Everyone needs a place to live, and it seems like everyone is moving in Texas — that has made the state’s places to live, particularly multifamily projects, one of the hottest asset types for real estate investors, institutional and otherwise.
Some of those small-time investors may be regretting their choice, as syndicators in particular face a wave of floating-rate debt coming due amid slowed rent growth and higher rates. But in real estate, one man’s looming foreclosure is another man’s distress deal. Some firms will come out of the latest slowdown better than before, and Knightvest Capital founder David Moore says there are still deals to be made.
Knightvest, founded in 2007, is an interesting firm to watch as the walls close in on some of its greener competitors. The Dallas-based firm uses renovations to turn older apartments into ones it says can compete with new construction, while boosting rents and property values. Some have tried that and run into trouble with rising costs and slowed rent growth; Knightvest is still buying apartments.
TRD spoke with Moore about why he thinks distress will miss some sectors of the multifamily space, whether sellers are finally getting real on pricing and whether Texas’ supercharged multifamily pipeline keeps him up at night.
The conversation has been edited for clarity.
TRD: It’s a weird time in the Texas multifamily market. Debt is more expensive, and deals have slowed. So when I heard that you’re still out there doing deals, I wanted to talk to you. Can you give me a bird’s eye view of your deal flow right now and what your goals are amid all the weirdness?
Moore: We’ve been around for 15 years and bought about 60,000 units. We currently own about 35,000. Our mantra has been the same forever: We want to buy and sell in both up and down markets.
It’s self-proclaimed, but we deem ourselves the best in the business at the renovation phase. We’re not buying Class C deals — we buy something that’s 10 to 20 years old in a B+ or better location and make the interiors and common areas look new, and compete with new construction at a discounted rent. So our view is that our segment of the market is not going to see that bloodbath that some other multifamily segments may.
We’re not waiting for the 50-cents-on-the-dollar-type trade that’s going to unravel. We’re buying more institutional-type assets from institutional-type sellers.
The phrase we use is “relative value.” We know we can renovate to like-new. I have no idea what pricing is going to be tomorrow, but I know that pricing today seems like it’s a relatively discounted price from what it was yesterday, so we’re going to keep buying.
Now, to be fair, we are probably going to have our slowest acquisitions year since 2010. It’s not like we’re backing up the truck. But we’ve bought four deals this year, and hope to buy three or more.
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Have you seen sellers’ pricing expectations change?
Yeah. Six months ago, there was a huge spread between buyers and sellers. Today’s sellers have realized that pricing is not going to snap back to yesterday’s pricing. People who want to sell in the next couple of years are realizing there’s a good chance that pricing is better today than it will be in six months, so you might as well sell today.
There are some groups that think pricing may stabilize, but certainly sellers are more under the realization that values have shifted downward at a pretty good clip.
You mentioned renovating older apartments to compete with new construction. Texas metros have some of the busiest multifamily pipelines in the country. Does that frighten you at all about your ability to keep competing with new builds?
We’re only in certain markets, but in those markets, we have enough data to be dangerous. We’re deep enough to have a pretty good feel for the renovation premium we can get — right now, if we renovate an apartment, on average, portfolio wide, we’re getting a 21 percent premium. That’s probably down from this time last year, when maybe we were getting 25 percent. Still, 21 percent is pretty good.
As long as we see that nice renovation premium, we’re going to keep with our same business model. There’s also our rents — in new construction, I’m making this up, but let’s say you need closer to $3,000 to make a project work. Our rents are between $700 and $1000 less, so there’s still a nice gap. So even if there is a lot of new construction, you can live in one of our properties — it may be 10 or 15 years old, but the interior is the same and you can pay $600, $700, $800 less.
Even if the top end is oversupplied, and the math eventually catches up to us, so let’s say rather than $2,800 rents, new construction only needs $2,200 rents, it will certainly impact us. But what it will really impact is new construction: there will be no new starts, because deals don’t work for $2,200. So even if you do build too much — rents start dropping, and we can’t get the premiums — it shuts off the pipeline for new deals going forward and will work itself out over time.
And debt and equity for new construction today is hard. The reality is, there’s a lot of new construction today, but if you look at how many new builds are starting today and would be delivered in a few years, that has slowed down dramatically.
Is financing relatively easier to get in your sector?
Because of Freddie and Fannie and the government mandate for affordable housing, there’s still available financing. It’s just that the leverage is pretty bad — where we used to be able to get a 65 percent [LTV] loan, it’s now maybe a 50 percent loan. The rates are obviously higher.
That’s why a lot of deals don’t pencil now. You need to pay less if you’re paying more interest to the lender.