Surprising Investment Trends in 2018

Hamilton Zanze CEO Mark Hamilton discusses what multifamily investors need to know in the coming year.

Before co-founding Hamilton Zanze in 2001, Mark Hamilton was making a name for himself in the Bay Area, sponsoring the acquisition, ownership, and development of approximately 40 properties.

As CEO of the 17-year-old company, Hamilton shared that as operators, the company looks to offer a strong value proposition for renters who have good credentials and good choices they can make for themselves. Moreover, as investors, it looks to line up its various capital strategies with appropriate long-term investment opportunities and finance them with 10-year fixed rate loans.

Hamilton’s focus has mostly been on finding value-add properties in changing urban neighborhoods and re-working them into higher-quality buildings with higher incomes, improved resident profiles, and higher resale values.

He recently took time to talk to MHN about what he’s seeing in early 2018.

With the first few months of 2018 behind us, what are the trends you’ve seen in the multifamily market?

Investor demand for apartments is as strong as we have encountered, and sellers are shooting for 2017 cap rates despite the uptick in borrowing costs. Competition is fierce. Arguably, the resolution of the tax bill and some of its specific provisions may have brought an influx of buyers and sellers from the sidelines. On the operating front, while some markets have seen excessive new construction, renter demand generally remains strong and household formation numbers look good over at least an intermediate term. There is a significant shortage of workforce housing.

Characterize what you’re seeing in the sectors you follow. What’s on your radar and why?

We are active investors in more than 20 U.S. metro markets and are making a strong push into the Eastern time zone. We’ve purchased six communities in Georgia and Virginia in the last 15 months and have three more acquisitions in the pipeline in Connecticut and Maryland. We are pursuing value-add and core-plus opportunities, and the competition is extreme in the value-add arena. We are looking for 200- to 500-unit communities and portfolios of 1985 vintage or newer. We need to make reasonable distributable returns with fixed-rate financing, and a number of institutional sellers know that we bring a keen eye, a strong appetite, and a very sharp pencil to every opportunity we see.

What do you feel is the most important thing that investors need to be aware of in today’s multifamily environment?

Value-add returns are compressed, and it’s a good time to be a seller. Toward the end of the last cycle, we saw an inversion of cap rates against borrowing costs, with caps below 5 percent in many cases and debt constants well above 6 percent. The market is testing that again, although perhaps not to the same extent. In the core-plus sector, we are seeing some opportunity for cash-on-cash yields in the range of 5-6 percent per year. Generally, it’s a good time to be a seller, but every seller still needs to pick a proven buyer, and we demonstrate our bona fides every time we go into contract.

What’s your biggest piece of advice with today’s current market?

If you’re a seller, pick a proven buyer or one whom you know. If you’re a buyer, have a rational game plan. Look for property improvement opportunities that tenants favor. Lock in fixed-rate financing.

Anything surprising happening so far in 2018?

There’s a little bit of gridlock right now. Sellers are striving for—and in some cases getting—very strong pricing. Demand is well north of opportunity. At the same time, it looks like some marketing periods are taking a bit longer than normal and some calls-for-offers are being extended. We will need to see if every buyer executes or if we see a rash of re-trading. Depending on that, we could see a very modest amount of retrenchment and something closer to equilibrium.