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Multifamily Investors Are Spending More Capital in Secondary, Tertiary Markets

Multifamily investors are now more likely to spend their money on properties in secondary and tertiary markets rather than in primary markets.

“In secondary and tertiary markets… the number of offers that we are generating is much higher than what it was,” says John Sebree, Midwest-based first vice president and national director of the national multi housing group with brokerage firm Marcus & Millichap. “The level of sophistication of those buyers is much higher.”

After the more than a decade of expansion, investors are running out of attractive places to invest their capital. In secondary and tertiary markets, the yields are often only slightly higher than in primary markets; however, the local economies are strong enough to keep attracting more investors.

“We have had economic growth for so long, that every market has been affected,” says Sebree. “Investors are hard-pressed to find that city that no one else has discovered.”

More than half (55 percent) of the apartment properties bought so far in 2019 were located in secondary and tertiary markets, according to Marcus & Millichap data. That’s up from 43 percent a decade ago.

“The heightened investor interest in secondary markets is illustrated by both robust construction pipelines and increasing capital flows,” says Shawn Lambert, senior analyst with real estate services firm JLL. The amount of money that investors spent to buy apartments in secondary markets more than doubled (showing an increase of 141.0 percent) between the peak year of the last year estate cycle and this one, according to JLL data.

Strong, consistent demand for apartments has helped make multifamily investors feel secure enough to spend most of their money on properties in smaller cities and towns.

“The fundamentals of multifamily are so strong right now,” says Sebree. “Even if there is a downturn in the next couple of years, the multifamily market is not going to suffer much from that.”

Apartment vacancy rate in prime markets has shrunk to just 3.4 percent in 2019—down from 5.4 percent in 2010. But the change has been even more pronounced in secondary markets, where the vacancy rate fell to 3.8 percent from 6.6 percent. And it was most dramatic in tertiary markets, where the vacancy rate fell to 4.8 percent from 7.2 percent, according to Marcus & Millichap.

“When the economy starts to expand it is going to expand in the major markets first, then in secondary and tertiary markets,” says Sebree. “In a lot of the tertiary markets, the economies are doing extremely well, including household growth and job growth.”

In addition, many smaller markets have become millennial magnets, according to Lambert. These secondary markets often have ample job opportunities and the cost of housing is relatively affordable.

When investors buy properties in tertiary markets, the cap rates average 7.0 percent, according to Marcus & Millichap’s tabulation of 2019 apartment deals. That’s significantly higher than the 5.3 percent average achieved in secondary markets and the 4.1 percent average cap rate in primary markets.

However, the risk of investing in smaller markets is still higher in a few ways.

“There is a little risk when you go into a small market that if a couple of new construction projects come up out of the ground, that can have more of an effect,” says Sebree. “It is a small enough market that there is going to be some competition.”


Source:  NREI

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New York-Based Multifamily Investors Flock To South Florida

There is a wave of investors who are currently selling their New York-based properties to invest in the South Florida area. Why?

Mainly because of the recent rent control law and its negative impact on returns on investments. It has been estimated, for example, apartment property values dropped 20%-30% as soon as the laws went into effect. Some investors are now mainly focused on getting their money out of New York and are looking to invest in properties that will produce better yields—specifically in non-regulated rent control markets, such as South Florida.

Why South Florida?

“There is zero incentive for New York multifamily investors to purchase a building and spend money on renovations if they can’t raise rents in these rent-controlled environments. Florida has always been a market with attractive yields. This is why most NY investors are choosing South Florida,” says Rafael Fermoselle, managing partner of Eleventrust Real Estate. “They either have their New York properties under contract to be sold, have already sold them, are in 1031 exchanges, or in some cases looking for diversification.”

Investors are selling their assets in New York and reinvesting in deals that yield more and ideally, are located under one roof. However, since Miami’s inventory is compressed with a lot of smaller multifamily properties and it’s difficult to find buildings with high unit counts under one roof, investors are turning to multifamily portfolios that are comprised of 4 – 8 buildings totaling 50-120 units. Although not all under one roof, investors are finding the 100+ units they are seeking with room to add value.

“Investors are working closely with Eleventrust because we have the inventory other brokerages don’t, plus, many of the deals they are transacting are happening off market, which many investors prefer,” explains Fermoselle.

Opportunity Zones

Opportunity Zones are another big reason why this new wave of investors are looking to South FloridaMiami, Fort Lauderdale and West Palm Beach are among the best places to invest in Opportunity Zones. There are about 123 Opportunity Zones in South Florida, including 67 in Miami-Dade30 in Broward and 26 in Palm Beach counties.

