To learn more about the state of the Multifamily and Affordable housing market in the US, we decided to get in touch with a leading expert in the field and Principle at Pursuit CRE, George Kruse.
Kruse is a true veteran in the real estate industry with a career that spans over almost three decades. Previous roles of his include Associate Director at Raymond James, where he specialized in underwriting equal opportunities in multifamily real estate transactions being developed in low-income projects.
After this, he then became Managing Director at Vesta Equity, LLC, a private equity company he started with one sole investor’s capital. He ran this for several years, during which time he got his real estate and broker’s license and began focusing on finance and investments with a long-term goal to acquire workforce attainable housing throughout the west coast of the US.
We would love for you to check out the replay of our webinar with George Kruse last week, but we also have summarized it here.
Given that he currently runs Pursuit CRE, a real estate investment and asset management firm focusing on multifamily and other commercial assets throughout Florida, the first thing we wanted to find out from Kruse was whether or not affordable housing in The Sunshine State is as much a hot button issue as it is up in the state of New York.
Perhaps unexpectedly, Kruse claimed that affordable housing is pretty much all he hears about these days down in Florida, and he will soon be appearing on a panel in two weeks giving a speech on the subject to many eager listeners. Florida, according to Kruse, is one of the worst states in the country for lack of affordable housing, and the subject has been reported on the front page of newspapers three times a week every week for the past three years.
Given that multifamily has been a huge focus point throughout his career, it’s safe to say the subject is one Kruse can speak about with absolute authority. One of the reasons he has devoted his working life to this type of asset is due to the diversity it offers, incorporating everything from mom and pop housing, all the way up to an institutional REIT. Multifamily, then, is necessary in every cycle, in every market, and is an asset where you can work with anyone from the dentist down the road with a couple of thousand dollars and an IRA looking to buy a duplex, to a big company out in New York looking to get some higher yield in the south.
Ultimately, Kruse sees multifamily as an asset class that transcends what typical investors would look for and the cheap cost of capital in today’s market has really democratized the ability to invest in multifamily.
“Whereas back in the day you would normally see Blackstone and Greystar buying up the larger properties, now you’re seeing smaller funds being able to acquire these properties. This opens the game up to more buyers, gives more opportunities for sellers, and is ultimately a much more dynamic asset class that is fairly recession resistant.”
Obviously, Kruse’s level of knowledge of the multifamily sector places him in a position of great authority in the field, and he knows exactly what steps to take to become successful in this sector. However, considering this, we wanted to know what level of expertise a broker would have to reach in order to get ahead.
Funnily enough, Kruse believes that it is not necessary to become an expert in the field of multifamily but having at least a basic understanding of it certainly benefits everybody working in real estate. For instance, by treating multifamily as something special from your traditional, commercial real estate asset class, you open yourself up to a lot of additional cash flow.
“You may be putting a tenant into an office space, and the CEO of that company who is moving into town relocating his company has the capital and needs to make investments in a multifamily property.”
By having that basic knowledge at hand, then, a broker has the opportunity to tie in multifamily properties with their given area of expertise – be it residential or retail – to generate an even greater, more lucrative real estate deal from the client.
For anybody who has spent the vast majority of their career specializing in retail, a recent Venn diagram for retail and multifamily demonstrated how those assets are actually moving closer together as time progresses forward. Up until now, we’ve already seen lifestyle centers with residential components attached to them, and now walkable purpose-built centers with multifamily elements included in them are one of the ways in which people are reviving shopping malls for the modern generation.
Kruse adds that this merging of retail and multifamily is actually growing at a huge rate across the entire country, rather than just in big cities. Now, people are proposing to make zoning changes, implementing mixed use components to places that were once exclusively commercial corridors with the sole intention of finding airspace to build more residential property while minimizing cost.
After establishing what it takes to become successful in multifamily, we then wanted to know what some of the things are that people should be looking for when they are considering either purchasing or brokering smaller multifamily properties.
From a purchasing side, Kruse explained how it really does pay to be informed on how the market operates and have a basic idea of what to expect. Compared to just last year, the multifamily market is very hot with much less inventory and much greater demand. As a result of this, there are a lot of questionable pro formas provided, so understanding the metrics is essential, and he even suggests getting inspectors into the property for a professional analysis to be carried out in full before any purchase is made. His reason for this is that multifamily properties tend to have a lot of variables which allow for easy manipulation of numbers, which can easily fool anyone who is inexperienced. For anyone who feels they are unable to learn how to do this independently, he claims there are a large number of property managers who are falling over themselves for the opportunity, some of which who will look at the numbers for free in a bid to secure a new contract.
