What Makes Pittsburgh a Competitive Market?
Insights from an investor and operator who grew up in the Greater Pittsburgh area on trends in the metro’s multifamily market.
Dan Croce, Managing Principal, Birgo Capital. Image courtesy of Birgo Capital
Banking on its affordable cost of living and low population density, the Pittsburgh multifamily market is in a favorable position to swiftly recover from health crisis-induced hardships. “In the past several years, Pittsburgh has become an extremely competitive acquisition environment, and the exuberance around multifamily that’s come from the pandemic has been yet another accelerant to investor demand for this product,” Dan Croce, managing principal at real estate private equity firm Birgo Capital, told Multi-Housing News.
Croce believes that the Greater Pittsburgh area can act as a safe haven for investors looking for new markets to deploy capital into. As a local investor and operator, he knows all the facets of the metro’s multifamily market, so MHN asked him to weigh in on what underlying conditions helped Pittsburgh pull through the hardships of the past 12 months.
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Please describe the state of the Pittsburgh multifamily market, a year into the pandemic.
Croce: Pittsburgh’s real estate market has historically proven itself to be remarkably resilient through economic downturns and the COVID-19 pandemic has been no exception—particularly for multifamily. The big headline is that the pandemic has been an accelerant for trends that have been in the works for a long time. We’ve always believed that the disproportionate affordability of Pittsburgh rents, coupled with the region’s economic diversity, makes it an attractive place to deploy capital into multifamily, and it seems that markets are wising up to that conclusion.
Transaction prices are soaring as cap rates compress and capital looks for a safe haven. Occupancy has been extremely steady, and it’s actually modestly increased in our portfolio throughout the past 12 months. We’re also seeing rents driven upward in the affordable market, as inexpensive units are increasingly in high demand. At the top of the market, rents are compressing and occupancy has taken a bit of a hit, which is to be expected in a recessionary environment.
As for collections, tenants have paid rents consistently. We’re a vertically integrated company, so we’ve been on the front lines interacting with tenants and the fortunate reality is that, generally, people are doing just fine. I think that’s reflective of the Pittsburgh market at large right now—it’s very healthy, stable and actually turning its attention toward continued growth and opportunity, especially in the tech sector.
When it comes to multifamily real estate, what are the strengths of the Pittsburgh neighborhoods that fared better over the past 12 months?
Croce: As with most major metropolitan areas, the suburbs and areas outside of the urban core fared particularly well. Multifamily product in those areas is affordable and spacious, and those two components of an apartment—affordability and spaciousness—are what renters have prioritized here in the past 12 months. In virtually every direction from the city, the suburbs are doing well.
In the urban core, there was definitely a softening. Downtown has been hit particularly hard and there was a quick dip for markets like the Strip District and East Liberty, but they’ve come back strong and are in a great position as we head into the spring of 2021.
It will be interesting to see how new, high-end product is absorbed this year, but all signs point to good outcomes even at the top end of the market right now. We believe that’s where the risk is—high-end product in the urban core. Spacious, affordable units outside of the city have done well and we believe they will continue to do well in coming years.
What can you tell us about rent collection across your portfolio since April 2020?
Craigdell Gardens, a 97-unit community in New Kensington that Birgo Capital purchased in August 2020. Image courtesy of Birgo Capital
Croce: What we’ve seen would have been almost unthinkable in late March of 2020, when we were just settling into the realities of the pandemic. We’ve written pretty extensively about payment patterns in our portfolio, and the punchline is that our tenants are paying rent and they’re doing so in droves. Certainly, those that were delinquent prior to the public health crisis have become more delinquent and the average past-due balance for those that pay late is a good bit higher than it was before COVID-19.
However, for the vast majority of the tenant base, there’s been no discernable change to payment patterns in the past year. Our tenant base is largely lower- to middle-income workers, so it’s particularly encouraging to see that this segment of the population has been able to pay rent with such consistency throughout the pandemic.
How much have stimulus provisions aimed at housing helped the Pittsburgh multifamily market so far? And what do you think about the new relief bill?
