If only we bought every apartment deal available in 2012, right? Forecasting market conditions and investing with prescience is obviously the hallmark of outsized returns, yet much easier said than done – especially as investment cycles mature. Despite what “inning” pundits argue defines 2016, the sure-fire methodology to make money in the current economic environment is to follow wise investment theses versus merely following the crowd.
According, where is the crowd not rushing? Or better said – where is the “smart” crowd placing bets? The following are five investment strategies sure to produce outsized returns for those seeking Alpha in a market replete with bets based on past market performance.
Five Strategies for 2016:
- Invest Near Neighborhood Retail
- Invest in Points of Continuity
- Invest in Property Management
- Buy in Second Ring Markets
- Sell Opportunistically
1. Invest Near Neighborhood Retail
Although our Team specializes in representing buyers and sellers of apartment assets, our true differentiator in the marketplace is advising clients on how best to achieve outsized returns. To do so, we specialize in understanding the behavior of your income steam – aka your residents/tenants – or more appropriately termed – your CUSTOMERS!
The stability and growth of your income stream (and accordingly NOI) is directly related to customer behavior. We study the performance of urban neighborhoods in other cities with more mature urban living. Time and time again, neighborhoods with vibrant, interesting and diversified retail amenities have outperformed other urban locations. Locating your apartment investment around such districts provides for your greatest economic success.
When looking across the nation, we compare emerging Seattle neighborhoods to the North Loop in Minneapolis, Chicago’s Logan Square or Wicker Park, East Austin, Back Bay in Boston and West LA costal neighborhoods of Santa Monica/Venice/Playa Vista – and similar neighborhoods from SF to NYC.
Many of these neighborhoods map to Seattle. A firm understanding of such comparisons presents arbitrage opportunities to invest early based on forward-looking performance expectations (versus oft ill-fated rear-view facing investment theses). Matured (and maturing) retail-based neighborhoods in Seattle are highly visible: Ballard, West Seattle and now Columbia City. Looking forward, Bellevue’s Main Street, Bothell’s Main Street and Burien’s urban core are all viable. And those are just the “Bs”…
2. Invest in Points of Continuity
Had one invested in Los Angeles’ Koreatown 10 years ago two events would have happened: colleagues would have thought you crazy and you would now need an accountant to count your piles of cash. What makes Koreatown unique? A lot of aspects. Yet, what made it obvious to the prescient crowd? It is situated smack between a LA’s hip Hollywood/Miracle Mile and thriving DTLA. From an investment perspective – slam dunk.
Where are such locations in Seattle? Quite a few places, actually. A couple of investors found a point of continuity between Capitol Hill and Madison Valley – locally known as the Madison-Miller neighborhood. The intersection of 23rd & Union is linearly between (and only blocks away from each of) Capitol Hill and Madrona – two of Seattle’s finest neighborhoods and fastest appreciating real estate markets.
What is next? Considering Vulcan has planted a flag atop Yesler Terrace and is now planning its next flag at 23rd & Jackson, the Jackson Corridor is a pretty solid bet. I’d say it’s that market is fairly reminiscent of Stone Way circa 2010. First Hill Street Car access to SoDo/Pio Sq/Waterfront doesn’t hurt either.
There are many other points of continuity across Seattle. The key is identifying them early and having the conviction to act before the crowd.
3. Invest in Property Management
As Seattleites, we demand much out of customer service. From Nordstrom to Amazon to Costco and REI, our retail chops are built on delivering to customers. Why should service to apartment “customers’ be any different?
With the proliferation of sexy new apartments the F, F & A war (fixtures, finished and amenities) has mounted attacks in interesting and innovative ways. If you don’t believe me, check out the first ever Drone Landing Pad Amenity planned in the South Park Tower in DTLA. Yet, as much as one can place bets on shinier stainless steel and granite-ier countertops, the reason we as consumers remain loyal to any business is service.
As our region is set to experience the delivery of over 14,000 apartment units in 2016 (see pages 12 – 14 of our 2016 Seattle Apartment Market Study), competitive differentiation is key. Beyond attracting tenants, managing resident (ahem … CUSTOMER) turn is the best way to preserve and grow NOI. Yes, keep your building full and you will make more money.
In recent years, our region is privileged to grow innovative professional property management companies, with attendant innovative practices – all of which are customer focused. In a time when location is less of a competitive differentiator (there are blocks with a new apartment on every corner) and F, F & A is a blur of the same, property management represents a critical differentiator and driver of value. Invest in property management – service is your key differentiator.
4. Buy in Second Ring Markets
In a recent post, Where are Rents About to Rise the Most in the Seattle Region?, we covered emerging market opportunities with excellent rental rate growth prospects. The fundamental drivers of rental rate growth remain growth in the core and attendant concentric rent growth pushing beyond the core is the basis of our insights into the hottest rental rate growth markets.
However, as the market matures hedging strategies are necessary should job/economic growth taper. The expectation is that rents will not fall in core, urban markets – yet affordability issues will likely prevent those who have left the core from returning. However, renters pushed further out in recent years may have opportunities to get closer into the core – and may pay a bit more to wait in less traffic (and have more money in their pockets due to rising minimum wages).
Second Ring markets such as Shoreline, Bothell, Newcastle, Renton and Burien are situated to perform well and poised to weather potential economic tightening, should such occur in coming years. Extending further, Second Ring markets with great transit options – Lynnwood and Kent are geographic polar opposites that come to mind – will likely have the strongest performance through economic cycles.
5. Sell Opportunistically
If you are looking to sell your apartment building in the next 3 – 5 years, there is no better year to exit than 2016. Truly, the wind is at the backs of Seattle region apartment owners. Given, many apartment investors are building portfolios and/or have very long-term hold strategies – and if that is your strategy, by no means should you force a sale.
That being said, if you are looking to maximize sales proceeds 2016 will provide the greatest certainty of a well-executed, well-timed sale. Seattle’s economic fundamentals (job growth, wage growth, rent growth, occupancy) are storied and attracting capital from around the nation and globe alike. Turbulence in equity markets, emerging markets, commodity markets and bond markets (more uncertainty in the latter), continues to push private capital into commercial real estate.
Given the confluence of economic uncertainty pushing capital into CRE, the duration of the current economic upturn and mounting imbalance of rental rate growth to wage growth – an exit in 2016 will be viewed in future years as very wise.
Give us a call to discuss the topics and guidance set forth in this post. We look forward to hearing from you.
Understanding both current and future market dynamics is critically important in positioning both your assets and your investment thesis for optimum returns. Our apartment investment sales team, comprised of four highly qualified professionals, and a back-office team of an additional four dedicated staff, specializes in assisting apartment owners in maximizing returns. We focus on representing buyers and sellers of apartment assets from 5 units to 500 units. Please give me a call to discuss how we can turn our expertise into your profit. – Dylan