From a broker’s side, Kruse explains that, in his experience, just knowing the right people is a huge advantage. For instance, you might find one person and they own 10 properties, and eventually, at some point down the line, they are going to want to sell.
“Traditionally in multifamily, people are pretty much going to sell around the 5 year mark for two reasons: the first is that a lot of multifamily debt is 5 year debt; the second is that the biggest benefits to individuals buying smaller properties are that it is essentially tax free up front because the depreciation is so vast it wipes out all your gains, that depreciation starts going away if you’re operating your property properly +/- seven years. If it’s a longer play, you’ll have to start paying bigger taxes.”
Considering this, a lot of people will recapture their equity that has built up, sell it to someone else and 1031 it to a new property and start the whole process of depreciation all over again.
In the past, Kruse claims he couldn’t find a buyer that wasn’t 1031. Right now, however, he sees very little, if any, inventory in that area. One of the reasons why is that people became pretty aggressive on their sale prices, and for a period of time they were successful with it because of 1031. Now, because there is less inventory, people are less inclined to sell their property because they are afraid of what they are going to do with the capital.
Another reason is that over a 5-7-year cycle between 2012-2019, property owners have seen a year on year compounding rent growth of 5-8%, which is a huge cash-on-cash return on these properties. Considering this, to go out and sell this property at a number that makes real sense to an actual buyer and being able to reinvest that capital someplace to match that cash on cash return or even that absolute return is virtually impossible.
Another point of interest that is shared by many is where to find financing for multifamily. According to Kruse, it is possible to finance them any place, and with so much capital out there today the marketplace has become increasingly aggressive. However, he adds that when considering buying a duplex or anything with four units or less, banks and lenders consider it as residential, not commercial. However, when you go 5 units and up, you get the commercial side.
“Right now, the biggest is agency debt. You can get it so cheap and it’s not hard to get per se, but it’s catch-22 as they won’t give you a loan unless you’ve gotten a loan from them before. So that is why you see a lot of partnering. “
Like everything else, multifamily was affected by the recession in 2018 – but perhaps not in the ways you would think. Unlike other assets, multifamily will always have a demand as people will always need a place to live. However, multifamily got hit predominantly by a loss of supply. In essence, the reason people lost their properties from multifamily wasn’t so much because the values dropped as dramatically as other asset classes, it’s because the money to buy them was virtually free.
“I remember doing loans on apartment complexes at 90-95% leverage. That only gives you a 5-10% drop during the recession, and when you get to a point where an asset can drop 20% compared to other asset classes that were dropping 40%, this is a safe asset. But if you leverage to 90%, you’re losing your profit. And banks took back so much property because the leverage was so crazy on these things that they had no choice but to start selling it back off.”
Not only did the banks sell back the properties, but they also sold them off cheap. As a result, this started a snowball effect that lowered the valuation, not because the metrics showed that it deserved to have a lower value, not because there was a meaningful drop in tenancy, but because banks took all the properties back.
Another big concern for anyone looking to get into multifamily is that the market is quickly becoming overbuilt. With this in mind, we asked Kruse how much truth there was in this statement and whether or not such concerns are validated.
On the contrary, Kruse believes that the country is not building enough multifamily properties. Right now, we are still undersupplied and will likely continue to be in the future unless the numbers are increased. Every year, the US needs about 350,000 new apartment units, just to keep pace with population. Up until 2016, the country was only building about 250,000. Back when the recession hit in 2009, there was less than 100,000.
“We were starting way behind the 8 ball with way too little supply and year over year we never caught up to that supply. We were still being undersupplied relative to deliverable versus what was necessary for years and years. Now, we are at a point where we are delivering about 400,000 units and the demand’s still around 350,000. So, people look at it and say hey, it’s oversupplied, but it's only oversupplied if you’re looking at it strictly on a snapshot of one year without considering the past decade in its entirety.”
When you take this into consideration, the nation already has a tremendous amount of backlog to fill before it can ever catch up. One report claimed by 2030 4.5 million new apartment units need to be built just to keep pace with the additional demand from new tenants. That’s 400,000 units per year, every year for the next decade just to keep pace – and up until now, the country has only built 400,000 in one year twice in the last decade.