Strategic Apartment Investors Remain Undeterred

Multifamily transaction activity slowed in the second half of 2022 and continues to remain muted due to pricing uncertainty. U.S. multifamily sales totaled $187 billion in 2022, down 16.1 percent from $222.9 billion in 2021, according to Yardi Matrix. 

The Federal Reserve has raised its key short-term rate, the federal funds rate, nine times over the past year for a total of 475 basis points in an aggressive move to fight inflation. The Fed’s actions have led to a sharp rise in commercial mortgage rates, which have a significant impact on pricing, states Yardi Matrix. The 10-year Treasury yield, the benchmark for permanent, long-term financing, is now hovering around 3.5 percent, up from 2.3 percent one year ago.

“In the current climate with inflation and rising interest rates, we’re a bit more cautious, but no less active in scouring the market for great investments,” says Tim Donovan, director of investments for Midloch Investment Partners. “Investment sales are happening in this market, including by us, but it’s generally taking longer for buyers and sellers to agree on a price, and for buyers to raise the equity required to meet lender terms for permanent financing.” 

In January, the Consumer Price Index rose 6.4 percent over the same period a year ago. While that’s significantly lower than the year-over-year increase of 9.1 percent in June 2022, it’s still much higher than the Fed’s inflation target of 2 percent.

Midloch, a real estate investment firm and fund manager with offices in Chicago, Milwaukee and Minneapolis, focuses on small- to middle-market joint venture equity investments, typically in properties valued between $5 million and $50 million. 

The firm recently acquired three garden-style communities totaling 652 units in Wisconsin for $71 million. Midloch plans to make energy-efficiency improvements to the properties, which are located in Madison and Sheboygan. 

Donovan states that more than 90 percent of Midloch’s existing debt is fixed versus floating, so there is less risk to rising interest rates.

“We typically borrow with five to 10 years of term, which generally provides enough runway to implement our business plans. In other words, we’re not usually short-term borrowers,” he says. “Fixing rates over the medium term mitigates negative impacts if rates go up.” 

Midloch prefers to acquire properties with “features that tenants really appreciate,” according to Donovan. Examples include large floor plans, in-unit laundry and a comprehensive amenity package.

When it comes to location, Midloch seeks strong demographics such as high home values and household incomes. The firm invests across the country, but its core markets are in several Midwest markets including Columbus, Des Moines, Indianapolis, Kansas City Minneapolis and Madison, Wisconsin.  

Donovan says that the amount of time Midloch holds an asset depends on the property itself. While there is no standard hold period, the firm typically sets a five- to seven-year expectation with investors. 

“We’re opportunistic, and if the time is right, we’ll sell sooner. Similarly, we’ll hold longer if necessary to achieve our business plan objectives in terms of cash flow and appreciation,” he says.

Just as the hold period can differ, the renovation plan for each property is different based on the business plan. Typically, most capital improvements Midloch makes are to address deferred maintenance such as parking lots, roofs and landscaping, along with the clubhouse and amenity spaces. In-unit improvements vary depending on the specific property and are based on the end user.

“Sometimes we make upgrades in the interest of higher rents. In other cases, especially if the goal is to maintain affordability, improvements are more modest,” explains Donovan. “But refreshing properties and ensuring the safety of residents are always at the forefront.” 

Midloch is also focused on energy-efficiency improvements. In its first week of ownership at one of the Sheboygan properties, Midloch made improvements to the underground parking lighting to reduce energy consumption to one-fiftieth of what it had been. 

Renters stay put 

Josh Purvis, managing partner for Terre Haute, Indiana-based Thompson Thrift Residential, says he is optimistic about the long-term supply and demand story for housing in the United States. One reason is that rising interest rates deter prospective homebuyers, making rental housing more appealing.

“We continue to remain bullish given the demand tailwinds and supply constraints in our target markets,” states Purvis. 

According to Yardi Matrix, 269,000 apartment units were absorbed in the U.S. in 2022. The U.S. average occupancy rate fell 90 basis points to 95.3 percent during 2022 as more than 400,000 units were delivered.

This year, Thompson Thrift plans to break ground on 14 upscale multifamily communities. The firm recently acquired an additional 62 acres as part of the $550 million expansion of Fishers District in the Indianapolis suburb of Fishers.