Category: COVID-19 Market Overview
Air Date: 06.02.2020
The Future of Multifamily Investing
Steve LaMotte, Jr. is an Executive Vice President and co-leads CBRE Indianapolis-Louisville Multifamily.
He discusses a variety of topics including:
- The future of multifamily investing and the industry he has seen as we adapt to COVID-19.
- How he expects the industry to change going forward
- The increasing trend for renters and the demand for multifamily
- Impact of the pandemic on market dynamics
- Strategy changes he expects for investors in the future
Steve began his career in 1994 and has focused exclusively on the sale of apartment property throughout the Central US. Over the last 10 years, Steve and his team have led production in their markets on large, institutional-grade and high-profile assignments. His team is the overwhelming leader with $1.1B in volume in the Class “A” space since 2012. Steve is a member of CBRE’s Institutional Properties, a small group of national market leaders who focus largely on institutional-grade assets and transactions of size. He has been involved in the sale of more than $4 billion of apartment product and is routinely included among CBRE’s top 10% of Investment Properties producers nationally and is consistently the top producer in CBRE’s Indianapolis office.
Steve sits on the Advisory Board to the IU Kelley School of Business Center for Real Estate Studies and is a regular presenter to the IU real estate program. He sits on the Apartment Life Midwest Advisory Board. He has also served on the board of directors of the Indiana Commercial Board of Realtors. He is a regular presenter to the Louisville Apartment Association, Midwest Real Estate News regional events, various other organizations and trade groups, and has presented to the Indiana Bar Association, Indiana Apartment Association, Apartment Life and numerous other organizations.
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—Full Transcript Below—
Stevel Lamotte, Jr. (00:00):
We take on the risk of, I mean, to execute a flawless renovation plan in order to achieve our investment returns when we can get that same return or maybe even a better going in return,
Kent Ritter (00:12):
Welcome to Ritter on real estate. The show about how to passively invest like a pro. On each episode, I interview real estate experts who give their top investing advice, strategies, and tools. And I break down those insights into practical steps to avoid the pitfalls and make better investments. I want to help you passively invest like a pro. This is Ritter on Real Estate and I’m your host Kent Ritter. Hello, fellow investors. Welcome to Ritter on Real Estate.
Kent Ritter (00:36):
I’m your host Kent Ritter and today I’ve got a very special guest Steve Lamotte, jr. And Steve is the executive vice president and co-leader of CBRE, Indianapolis-Louisville Multifamily. In his role, Steve leads the market in large institutional grade sales with over 1.1 billion in volume since 2012. So, Steve, thanks for being here today. Really excited to hear your insights on the market and hear from your perspective, working throughout the Midwest, kind of where, you know, where people should be focusing, how things have changed and what you expect coming out of all this that we’re in right now, as we start to get back outside, where should people be? Where should people be looking for deals. So really excited to have you today. Yeah. Why don’t we start off with,I’d love to just hear a little bit more about your background. I know that you’ve had a long career in multifamily, so tell us, give us your history and tell us what led you to multifamily.
Stevel Lamotte, Jr. (01:41):
Yeah, sure. Well, Kent, I guess sort of an interesting story and it’s a short story as well, because I’ve been doing this my entire span. So almost about 26 years in the multifamily space. I always knew I wanted to be in real estate because of family, friends who are in the business. So that was sort of where I, I feel like I was, I was slated for this industry, the apartment piece though, was a surprise. I thought I was going to be in the office side to line up with you know, how I was wired and, you know, kind of working in a, in a professional space, studied finance at IU. I would go into it turned out that that door closed and the door opened up to jump into multifamily three months into my apprenticeship at CBRE, which at the time was Commercial. And I, I decided to jump out of this apprenticeship DataBank program early, which was an attractive option and jumped into the multifamily space.
Stevel Lamotte, Jr. (02:36):
So, you know, my explanation of that is it was not on my radar at all multifamily was very different 25, 26 years ago. And it does today was very, very mom and popish, very unsophisticated. It was not, it was not a glamorous side of the business at all, but there was an opportunity there and I jumped. So, you know, when I reconcile all that, God opened up the door and and I jumped in and it was, it was multifamily space where I could use my finance degree because it was investment, property sales. So and you know, it turns out over the last 25 years, the apartment space is really turned upside down from what it was it just in terms of sophistication and asset design and capital thats invested in the space. So it’s a, for a lot of reasons we can talk about here, it’s a resilient space, that’s a nice hedge in a down cycle and it rides up in an up cycle as well.