“Almost 16% of South Florida’s commercial assets are located in Opportunity Zones, one of the highest rates in the nation,” Fermoselle tells

Tax Savings

New York investors looking to move to Florida also benefits from the state not having an income tax for Florida residents. New York state tax rates range from 4% to 8.82%. Additionally, the effective real estate property tax rate for Florida residents is approximately 0.98%, compared to 1.68% in New York.

New York investors will also save on capital gains tax in Florida where the top marginal tax rate on capital gains in Florida is 25% and top marginal tax rates on capital gains in New York is 33.82%.

“We currently have 4 successful deals with New York investors including multifamily properties with 9-18 units,” says Fermoselle. “We also have properties located in emerging neighborhoods that are garnering interest from east coast investors.”


Source: GlobeSt.

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Rent Reform In New York, California Propels New Wave Of Multifamily Investors To Miami

First, it was tax reform that pushed CEOs, hedge fund managers and other high-net-worth individuals to South Florida. They were lured in by the favorable climate, luxury residential properties and most of all, substantial tax savings.

Now, it is the multifamily investors who are heading to South Florida, and for a different reason: rent control, something the Sunshine State lacks.

In June, New York state passed a sweeping rent reform law, expanding its protections for millions of rent stabilized tenants. The law dramatically limits how landlords can increase rents on stabilized apartments and opens the door for rent stabilization to expand outside of New York City. It stopped short of a rent cap, but that is expected to be on the table in some form in the next legislative session.

In Illinois, although rent control advocates lost a legislative battle earlier this year, they’re gearing up for a push to overturn the statewide ban on rent control in Springfield next year. And California is now poised to implement a statewide cap on annual rent increases.

Multifamily investors are moving quickly and making offers on properties in South Florida, brokers say. But they are also encountering a strong rental market and low supply, which have pushed up prices.

Eleventrust, a commercial brokerage in Miami, is working with investors from New York and Los Angeles who are looking to shift their focus to Florida because of the impact the new laws will have on their current investments.

Jose Ramos, a broker with Eleventrust, said at least 40 percent of the calls it’s getting have been from New York investors who want to close on properties in South Florida. “There’s a lot of confusion, a lot of focus on getting their money out of there and getting it into high-yield markets,” he said.

The brokerage is negotiating with two groups of investors to acquire apartment properties, via 1031 exchanges. One is for the River Lofts Apartments, a 43-unit complex at 500 to 522 Northeast 78th Street in Miami’s Upper East Side neighborhood, which hit the market with Ramos and Rafael Fermoselle, Eleventrust’s managing partner, earlier this year. It’s on the market for about $7.8 million.

Ramos and Fermoselle are showing investors properties in gentrifying markets like Little River, Little Havana and Allapattah. “The thing with Miami-Dade specifically is there’s not a lot of product that’s big enough,” Fermoselle said.

The investors they’re dealing with are looking for deals in the $5 million to $30 million range.

Deme Mekras, managing partner of MSP Group, has also received offers from New York buyers who plan to invest in South Florida multifamily properties because of the recent rent reform measures. New Yorkers especially, are more comfortable with properties in the urban cores, he said.

Rent reform is also becoming a national issue, as more than a third of Americans are considered rent-burdened. The problem is worse in South Florida, according to a report from Freddie Mac earlier this year, which found that Miami ranked as the most rent-burdened market in the U.S.

Vermont Sen. Bernie Sanders, a self-described Democratic socialist, is proposing a $2.5 trillion housing plan that would cap annual rent increases at 3 percent or one and a half times the consumer price index, whichever is higher.

Searching For Yield

Multifamily investors from out of state would prefer to spend their money on one large deal but are challenged by a lack of supply, brokers said. They’re non-institutional players, looking to spend in the range of $30 million and $40 million.

But because South Florida’s rental market has remained strong, some sellers aren’t willing to part with their property. And if they are, the prices are too high. Rents have increased by 15 to 20 percent over the last eight years, according to Hernando Perez, director of multifamily investment sales for residential brokerage Franklin Street. More people are also moving to Florida, in part because of the favorable tax climate.

“There are not a lot of deals that make sense and not a lot of deals to buy,” he said.

Perez said he is seeing a number of California buyers looking to use the proceeds of 1031 exchanges to buy in South Florida. They cited the pending statewide rent control legislation, known as AB 1482, as a reason. Perez said he is working with a group that wants to spend $10 million for a multifamily building. The group, which Perez declined to identify, is looking at properties in Hallandale Beach, Fort Lauderdale and Pompano Beach.

And what if Florida was to enact similar statewide rent regulations? Simple, Perez said.

“It would crush the profitability of the real estate market.”


Source:  The Real Deal

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