Sean Bannon, managing director, head of U.S. Real Estate at Zurich Insurance Group, has been a real estate investment professional for 23 years, having obtained an MBA from Columbia Business School, and having worked for such well-known firms as Arthur Andersen, Lehman Brothers and for the past 19 years, Zurich Insurance Group.
The industry vet recently took some time to talk with Multi-Housing News about investments in the year ahead.
MHN: What are you seeing in the apartment sector in the early goings of 2016?
Bannon: Coming into the year we expected another strong year in the apartment space. We invest across office, retail, industrial and apartments, and we’ve been trying to ramp up our apartment portfolio more significantly out of all four-asset classes because historically, we had not been a big investor in apartments. We did a lot of tenant/credit transactions and certain joint ventures where we didn’t access as much apartment product as we would have liked. We’ve done a good job over the last three years of playing catch up and it’s been a very good time. There’s been development discipline over the past few years nationally, and I think the outlook at the beginning of the year was pretty positive. Though now we do start to see meaningful additions to supply in some specific markets and submarkets.
MHN: Do you foresee any major strategic shifts, whether it’s more product in secondary and tertiary markets?
Bannon: We have invested in 14 markets in the U.S., where ours has been a very predictable list. We’ve been really pleased in what we’ve seen in our apartment investments in Seattle and Boston, and in what we’ve seen in San Jose and Portland, and we’re looking to expand our markets in multifamily to 21 markets. The competitive landscape continues to be strong and opportunities are difficult to source at attractive pricing, so I think exposing ourselves to some secondary markets is a smart thing to do from an opportunity sourcing standpoint.
MHN: To what extent will the Federal Reserve’s interest rate hikes influence multifamily investment?
Bannon: It’s interesting. If you look at some prior periods of rate hikes, you can actually see cap rates not behaving in a way that people would expect. First and foremost, I’d say a lot of what’s happened since the beginning of the year, as it relates to oil prices and some of the economic indicators, may have postponed some of the rate hikes many of us expected at the beginning of the year, so they may stay lower for longer. If there’s a fair bit of rent growth in the system and people are looking at the economy as strengthening and you have rates going up in that environment, I think buyers will look at that rent growth potential and price it accordingly. I don’t think there’s a simple relationship between cap rates and interest rates that a lot of people think. Going into the year, we expected rates to increase and priced cap rate expansion into our acquisitions, but also understood there was a very good chance that cap rates would stay lower for longer, but it is certainly something to monitor and factor into one’s underwriting.
MHN: What trends are you keeping an eye on in 2016?
Bannon: I think much is said and written about the trends we see today around demographics and urbanization and technology. You see some units getting smaller and smaller, and we’ve certainly done some of that in certain markets, but we think there’s a place in our portfolio for some diversified multifamily investments—your conventional, near-suburban locations that have some transit orientation but don’t overplay those trends. We want to spend some time thinking of those plays.
MHN: What do you think is the most important thing that investors need to be aware of in today’s multifamily environment?
Bannon: Supply and household formation. That’s what we look at a lot, and that’s whether you’re developing or buying existing product, because that development is going to become relevant to you. That’s really what we’re looking at and trying to make sure we have a really good handle on those statistics.