Kent Ritter (03:31):
So can you tell us a little bit more about the history there, kind of the evolution and how we’ve gotten to, to the market of where we’re at today? Yeah, sure. Well, I think one interesting observation that’s just very obvious is that 25 years ago, if you’re a college grad and you’re 25 years old, you, have to be in a house and if you’re not in a house, then something went wrong with your plan, there was a failure. And today, if you’re a college grad 25 years old and you’re in a house, something went wrong with the plan. So it’s a share, we’ve got 180 degree flip here. The preferences have just changed. People just don’t want to own a home young people, empty nesters, certainly. And then a lot of folks in the middle of that spectrum, just don’t want the responsibility to come with owning they’ve realize like myself personally,uwhen you invest in a single family house.
Stevel Lamotte, Jr. (04:23):
It’s not necessarily an investment, it’s an investment, but it might not be an appreciating investment. So take that away. And some of the motivation to own single-family goes away. Then you look at where multifamily has been built over the last 10 or 15 years. It’s built in very strategic central locations and possibly jobs locations, walkable locations, much closer in then typically where the same level of single family housing that would be income, demographic appropriate for that renter. It would be built and those homes are being built much further out. So we have walkability, we have centrality, we have proximity. I’m, I’m kind of saying the same thing. And those three, those three labels asset finishing feature, you have new construction. Today you’ve got quartz or stainless steel, Oh, sorry. You’ve got quartz or granite counter tops. You’ve got stainless steel appliances. You’ve got phenomenal interior finishes.
Stevel Lamotte, Jr. (05:20):
You’ve got amenity space, which is resort style. And you live with 250 other all households that are maybe fairly similar to you. So there’s the sense of community that you just don’t get in single family. Yet, You get a different view that you have, you have different features in single family and I’m not suggesting the single family doesn’t play a role. Certainly still the majority of it, Americans, but it’s playing a decreasing role for the majority of Americans as these preferences have leaned in toward the things and the features that multifamily offers today. And I guess one of the things I’d say on this one, one of the most interesting evolutions to use your word, Oh, would probably seen us more. So over the last five to eight years is the amenity space in the sense of community that is being fostered in the apartment industry.
Stevel Lamotte, Jr. (06:10):
It used to be that folks that lived in apartments were, you know, they were very focused on their box and what happens inside owners, operators, developers very focused on the box itself. What are these four walls look like and how they make that experience, the best experience for the resident. And that’s changed dramatically today, where now I guess we can blame it on the digital age that should make us hyper-connected, but has this ironic twist of disconnectedness physical disconnectedness we’re, we’re connected digitally, but we’re not connected physically and spatially. So I think there’s a, there’s some pushback in American society on that where people are saying, we want to be together. We want to be in the same common space. And so now we’ve seen this shift, from just focusing on the box to focusing more on the amenity space and creating a sense of community inside of the properties that occurs, you know, largely in the common area, in the clubhouse and the pool and fitness center.
Stevel Lamotte, Jr. (07:09):
And, you know, the best examples of this are take a, you know, an urban property with a street level, a retail space. Storefront type space and picture like a boutique type hotel. We walk into the lobby hotel and you’ve got The coffee shop over here to the right, you’ve got a restaurant bar concept to the left, and then right in the center, you’ve got the registration desk. So all those elements exist in one space. And you’ve got different people who have different agendas melting together in the center. And that happened now in the apartment space where you taking all these different elements and types of traffic you’ve got people coming of the street and want to get a coffee, you got people coming off the street and getting dinner or a drink. You got the residents who are walking in, who are exercising or using the common space and sitting areas it’s all happening together and creating a sense of community that just didn’t exist before.
Stevel Lamotte, Jr. (08:04):
So my view on, on the amenity space and the evolution is occurring, there is that community really is the future amenity and the operators and developers who are figuring that out and designing spaces around community and fostering a sense of community are ones that I think are going to win. And then we see groups like part of my life, which is yeah, third party organization that comes in and bring staff into a property, conduct, social events, get to the residence. So, you know, a lot of, lot of people are thinking about this new base of humanity.
Kent Ritter (08:37):
So I think that’s a really interesting thing to bring up and talking about the sense of community and amenities, especially in the time we are in this COVID environment that we live in this kind of social distancing environment. What’s your perspective on how that idea of community changes? In this world we live in, we’re worrying about getting infected and the pandemic. I mean, do you see that having a, having a longterm effect and maybe changing that approach? Or do you think that, mell I guess just that, I mean, how do you see that altering?
Stevel Lamotte, Jr. (09:14):
Yeah, I think I’ve got two immediate thoughts on that one. I think that everybody is about to lose their head by the quarantine. And as soon as we’re released from jail, there’s going to be, just a lot of pent up demand to go out to eat to go to games, to go to concerts and do the things that we all used to do before. And so we’ll see a lot of, a lot of maybe hyper community. If I can coin that phrase the other thing that’s happening though, is that we’re all discovering like this conversation we’re having right now that we don’t need to be face to face a lot can be conducted digitally. And so I think that’s going to change the way, you know, that’s going to change the way a lot of people do business. It will certainly change the way leasing is conducted in the wake of Toronto.
