Facebook Chat with Albert Berriz, CEO, McKinley
- Mar 15, 2012
By Jessica Fiur, News Editor
New York—Albert Berriz, CEO of McKinley, a real estate investment firm based in Ann Arbor, Mich., participated in a live chat on Tuesday, March 13th, on the MHN Facebook page to answer readers’ questions.
Below is the transcript of the chat session.
Question: What statistics do you have regarding Facebook use of residents relating to their community (information, events, social) as opposed to potential residents (Facebook as a marketing tool)?
Berriz: We have created a proprietary system at McKinley called My.Mckinley.com. It is based on a Facebook format, and it allows our residents to praise, complain, pay rent and submit work orders via the system. This gives us significant data as to customer interactions by category, and as a result our internal customer satisfaction metrics have soared.
Question: Do you think the interest in secondary or tertiary markets will increase or decrease in 2012?
Berriz: I think there will be a significant increase in the desire to invest in secondary and tertiary markets. Returns have become so compressed in the primary markets that I think you will see significant interest in secondary and tertiary markets.
Question: Given lenders lose less on multifamily loans, what can I do to encourage my lenders to decrease interest and fees?
Berriz: It is a complex topic, but in my experience lenders are always willing to work with good sponsors. Typically the single biggest problem we have in workouts is a problem sponsor, so having someone who wants to cooperate is a big plus.
Question: What return perimeters are you seeing in those markets?
Berriz: We are able to achieve 8 percent returns unlevered, and north of 12 percent returns on a levered basis. In many cases, we are doing much better than that, but that is our internal floor.
Question: What do you see as the best indicator on determining the value of an apartment project in a secondary or tertiary market?
Berriz: Net-operating income. I would argue it is the only indicator of value. And another thing that I track is depositing cash in the bank every night. Our current experience is that cap rates are 6 to 8 percent in most markets that we invest in. So we have seen a significant increase in value in our holdings in the past 36 months.
Question: What NOI are you looking at more heavily: T-12 or T-90 days (as most markets have improving income)?
Berriz: We are seeing 8 to 10 percent rent increases in most of the markets we are operating in that gives us very immediate improving trailing results in all of our properties.
Question: What issues arise when investing in secondary markets in Utah?
Berriz: Unfortunately Utah is one of the 25 states that I do not invest in.
Question: Please advise on your top three secondary markets for 2012.
Berriz: Las Vegas, Houston and Phoenix, because it is where I see the largest volume of distressed multifamily. We are a contrarian investor, so we are going in when other people are not going in.
Question: I’m curious of what your thoughts are post-2012 for the multifamily industry. How long do you think that the United States will be a “renter nation”?
Berriz: We are witnessing a profound social change, which is far more impactful than the financial changes that we have witnessed. Renters today value mobility as their No. 1 personal priority, followed by living with people who are like-minded and finally, walkable urbanity.
Question: So you don’t think this is a short-lived phenomenon?
Berriz: We are witnessing a generational change in people’s living habits; the post-second World War single-family boom is now transitioning to a new era where people will be opting to rent as opposed to buying. Many renters 18-29 years of age have seen their parents not being able to sell their homes and/or lost them in foreclosure, and that has left a permanent scar on their thinking. They are no longer chasing the dream of home buying as we did in the 1950s and 1960s.
Question: What are your thoughts on properties in Texas, built in the ‘50s and ‘60s with two pipe chill systems, flat roofs, aluminum windows and slab foundations that are becoming obsolete? They are very inefficient and require very large amounts of capital to even try to make them better. It seems like there are a lot of B, C and D properties that are headed for extinction.
Berriz: Your first observation is correct: the majority of the problem loans in Houston and Dallas have the identical characteristics that you have described. Having said that, we are finding terrific opportunities in the very same description that you have provided. What is true is that in a city like Houston, there is strong demand for workforce housing. We are able to buy and reposition C and D assets and effectively reposition them physically, operationally and financially. We expect to hold them long term.
Question: What are you paying for the properties—$5,000 per unit, just land value? It seems that you would have to spend at least $15,000 per unit to make them better, but at that amount of capital, it would take many, many years to make back the money.
Berriz: We are not seeing the same thing on the deals we are looking at. I agree on a purchase price, and that for us has been $5,000 to $12,000 per unit. We are not spending even close to the levels of CAPX that you are outlining. You have to be very careful with your renovation numbers and analyze it from a defensive and offensive capital view to ensure that you are getting the ROI for your investment. We are spending $2,000 to $5,000 per unit on our recent deals.
Question: One of our owners just purchased a distressed property and has brought it down to the studs and is redoing it to include a new clubhouse and fitness center. They got the property for an amazing price and even with the money they are putting into it, the value of the community is much more than the total cost to renovate the existing or to build new. They even put balconies where the picture windows were. It is a beautiful place now. Nothing like before.
Berriz: In my over-30 years of experience I have not found a better time to buy distressed apartments than today. You description makes a lot of sense, and it shows how properties are trading at a price that allow your owner to make these investments. This in my opinion is a very unique time to do what you and your owner are doing with your property.
Question: If you could only pick one U.S. market in which to own and operate apartments, where would you invest?
Berriz: Orlando, Fla. And if I can cheat and give a second: Ann Arbor, Mich.
Question: How do the fundamentals compare in those markets to Atlanta?
