The current economic environment is putting some investors on the sidelines, but Fogelman Properties, which has been on a multifamily buying spree the first half of 2022, has cautious optimism heading into the second half of the year.
“It’s been a wild four weeks now where the run-up in Treasuries and macroeconomic tumult has really affected the debt markets for our industry,” says Mike Aiken, senior vice president of investments at Fogelman Properties, based in Memphis, Tennessee. “That’s still the majority of the capital stack for most buyers out there.”
He says he has seen a lot of disruption in the market in the past month.
“Many assets that were awarded to buyers in Q2 2022 have involved retrades or were dropped completely. Properties we pursued 45 days ago where we ended up second or third in the bidding process are now coming back to us because loan terms have changed significantly and broader concerns from many about a potential recession,” says Aiken. “We’re not seeing a complete reset in prices, but depending on the quality of the location and the quality of the asset, there’s a 5% to15% deterioration in values. It’s to be determined on how permanent that shift is.”
According to Aiken, many buyers who were most active before are on the sidelines now because they are having trouble getting debt, or, in some cases, equity is not there in the same form it was previously.
“It’s leading to a lot of interesting opportunities for groups who have cautious optimism,” he says. “We think you can make investments at any point of an economic cycle, but you have to be thoughtful of downside risk in how you model it.”
While the investment side has changed meaningfully in terms of cap rates and capital market flows, apartments have proven to be one of the most resilient asset types.
“What has not changed is performance on the ground at the properties—strong occupancy and rent growth across our whole portfolio. That part of the equation so far has held up well,” he says. “The basic need of having a roof over your head is not going to go away and should continue to outperform other types of properties, whether office, retail, and even industrial. If you have a recession, those are likely to be hit harder than multifamily. I think there’s no reason that won’t continue to be the case here.”
Aiken says it’s been the most active 12- to 13-month period in the company’s history. Year to date, Fogelman has closed on six investments—everything between 1970s vintage deals to 2000s—that are value-add in nature in the strong Sun Belt markets of Atlanta; Charleston and Greenville, South Carolina; Houston; and Memphis.
Its most recent acquisition is The Moorings, a 201-unit waterfront apartment community in the Houston metro, where the firm has seen strong economic growth.
The community, which is 95% occupied and will be managed by Fogelman, is comprised of newly upgraded one- and two-bedroom apartments with rents ranging between $897 and $1,565. Amenities include waterfront views, Amazon hub lockers, a 24-hour fitness center, and a resort-style pool.
“The Moorings is located in a distinguished seaside community on Clear Lake in League City, a prime Houston submarket. With access to top employers and school systems, as well as dining and entertainment, the community is well-suited to access boating and recreation literally at your doorstep,” says Aiken. “As active investors and seasoned property managers, we look forward to expanding our footprint in the Greater Houston area.”