Q&A with Jeffrey B. Allen: Apartments Provide Best Risk-Adjusted Investment Returns of all RE Sectors
- May 21, 2009
Raintree Partners, a Laguna Niguel, Calif.-based real estate investment company, has completed its first multifamily acquisition. CEO Jeffrey B Allen (pictured) formed Raintree Partners, a private real estate investment company, to pursue multifamily development and redevelopment opportunities, in December 2007. Shortly after its formation, Raintree secured a $200 million equity commitment from a major institutional investment management company. Prior to founding Raintree Partners, Allen was founder of J.B. Allen Realty Inc., a private real estate development company formed in 1999 and focused on mixed-use and multifamily residential projects in Southern California. Allen talks to MHN Online News Editor Anuradha Kher about why the company wants to invest in multifamily, what it plans to do with the properties and when he thinks the sector will rebound.MHN: Why did Raintree decide to invest in the multifamily sector? Allen: Having spent the first 15 years of my career developing and investing in a variety of property types, including office buildings, industrial buildings, single-family homes and apartments, the decision to focus on multifamily was an easy one. Apartments provide the best risk-adjusted investment returns of all of the real estate sectors. MHN: What will Raintree do with the properties it acquires? Rehabilitate, sell etc.? Allen: Our basic strategy is to own the type of apartments that will be able to generate a sustainable and growing income stream over the long-term. We will consider core, core-plus and value-added properties as well as development projects. Our goal is to produce appropriate investment returns given the risk associated with each property. We will certainly do rehab and development deals provided we believe the investment yield is sufficient to take the higher risk associated with those types of deals. Our investment horizon is 7-10 years but we have the flexibility to sell assets sooner or keep them longer, as we deem prudent, given the market conditions at a particular time. MHN: Which cities and what kinds of areas does the firm want to invest in? Allen: We are focused on the major West Coast markets, particularly the corridor from LA to San Diego and the San Francisco Bay area. We are also looking selectively at other western U.S. cities, like Phoenix, that historically have produced a lot of jobs and, once the economy turns around, should produce strong employment growth in the future.MHN: Will Raintree predominantly invest in projects close to employment centers? Why? Allen: The primary drivers of investment performance in the apartment industry are employment growth and household formations. Consequently, we want to invest in markets where people want to live and where there is a strong base of job-generating businesses. There are also quality-of-life benefits that come with having housing options close to jobs. It cuts down on the stress and expense of commuting. Also, all other things being equal, we prefer markets where there are constraints on the ability to create a new supply of units since it’s tough to generate revenue growth in perennially over-supplied markets. MHN: Was it easy to get financing for the Trellis Square Apartment community? Allen: Fortunately for apartment investors, Fannie Mae and Freddie Mac are still actively providing mortgage loans on reasonable terms. The loan documentation process was rigorous but it was not tortuous. From all indications, it appears Fannie and Freddie will remain committed to the apartment industry. The availability of mortgage money from the GSEs has helped to underpin the viability of investing in apartments.MHN: Do you think the multifamily industry will rebound by the end of this year? Allen: I do not expect a rebound this year. We are assuming that rental revenues will be declining through 2010, although we think the rate of decline will gradually moderate over the next 18 months. Some markets will perform relatively better than others but, in general, we do not currently see a catalyst that will produce a rebound anytime soon. The good news is that eventually the economy will get back on track, new jobs will be produced and the echo boomers will be forming new households. Those factors, coupled with a supply pipeline that has dried up, should result in some pretty good growth in apartment rents three or four years from now.