Multifamily real estate investing has not been an activity for anyone with a weak stomach in the past year.
Between interest rate increases, the need for expensive capital for renovation, overall seismic fluctuations in the capital market and a rent slowdown, fewer investment winners are emerging. Benzinga talked to one company that’s weathered market fluctuations to build $5 billion primarily in multifamily investments.
Dallas-based RREAF Holdings is a privately held commercial real estate firm with a track record of acquisition, development, asset management and ownership success across the U.S. through the financing of complex real estate projects. Chief Investment Officer Graham Sowden discussed RREAF’s winning strategy and the current multifamily investment climate with Benzinga.
How invested is RREAF in the multifamily space?
We launched the company in 2010 and currently have six main verticals we invest in, but the multifamily acquisition is by far our largest. We mainly focus on B+ multifamily properties and are focused on secondary markets. In the last five years, we’ve developed a reputation for being one of the most active buyers in that space now own 15,000 units and have sold six or seven properties in the past few months. Our total portfolio is about $5 billion, with multifamily investment at $3 billion of that.
Are you concerned about an impending recession?
We’re in one right now. But I think that while our space is not recession-proof, our business model is recession-resilient. Multifamily investment has always been a good inflation hedge. We’re not buying Class A properties because those will be the first to get hit.
Is the current economic environment affecting your multifamily investment decisions?
It’s tricky to buy anything right now. The capital markets have been volatile, and things are slowing down. Rental rates have not increased as expected and a lot of these groups have to lend to the properties to keep them afloat. Eventually, they will be forced to either sell or refinance, which will be difficult today. What we have done in the multifamily investments we’ve made is lock in long-term fixed rates. We remain opportunistic buyers, however, and have been one of the most active over the last two years. While we will continue to buy, the market has slowed down, and we believe it will continue through at least the first quarter.
Are you optimistic about the second half of the year?
We are confident that interest rates may go back to zero in the next two to three years, and there will be some buying opportunities and loan assumptions or properties that need a cash infusion. But you have to have the cash to do it, and we’ve been focused on rebuilding our own cash reserve.
Why are your investments targeting the Sun Belt exclusively?
We’re of course seeing tons of migration from both coasts and the Midwest into the Sun Coast. It’s tax-friendly with a lower cost of living, and people working remotely have an opportunity to spread out and have more space. We’re seeing a lot of economic movement with companies moving to the area. We’re now focused on Florida, Texas, Georgia, North and South Carolina, Mississippi and Alabama and anywhere exhibiting double-digit population growth. We look at areas with economic drivers like universities, medical facilities, military bases, manufacturing and distribution. They have to have a combo of those. For instance, we’re not just investing in markets where Amazon has a distribution center.
There’s been a lot of discussion about companies taking advantage of low rental inventory and raising rates as high as 40% in the past year. What is RREAF’s strategy with rent increases?
We are growing rents in line with where we budgeted two to three years ago. We are now right above the budgeted pro forma rents and aren’t raising them arbitrarily. We are going in and spending $7,000 to $10,000 on rehab for each unit and raising rents anywhere from 5% to 20%.
With so many question marks in CRE in 2023, what is RREAF’s future strategy?
We’re now buying hotels and motels on beaches in the Florida Panhandle and the Gulf Coast, such as Coco Beach and Amelia Island in Florida and Myrtle Beach, South Carolina. We are gutting hotels to studs, adding new restaurants and bars and giving middle America the same experience you could get from 4- or 5-star properties on the beach. In this space, we are catering more to blue-collar customers. Our strategy is to own these properties long-term and offer 30% returns.
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