The Next Wave in Multifamily: Middle-Market Assets

By Alexandra Pacurar

Jay Rollins, JCR Capital

Multifamily is holding on to its title as the most durable and attractive asset type in the industry, though construction and rent growth are expected to dampen even further. Jay Rollins, managing principal & co-founder of JCR Capital, talked to Multi-Housing News about the next stage in the cycle: the winners, the losers and the most attractive investment opportunities.

MHN: Are there any factors indicating that it would be time to pull out of multifamily projects in major markets?

Jay Rollins: It really depends on the market, where you are in the capital stack and what your long-term objective is. If you are a three- to five-year equity investor, that time was two years ago. If you’re a long-term holder, it won’t matter. We expect rent growth to slow in many major metropolitan areas over the next several years, but the market remains safe for long-term holders. On the other hand, equity and mezzanine investors may be disappointed with returns over the next several years.

MHN: Could you give us some details on a particular market where this theory could apply?

Rollins: Many markets are overbuilt—such as Denver, L.A. and Tampa—and rents will fall, but lenders have been conservative in their underwriting, and they will be fine. It will be equity and mezzanine lenders who will be disappointed.

MHN: What can you tell us about multifamily financing? It seems that only high-quality assets have access to capital. Should we expect this to continue going forward?

Rollins: Not true—all multifamily assets have access to capital. It’s one of the most durable asset classes there is. Furthermore, the federal government subsidizes the market, which compresses cap rates in multifamily by 100-200 basis points. As long as there are people, it’s a great asset. While the market has been extremely robust for years, lenders have generally stayed conservative and are not out over their skis the way they were in 2007. Going forward, investors simply need to pick their spots more carefully. It’s all about basis.

MHN: What are your predictions in connection to the multifamily market’s future? What is the next stage of this cycle going to look like?

Rollins: Not very different, except you will not see much more new construction of Class A multifamily in urban markets for a while. Absent that, it’s a strong market.

MHN: What should investments strategies focus on next, since the multifamily market is slowing down? What is the next big thing on the real estate investment agenda?

Rollins: The next big thing is the largest transfer of assets in the history of real estate. Specifically, middle-market assets (valued under $50 million) owned by aging Baby Boomers. The vast majority of the assets within this $10 trillion market will change ownership in the next 5-15 years. Every time that happens, it creates a financing opportunity.

Image courtesy of JCR Capital