Nolan and Misner Discuss Innovation in Multifamily Institutional Investment

February 20, 2020

Nolan and Misner Discuss Innovation in Multifamily Institutional Investment

February 20, 2020

Berkadia continued down its path of ongoing innovation in 2019, earning a coveted piece of the multifamily institutional investment sector along the way.

Institutional sales—defined as an investment of $30 million or greater and including 100 or more multifamily units—make up a relatively thinly traded segment of the market.

Despite the intense competition, Berkadia closed $9.2 billion in investment sales in 2019 by representing a diverse mix of private equity funds investing on behalf of pension funds and endowments, REITs, and life insurance companies.

Berkadia’s Dori Nolan, SVP Clients Services, and Keith Misner, SVP and Head of Investment Sales, recently sat down with us talk about how Berkadia plays an active leadership role in this segment.

Why has Berkadia found success in closing institutional sales in the past and where do you see the opportunities for future expansion into the segment?

Nolan: Our success is grounded in providing seamless service and customized solutions to our clients. More and more, that service and those solutions rely on actionable insights derived from innovative technology and cutting-edge analytics. Berkadia has and will continue to make significant investment in technology innovation to empower institutional multifamily clients to make better informed real estate investment decisions.

“Second-tier gateway” cities like Phoenix and Atlanta will remain appealing to investors thanks to uncapped growth potential.

What’s driving institutional investment in 2020 and which markets do you see investors focusing in on?

Nolan: We expect 2020 to be another great year for the multifamily sector, largely driven by strong apartment fundamentals. In terms of geographical focus, institutional investors are turning their attention to secondary markets, including Phoenix, Las Vegas and Atlanta. These “second-tier gateway” markets offer uncapped growth potential, since local regulations are not as restricting as first tier cities like New York or Los Angeles.

At the same time, these markets are developing at a breakneck pace, with rising rents, accelerated job growth and tenant lifestyle preferences that mimic those of larger cities, making them attractive, particularly for value-add opportunities.

Misner: We will continue to see investors search for yield and focus their attention on core-plus, value-add and ground-up development projects in suburban locations within secondary and tertiary markets. Given the abundance of capital sitting on the sidelines, competition for prime assets is expected to intensify, attracting interest from both domestic and foreign capital sources.

Are you seeing institutional clients actively pursue a specific asset class or investment strategy?

Nolan: Typically, institutional clients are still searching for diversification, though they construct their portfolios around certain concentrations, such as property types, geographies and life cycle. The exception to that trend would be if they’re a niche investor that will overweigh their portfolio with a specific asset class like value-add plays or new construction.

New excise taxes, like those recently passed in Washington state,  are a potential challenge for multifamily in 2020.

What are some of the challenges, considerations and changes you see ahead for the multifamily investment sector?

Misner: Considerations change routinely and there’s always some uncertainty in terms of what’s coming down the pike, especially with technology continuing to be a major disrupter in our industry. We are late in the real estate cycle, so investors are more apt to settle for lower risk-adjusted returns.

Key factors to us when evaluating deals include changing rent stabilization regulations in certain markets, increased scrutiny around the lack of affordable housing, the potential for excise taxes at the time of sale similar to what was recently passed in Washington State, uncertainty around real estate taxes, and penciling ground-up development projects with reasonable exit scenarios. We also remain watchful in terms of what will happen to LIBOR when it sunsets, where interest rates are headed, the potential for GSE reform and debt underwriting.

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