What Draws Investors’ Attention to Western Markets?
- Jun 18, 2020
The multifamily sector remains strong in West Coast cities, particularly because of healthy employment figures. According to Yardi Matrix data, Sacramento, Calif., is among the markets with the highest concentration of durable jobs in the country with 34.5 percent, following Lansing, Mich. with 44 percent and Washington, D.C., with 41.8 percent. At the same time, San Jose, Orange County and Seattle were among the first markets to impose strict lockdown measures, the same report shows.
San Diego-based MG Properties Group focuses on the acquisition, development, rehabilitation and management of apartment communities throughout the western U.S. Since 2017, the company has acquired nearly $3 billion worth of apartment properties on the West Coast. Earlier in March, MG Properties purchased a 270-unit community in Sacramento, expanding its local portfolio to nearly 1,000 units. CIO Paul Kaseburg talks about investing in the area during these challenging times and shares how the company’s approach has changed.
MG Properties Group recently closed a deal in Sacramento. Are you planning to expand your West Coast portfolio?
Kaseburg: We tend to be net buyers throughout market cycles and are continuing to actively pursue acquisitions in all western states. We target properties in locations with strong job growth prospects, a limited supply pipeline and high barriers to entry. As a vertically integrated owner/operator, we use feedback from our existing portfolio to inform our investment decisions and target properties and locations that we believe have the best opportunities for solid, sustained performance.
What makes smaller western markets like Sacramento, Inland Empire and Orange County suitable for multifamily investment?
Kaseburg: Much of the development during this last cycle has been focused on core urban locations in gateway markets. The affordability of secondary markets has driven population and job growth, creating strong demand combined with less competition from new supply.
Tell us more about your investment strategy.
Kaseburg: The bulk of our equity capital is syndicated from a broad group of private investors, family offices and wealth advisers. We are long-term cash-flow oriented investors and focus on properties that provide both potential upside as well as stability during market downturns. As owners/operators, we target properties where we can add value through value-add improvements and by implementing our hands-on management approach. We use moderate leverage and match our capitalization plan with the business strategy for each asset.
How has your focus changed during the health crisis?
Kaseburg: Our primary goal has been to support the health and well-being of our residents and employees by working proactively and individually with those personally impacted by the crisis. The fact that we manage our own properties has allowed us to quickly reallocate our corporate and on-site teams and to implement new processes to address the situation as it unfolds. With no playbook or best practices to rely on, our operations team has had to be creative and flexible to manage issues as they arise.
How has the pandemic impacted your business so far?
Kaseburg: The initial impact of the crisis on our investment portfolio has been a modest increase in delinquency rates. However, we expect to see erosions in rents and vacancy as well, if demand softens due to an economic slowdown. The multifamily industry has been less impacted by the crisis than other asset types so far, but it is hard to predict the effect of the pandemic on the broader economy and our prospects for future growth. Multifamily has a reputation as a lower-risk product type within the commercial real estate industry and its performance in this crisis should reinforce that reputation with investors.
How did the health crisis impact the California markets you are active in?
Kaseburg: Within California, the performance of our regions has varied significantly. Los Angeles and the Bay Area have been disproportionately affected by the crisis, while the influence on other markets has been more moderate. Portfolio performance so far tends to be most impacted in submarkets with a high concentration of job losses due to COVID-19 and those with more polarized political environments.
What are your expectations for investment in the West Coast markets going forward?
Kaseburg: We continue to be strong believers in the long-term growth potential of our markets in the Western states. Western markets tend to have relatively higher barriers to entry and they have benefited from sustained job growth, which we do not expect to change due to the COVID-19 crisis.
How can multifamily investors better prepare for economic uncertainty?
Kaseburg: Over our 30-year history we have invested through multiple cycles, but this has been a unique situation. The economy generally and multifamily specifically have benefited from a tremendous period of growth since the financial crisis, and this has been a reminder of the value of preparing for the unknown.
We believe that having a long-term investing mindset and capitalizing transactions conservatively is the best way to prepare for the downturns. Our internal management platform also gives us a strong understanding of our portfolio’s performance and better allows us to fine-tune our operating and investment plan for each asset when the unexpected occurs.