Croce: Stimulus measures have, of course, been helpful to the economy at large and the trickle-down effect has been very noticeable to the multifamily industry, and Pittsburgh is no exception. However, this region’s economy was not disproportionately impacted by the pandemic-induced economic shutdowns. We’re not uniquely exposed to the hospitality, travel, entertainment or retail industries, so most targeted stimulus provisions weren’t aimed directly at this region. That said, Pittsburgh is a city that is largely supported by small businesses, so we hear time and again that the Paycheck Protection Program was an incredible lifeline to so many.
As for the new bill, there’s no doubt that for a tenant base that lives paycheck-to-paycheck direct payments of $1,400 per person can be a huge injection of liquidity. Pittsburgh is deeply affordable and since the direct payments aren’t indexed to a particular geography’s cost of living, they go a very long way in Pittsburgh. That’s more than two months of rent for most of our tenants, and if they’ve got four or five people in a household, an injection of $5,000-plus provides an incredible amount of runway for low-income families.
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The pandemic has spurred a wave of relocations to smaller, less dense U.S. cities. How much has Pittsburgh benefited from this trend?
Croce: This trend has absolutely been a benefit to Pittsburgh. Pittsburgh is home to many colleges and universities, so there’s a significant pattern of people who went to school here and have some roots here coming back to Pittsburgh for the affordability, culture and lifestyle that comes along with those. Remote work makes that possible for so many, but there are also lots of local companies that are growing at incredible rates and providing attractive employment opportunities right here in this market. So, the net migration of young people coming to Pittsburgh is very noticeable and it’s a tremendous contributor to growth in the local economy.
The tech sector is gaining traction in Pittsburgh and universities continue to stimulate high-tech firms to move to the metro. What is the impact of this sector on the metro’s multifamily market?
Croce: There’s much more demand for high-end product in Pittsburgh today than there was even five years ago. It’s almost like it happened overnight—expansion of East Liberty, development in the Strip District, the reemergence of downtown living and now the North Side/North Shore emerging as a residential destination because of its proximity to so much. These trends are clearly supported by the growth of the tech sector.
The impact of Carnegie Mellon University on the region also can’t be overstated—world-class talent is being developed here and as that talent develops an affinity for this city and an appreciation for its affordability, it wants to stay here. We expect this to continue to accelerate demand for higher-end apartments in a way that will continue to feel new and different for Pittsburghers.
Has the pandemic altered your investment strategy?
Downtown Pittsburgh. Image courtesy of Birgo Capital
Croce: We’ve always focused on stabilized but underutilized workforce housing because we believe that’s where we can find the best risk-adjusted returns, and really the pandemic has just led us to double down on our core convictions. The societal prioritization of affordable housing has been underscored in the past 12 months and we have to think that bodes well for long-term demand.
The pandemic did bring to light a new set of risks to income disruption, so we’re thinking more critically about tenant mix and location of our target acquisitions so that we can play good defense if we were to somehow find ourselves in a similar scenario in the future.
We’re also being very careful with how we think about valuation—because the current cost of debt capital is so low, it’s easy to pay up and still generate a decent yield, but we’re being very wary of long-term changes in interest rates and the impact that will have on exit valuations. So, the interest rate environment that the pandemic has driven certainly makes its way into how we think about capital deployment. Otherwise, it’s business as usual for us, and we still believe that now is always the best time to buy multifamily.
Are you planning any acquisitions in the first half of 2021?
Croce: Yes, we’re closing on some deals that we scoped out in the second half of 2020. There are two acquisitions that we’re fairly certain will close in the first half of the year and they’re both right down the fairway for us: stabilized workforce housing within 30 minutes of the central business district, with very low rents and plenty of upside. As is consistent with trends, we’re paying a lower cap rate than we historically would have for this product type—6.75 percent—but with where interest rates are today, we can generate a really strong yield, even at a modestly lower cap rate.
What are your expectations for Pittsburgh’s multifamily industry this year?
Croce: It’s always a seller’s market in Pittsburgh as trading volumes are unusually low here, even when markets are moving quickly at large. In the past several years, Pittsburgh has become an extremely competitive acquisition environment and the exuberance around multifamily that’s come from the pandemic has been yet another accelerant to investor demand for this product.
So, I expect prices to continue moving up, cap rates to continue moving down and new acquisitions to be hard to come by, especially for unknown buyers. Pittsburgh is a blue-collar, relationship town, so I do think those who have proven themselves will be able to put capital to work by drawing on that track record to win deals.