Berriz: Atlanta has always been a developers’ market, and the key metric that we track is rental rate increases. We go back to 1982 in Orlando and 1968 in Orlando, and our rents have essentially doubled every decade. I don’t think the same can be said of Atlanta. We look for secondary and tertiary markets with major employment drivers that will never go away. Examples of that are the University of Michigan in Ann Arbour with 45,000 jobs and Central Florida with a massive tourist commercial infrastructure anchored by Disney, Universal, SeaWorld and the Convention Center.
Question: What employment factors are key to investigate?
Berriz: For us we look at major employers that won’t go away. A good example of that is Norfolk, Va., which has the Naval Atlantic Fleet and Coast Guard that provide tremendous stability to that market. We are seeing significant growth in manufacturing in states such as South Carolina, North Carolina and Virginia. Examples of that include the major investments Boeing and BMW have made in South Carolina.
Question: Is McKinley currently considering expanding its portfolio into new markets? Which ones and why?
Berriz: The answer is yes. We are actively expanding in Las Vegas, Phoenix, Houston and many cities along the eastern seaboard. The reason why we are in those markets is that Houston, Las Vegas, Phoenix and Atlanta are cities with the single largest concentrations of CMBS defaults in the country. To be more specific, multifamily defaults.
Question: When do you think the CMBS market will finally shake out and come back to normalized standards?
Berriz: I think it gets worse before it gets better. Our prognosis for 2012 and 2013 is an increase in busted deal flow. When that wave ends is a difficult equation to answer, but I don’t see all of the distress multifamily inventory clearing until at least 2015.
Question: Is that because of the amount of five-year CMBS loans that are coming due this year?
Berriz: We are seeing a significant amount of deal flow from the 2007 vintage of CMBS multifamily. 2007 was the height of CMBS lending, and it was also the weakest underwriting of any vintage. We are seeing a lot of five-year CMBS loans that were originated in 2007 that will turn into workouts or foreclosures as a function of either maturity defaults or sponsors running out of money and energy.
Question: What is your favorite tertiary market these days, excluding Ann Arbor?
Berriz: Orlando, Fla. Low taxes, pro-business, huge employment growth and significant immigration. And we love the great weather, Mickey, Minnie and Pluto!
Question: Do you believe Florida as a whole is coming back in vogue for multifamily owners and managers?
Berriz: Yes, we are certainly very bullish on Tampa, Orlando and Dade, Broward and Palm Beach County. We are not bullish on Lee County, Collier County, Jacksonville and Pensacola. However, we have executed some recent sales in Jacksonville and Pensacola at prices I have not seen in a very long time. We are also very bullish on Gainesville and Lakeland.
Question: It is mentioned over and over about stability and purchasing in areas of stable jobs, that would make me think that purchasing in the Flint, Mich., and surrounding areas would be like playing a game of roulette. I would like to believe that purchasing distressed properties in these areas would be a plus, not a negative, but now with the market in Flint the way it is, I seam leery of even looking. What are your thoughts on purchasing properties in this area? I am not speaking of the city of Flint, but more in the areas of Clio, Birch Run, Grand Blanc, etc.
Berriz: Your instincts are spot on! I would not invest in Flint, Mich. However, look at places like Grand Rapids, Holland, Kalamazoo, Wayne, Westland, Taylor, Romulus and of course all of Washtenaw County.
Question: So stay out of Genesee County?
Berriz: Yes, stay out of Genesee County.
Question: Are there any new technologies/products/services out there that will find their way into multifamily?
Berriz: Yes, I am very interested to explore Dow Chemicals’ new solar energy roofing product. We are good friends with the folks at Dow Chemical in Midland, Mich. I find this idea fascinating. I am not sure that it makes economic sense, but we are doing a lot of research right now. If nothing else, as an architect and engineer, I enjoy the topic.
Question: What are your one or two preferred methods to identify the optimal distressed multifamily agents in an area?
Berriz: It is a great question. We built a marvelous network of brokers throughout our 25 states that understand exactly what we are looking for. If you have a particular market for which you would like a recommendation, please feel free to email me at email@example.com and I will give you several good ideas.
Question: How does distressed property get graded, as with A, B, C, D? Is there quantification of some sort for levels of distress to simplify communication?
Berriz: Most everyone uses C and D as what we call opportunities in the distressed universe, so it is the same as A, B, C, D, except we make a living at turning Ds into Cs and Cs into Bs.
Question: Setting aside Orlando, what other “up and coming” markets are on your horizon for a three to seven-year hold?
Berriz: Tampa, Augusta, Raleigh, Norfolk, Las Vegas, Houston, Phoenix, and I have many more…
Question: How do you compete in an environment with 20-30 offers on Class A properties?
Berriz: Great question. We don’t go there. We focus on distressed C buildings that we turn into Bs and D buildings that we can turn into Cs. So in our world we don’t have an environment with 20-30 bidding on any single investment. We can also close immediately for cash, which is a major driver in our ability to get deals. We offer all-cash terms and a very short due diligence period, which is a unique advantage in the marketplace. We can analyze a 300-unit transaction in seven to 10 days front to back, and then close there immediately after for cash.
Question: What is the most important piece of advice you would give to an investor who is looking to enter the multifamily market?
Berriz: Understand your market very well. Learn everything about it, who is the renter, why are they renting, what can they afford to pay, who are the major employers. And I would not invest a nickel in any market until I had a very thorough understanding of the economic metrics.
Note from the editor: Please note that information, such as names and locations, were omitted from the transcript to protect our readers’ privacy. Additionally, the questions and answers have been edited for spelling and grammar.