TruAmerica Still Bullish on Value-Add Buys
Robert Hart talks about how to overcome challenges in hot West Coast markets and reveals why opportunity zones are not yet a target for the multifamily investment firm.
TruAmerica Multifamily is proving that value add is not a niche play but a preferred investment strategy that offers higher returns and more opportunities. The company, a joint venture between Robert Hart and The Guardian Life Insurance Co. of America, recently acquired a 596-unit community in Orlando for $79 million, growing its Florida footprint to 3,700 apartments. TruAmerica’s portfolio, now made up of about 35,000 units, is worth $7.5 billion, according to a recent statement from the firm.
President & CEO Robert Hart discussed the company’s East Coast growth, new markets and goals in an interview with Multi-Housing News.
TruAmerica is a top multifamily investor in all major West Coast markets. What are the current investment trends in the region?
Hart: The markets are, for the most part, healthy and still growing. Investor demand for multifamily properties is as strong as it’s ever been due to large amounts of aggregated public and private capital seeking durable cash-on-cash returns and long-term, risk-adjusted returns. There has been some erosion of Class A rents in a few markets such as Seattle, Portland and San Francisco, which have seen the highest level of new construction in more than a decade.
Same-store growth has declined since 2017, but this has not materially affected investor demand. The demand for Class B and workforce housing, which targets renters by necessity, continues unabated as the increase in Class A supply does not directly affect those sectors of the market. Spreads have narrowed as interest rates have risen. They are still positive but not by nearly the same margins of 200 to 300 basis points from two years ago.
How do you see the evolution of these markets in the years to come?
Hart: Demand for rental housing remains strong and will continue to be into the foreseeable future as drivers such as job formation and increases in wage gains continue at a robust pace. This has resulted in the formation of new households, most of which cannot afford to buy and, therefore, renting remains the primary option. We see this primarily with Gen Zers and Millennials, who are now taking their place in the workforce and are migrating to where the jobs are—Los Angeles, Las Vegas and Salt Lake City, for example.
Los Angeles is as strong as ever with renter demand continuing unabated, as digital media and tech firms form new job centers in West Los Angeles, South Bay, Downtown and other submarkets. Las Vegas is also booming in this cycle as total employment has topped one million. Less dependent on single-family home construction and casino development, Las Vegas is seeing tremendous job growth in professional business services, health care and manufacturing. We are seeing a significant population migration to the no-tax state, particularly from California, as people seek to take advantage of the new jobs, lower cost of living and lower cost of newer housing, which has created overall multifamily demand.
Any other markets worth looking into?
Hart: Another market that has extremely steady growth and rental demand is Salt Lake City. Utah, in general, has experienced several consecutive years of strong job growth and low unemployment. However, supply has not kept up with the demand. Other than recent development in Salt Lake City’s southern suburbs, there has been very little multifamily development added to the inventory. Drawn by the increasing number of job opportunities and Utah’s livability factor, the state has become a magnet for Millennials and is the nation’s youngest state in terms of median age with approximately one third of its population under the age of 32. And as we know, this demographic is more likely to rent than buy a home, especially in and around Salt Lake City.
Name a few challenges in the industry and how to overcome them.
Hart: The biggest challenge right now, in California, is the potential repeal of the Costa-Hawkins (Rental Housing Act). This legislation was passed in 1995 to stimulate new development throughout the state by restricting rent control on units built on or after Jan. 1, 1995. On the ballot in November, Proposition 10, if voted on, would repeal Costa-Hawkins, which could lead to local municipalities instituting new or more stricter rent control laws.
Tighter, more rigid rent control laws would serve to have a contagion effect on new development that would virtually halt new apartment growth and affect California’s overall economy. The solution for the industry is to start building more affordable housing to address the needs of all Californians seeking better quality of life and safe modern housing for their families.
Some industry players say that competition in value-add investing has increased and buying new is becoming more appealing. What are your views on this?
Hart: A one-size strategy doesn’t fit all. Our business model has been to buy well-located properties in high-growth submarkets at below replacement cost. We also create a positive spread between the going-in cap rate and the stabilized cap rate. We do this by creating same-store growth through the renovation of vacant units and then bringing them to market.
The advantage of buying new product, even at low cap rates, offers cash flow– driven buyers the possibility to stabilize sooner and mark to market. This works well for pension funds and REITs that rely on durable current income and does not require them to make significant additional capital investment. One REIT that has done very well operating in both spaces has been Essex property Trust, while its peer group has focused exclusively on mostly new development and Class A acquisitions.
How is technology changing multifamily investment?
Hart: Technology is making us better operators and market makers. The advent of optimization pricing models, rental and investment analytic tools give us a strategic advantage over competitors that do not use this technology. We can increase leasing velocity and stabilize cash flow quicker by using these tools to price apartments more accurately based on competitive levels and seasonality. Investment research and comparable sales data base services are more accurate and compile data quickly, allowing us to make more informed investment decisions.
What role do opportunity zones play in TruAmerica’ s strategy?
Hart: We are studying the benefits of investing in opportunity zones, which is a fantastic initiative led by the federal government and the Trump administration to stimulate growth in underserved MSAs. The basic idea is to double the basis of a new real estate investment through capital investment from aggregated funds from individuals and institutions who want to defer capital gains treatment on the sale of stocks, bonds, real estate and other assets. Because TruAmerica sponsors joint ventures with large institutional investors and pension funds and does not typically do ground-up development, it’s less likely we will be refocusing our capitalization approach on this initiative. However, we are still considering it and are open to investing in opportunity zones, which need better quality workforce housing.
Tell us about TruAmerica’ s investment strategy going forward. What new markets are you considering for expansion?
Hart: In September 2016, we established an office in Arlington, Va., as the first step in our national expansion. Since then, we have purchased $1 billion in multifamily assets in select East Coast markets, primarily in the Mid-Atlantic and Southeast. We will continue to build that business and seek to double our capacity there over the next two-three years as we evolve into a broader national platform. Our number one target market this year has been the Tampa-Orlando MSA. The state of Florida attracts 1,000 new residents per day. Job growth and housing demand is the highest it’s been in decades. Tampa-Orlando MSA will continue to grow and create new multifamily demand as jobs in entertainment, services, health care, technology and government continue to expand.
Image courtesy of TruAmerica