Not all multi-family investors can afford to pay Seattle, San Francisco or Brooklyn prices. As these cities’ punishing markets keep finding a way to push prices and rents higher, their appeal becomes increasingly limited. San Fran is a great city if you’ve already made a million (well, two or three to be safe), but anyone attempting to establish themselves – which often involves not spending over 50% of their pay on rent – are already looking at other areas of the country as more viable alternatives.
“For the past five or six years, you've seen a very large exodus out of California, New York, and Illinois in general,” says Ari Rastegar, founder of Rastegar Property Company. Many on the East coast are moving to Florida, but those in the West are making their way to cities like Dallas, Phoenix and Austin, where they’re filling up multi-family properties at a steady clip.
Rastegar feels these cities’ B- and C-Class multi-family properties are where investors should consider parking their money.
“I think we're going to see a massive growth in Class B and Class C properties, because a lot of times these assets are in very well-located areas,” he says. Such properties tend to require extra capital to cover the cost of renovations, but even with the added reno costs these properties should remain more affordable than Class A or new construction.
“You can offer a solid product to consumers that are in the areas tenants want to be in, but not have to pay the premium,” says Rastegar.
Because of its proximity to California, and Los Angeles specifically, Phoenix has a special appeal to Californians looking for more space and a lower cost of living. That increased space – Phoenix is a sprawling metroplex and one of the 10 largest cities in the U.S. by area – could prove even more attractive in light of COVID-19.
“It's very spread out, and because it’s more spread out it's going to be more attractive for the future because densely populated areas like New York and San Francisco are where the virus spreads easier,” Rastegar says. “But there's also great healthcare in Phoenix, so you're going to see a lot of the market be able to absorb some of these issues because the healthcare sector is so strong. Healthcare is one of the main drivers there, but you're also starting to see large technology companies take notice of Phoenix.”
Rastegar says cap rates in the city are similar to what they are in the rest of the Southern U.S., which “is higher than they are in New York and San Francisco.”
There’s a reason Austin has become the country’s fastest-growing community, and it’s not solely because of the hipsters. Austin’s economy, built on a solid bedrock of healthcare and government jobs, is also home to the Southwest’s most happening tech hub: Google, Oracle and Facebook already have heavy presences in the city. Apple is currently building a billion-dollar campus in North Austin.
Austin is crawling with millennials, who often gravitate to newer product. But Rastegar says B- or C-Class properties carry plenty of appeal for the demographic, so long as they’re well-located.
“If they have a great location, something walkable that allows them to enjoy the city, they're going to do it,” he says. “And that's what makes Class B and Class C properties so attractive, because we can always renovate them.” Some younger tenants who spend little time in their apartments may not even require a renovated unit.
Austin’s days as an affordable alternative to some of the country’s other tech centers, however, may be coming to an end.
“Austin cap rates have started to compress. People are paying a premium to be there because of the jobs. It’s becoming more of a San Francisco, because the companies that are in San Francisco are starting to have a big presence here,” Rastegar explains.
While Houston is being hammered by oil- and COVID-19-related layoffs, Dallas’ diversified economy is standing tall. As the centre of Texas’ financial services’ industry, great jobs and accessible capital are everywhere.
“It does not have that consolidation of oil and gas and energy that Houston does, which makes it much more attractive,” says Rastegar. “Multifamily demand in Dallas has been incredibly high throughout the metroplex, including Fort Worth, Denton, Plano and all the surrounding areas.”
Once COVID-19 finally passes, millions of Americans are going to be faced with the prospect of starting over. Their savings will be depleted and their jobs will not be coming back. People will be on the move, and the cities that provide both an active job market and a lower cost of living will be at the top of the list of places where they can get back on their feet. Investors and their lenders should prepare for the influx.