Why Mallory & Evans Likes Tier 2 University Markets

Mallory & Evans Development, headquartered in Scottdale, Ga., is a vertically integrated organization that manages its properties through Caliber Living, allowing for development, acquisition and management all under one roof. 

Brantley Basinger, principal and director of development and acquisitions for the firm, started its student housing business and currently has a strategy of developing in non-flagship Tier 2 university markets and finding unique opportunities in flagship Tier 1 university markets for more boutique deals.  

The company just opened two new developments: Bellamy Coastal at Coastal Carolina University and Bellamy Florence at the University of North Alabama. Construction is also underway on Bellamy Daytona, which will serve at least a half dozen universities in the Daytona Beach, Fla. market. 

We’re about three quarters of the way through 2018; what are the trends you’ve seen in the student housing and overall multifamily investor market?

Basinger: Investing is not slowing down. We specialize in student housing but this is also true for the overall multifamily market. Investors are being very aggressive still on both the acquisition and development front. We’re seeing a flood of foreign capital enter the market. The dollar’s very strong right now and more and more foreign investors want to invest here in the U.S. They are hedging against currencies in other areas of the world.

Where is the capital headed?

Basinger: Most of the capital is focused on more flagships markets and bigger universities. A lot like the name recognition of larger universities and colleges; it makes them feel safe. That said, Mallory & Evans is very well-funded focusing on non-flagship university markets. They’re aggressively still chasing very core assets and paying top dollar for those assets. We’re also seeing a trend toward money chasing value-add deals at flagship and tier one universities. Many focus on curb appeal more than large renovations. 

What’s on your radar and why?

Basinger: We’re going to continue to follow our strategy, which from a development standpoint is developing in Tier 2 non-flagship-university markets. We are also starting to pursue boutique opportunities in more flagship and Tier 1 markets. From an acquisition standpoint, we are still looking at opportunities to acquire in non-flagship universities that have growth projections with strong enrollment growth and retention rates. We feel there is more yield to be had in these markets and less competition going after these types of deals. Our firm is very focused on cash-on-cash return instead of trying to reach an IRR we assume we can reach in three to five years. 

What do you feel is the most important thing that investors need to be aware of in today’s multifamily environment?

Basinger: These are frothy days. You’re seeing a lot of kids go to college, so enrollment is strong. Average income is going up across the U.S. Interest rates are staying down. Cap rates are staying down and in some case still compressing. The stars are aligned.

It’s not going to be frothy forever. Real estate is cyclical so we can probably expect a downturn in the next two to four years. The key is how you start to prepare for that. Our philosophy is to work to sustain this and remain aggressive when the inevitable slowdown starts. 

What’s your biggest piece of advice with today’s current market?

Basinger: It’s important to be aggressive, but not too aggressive. Still do deals you feel will perform when there is a downturn. We balance being aggressive with being conservative. We don’t just look at how a property is going to do in year one or two. We also look at how it’s going to do in year five or six to keep things in check.  

Anything surprising happening so far in 2018?

Basinger: We’re all a little surprised that cap rates continue to stay where people are paying top dollar—and where these assets are trading from a return standpoint. It’s surprising that institutions are looking toward a future IRR and neglecting a real cash-on-cash return in the early stages of an acquisition.

What’s the key to planning a successful strategy?

Basinger: The key is sticking to your strategy and not trying something you don’t really know how to do. Create some parameters and don’t try to do too much.