a lot of stability in the market coming back. Even with our own portfolio globally, we’re looking at a reduction of concessions, we’re starting to see better renewals, we’re starting to see better collections, so our economic ability is slowly going up, and that will eventually make the case for new construction starts as well in those places. We are quite bullish that the multifamily side will continue to improve substantially.
MHN: Do you plan to expand in different states?
Lucchese: Right now we’re in Florida, Texas and North Carolina, and we’ll continue to look in those regions and even regions we can service from them, so we’ll continue to look in the Carolinas and Georgia. Texas is a big state with lots of opportunities there. Right now we’re mostly in Houston, but we like the Dallas market, and we’re looking at the Austin market for opportunities there as well. I think right now just because we’re really big on using our own management platform, we’re going to look specifically to those assets that we can work with.
MHN: You focus on buying distressed properties. How do you decide which properties to buy?
Lucchese: There’s distressed properties in the sense of physical issues for the asset. If we like the market and we understand the marketplace that asset happens to be in, and we have legs on the ground—so to speak—we can decide how aggressive we’ll get. But we have capabilities in-house to do major rehab to cosmetic turns, and, more importantly, with good management we’re able to get it where it needs to go. So really we look at our resources that we have at the time—people resources, funds resources—not everything we have is going to be heavy lifting, so to speak, so we want to balance that out a little bit. We’re a small organization in that respect. We want to be careful how many we take on. Right now we’re in Houston with an asset that we’re currently underwriting, for example, which is operating well—occupancy is pretty good on the asset—but it’s been starved for some capital and needs some capital re-injected to show tenants that we could justify a higher rent. We’re adding better service and better finishes. But the market is a great place to be in, it gives us critical size, it happens to be within a 20-minute drive from other assets that we own so we can pull resources from those assets. We have a strong regional person that could take on this property as well, and do these mild cosmetic improvements and see it through to turning it around.
MHN: Do you find you can do that in a lot of your properties—make minor changes and raise the rent? Do you find that a successful strategy?
Lucchese: Absolutely! That’s what we’re seeing now. We’re seeing properties that we felt hit the plateau of the market, and now we’re starting to go back. Once we hit our occupancy numbers, for example, in Daytona, which is a second-tier market, [we have] a small property we’ve had. We’ve been operating in the high-90s in occupancy and thought we hit the top of the market, and then we started to experiment with some improvements on the interiors of those units where we start going in with faux finishes and countertop treatments and changing some of the light fixtures, and we are definitely getting the return on doing that. We’ve surprised even ourselves that we’re able to push things. I guess it’s an indication that the market is kind of ready to start seeing some of those things.
MHN: Do you feel that a lot of other international companies jumped on the bandwagon and are now in the United States? How does this affect your business?
Lucchese: There’s a lot of money floating around, and it’s causing us a bit of a problem in the sense that there’s fresh money and fresh companies that have never been in the multifamily space in a certain geographic area that’ll be bidding up projects. We only chase things that are in our backyard, so to speak, so when a group with no experience in the area comes in and bids against us on an asset, they tend to overbid. We’ll end up losing because the price at the end of the day is a big factor, but they find themselves going back and asking the seller for a discount because of something that they missed. That’s frustrating for the seller and obviously frustrating for buyers like us, because now it kind of confuses the market. It confuses the seller because now the seller wants to achieve the price point that was put on paper, so it causes a lot of issues. So by taking the position that we’re not going to re-trade this deal once we get it under contract, we try to come to the table with more information than even what the owner may have to demonstrate that we know what it is we’re buying and there’s low probability of us walking for the deal and asking for a discount.
MHN: Do you think these companies are wising up, or will they still try to outbid you?
Lucchese: It will get worse. And as there’s more news about the recovery, there’ll be more people who were sitting on the sidelines wanting to jump on, which will encourage them to be more aggressive and make it a little more difficult for the people in the know.
MHN: But since you have all your information on the assets, people could fall back on you, so that’s probably an advantage.
Lucchese: Here’s hoping!