Stevel Lamotte, Jr. (10:02):
We did an investor survey last week talking to a number of our, our owners in our markets and asked them, what do they think? What do they think this does as far as lasting changes in the way that they conduct business? We asked a number of different questions, but related to this topic we’re on right now we asked the question, how will, how are you, how will your post Corona tours change based on what you’ve learned mid-Corona? The point of that is, well, we’re seeing virtual tours and a lot of, a lot of the non, non real time, spatial tours taking place it’s happening across the industry. That’s certainly happening in the apartment industry. And so the question was, how will this affect what you do going forward? And interestingly 28%, not 58%, but 28%. So they will, they will rely increasingly on virtual prerecorded tours in the future. I would guess that that answer would have been five percent, it probably wasn’t even on most operators radar before the need to evolve occurred. So you know we’re seeing, we’ve seen a lot of changes, but I still go back to my comment two minutes earlier that uI think people want to be together and want to be in the same space. I think that will prevail, but we’ll see modifications where we all conduct our life and conduct investing and conduct due diligence and conduct everything, the transaction space, alone, plus every other area of life.
Kent Ritter (11:28):
Yeah. I mean, I tend to agree with you. I think that that community is a central human need, right? We, we, we are we as a people we want to be together and I don’t think that that’s going to go away. I think there will be, you know, there’ll be some backlash to this for a while, but I, I think it’s innate in use as you say to want to be together. I agree with that. I see that. I think that,uit’s interesting. So, from an investor perspective, thinking about,uthinking about deals and looking and evaluating a deals then,uI mean, you, it sounds as if you rate the amenities in the deal highly, I mean where does that rate in relation to things such as looking at finishes and then the box, as you say to add value when you look at rent premium and comps and price per door and things of that nature.
Stevel Lamotte, Jr. (12:30):
Yeah. Well, I think it’s a package deal. I don’t think you can really have one without the other, do you know, to really well on a, on a, on a well-designed renovation value add program, I think you need to address all those areas. I’m not suggesting that one is more important than the other. I think you still need, if you’re going after a class A renter in an A location with a value added property. And by the way, that’s, that’s the asset that was pre Corona and post Corona in my opinion will still be incredible demand, or maybe there’s some modifications, but, but I think that for that asset and that location, you still have to spend the money in the club house you still have to spend the money inside the apartment delivering the best features and so forth. So yeah, they all play a part if you’re modeling up a value-add transaction and value-add plan is how do we allocate rent bump to, the dollars we spend in the amenity space that’s really hard to do.
Stevel Lamotte, Jr. (13:28):
It’s very easy to do, or at least we can come up with logical conclusions on dollars spent inside the unit because you’re that future renovation that future kitchen finished and so forth to the property up the street and has a dollar higher rent. So you can, if you can say, all right, we’ll do this, this and this inside the unit we’re going to get close to or equal to that rent up the street. Can’t make those same arguments. It’s just much more subjective in the amenity space, but yeah, they’re both equally critical. In fact, you know, my view on it is you get five seconds with a prospect walking into the clubhouse, you get five seconds to make their decision. It’s what are they seeing? What are they hearing? What are they smelling? Hopefully they’re snowing good thing. But all those things, all those opinions get formed really quickly in the mind. And those are dollars and spend, buy a house and the amount of space. Yeah. So it’s just hard to say, okay, we do this and this, and we’re going to get this kind of a bump. You can’t make those correlations correctly.
Kent Ritter (14:32):
Yeah, absolutely. I think that makes a lot of sense. I think if I’m thinking about it from an investor standpoint, though, I’m thinking about, okay, if I’m looking at a deal, I want to make sure that the sponsor that I’m working with has a plan for both, right? Because both are important, right? If you’re putting, granite and stainless steel in, but you’re not providing amenities that are comparable in the market, then you’re never going to be able to, achieve the value that you would be able to achieve without it. Right? So you’ve got to make sure that there is a thoughtful plan for the amenities, as well as the nuts and bolts of what’s going in the box, as you said, I think so. Thinking about changing gears here, a little bit thinking about you know, where we are today and as we come out of, as we come out of COVID-19, you know the world will open up again. What are, the markets that you’re dealing in that, you like? And maybe, maybe it’s the same as before, but what are things, what are the markets that you like and what are the things that you like about them,
Stevel Lamotte, Jr. (15:40):
Right. Yeah. Well, I’m going to start broad first and just point out something that is self evident. Multifamily is a space where there is constant need that the user side of that business, the renter has a profound need. They need housing. And you compare that to, let’s just say that I’m going to pick on the retail side, don’t have the need to go to Dick’s sporting goods and buying a tennis racket every day, every week, or shorts, whatever you go on down the list, we don’t have that same need in the retail side. We don’t have to go out for dinner. We don’t have to go into the office. We’ve proven that here, now that many Americans are working remotely today and while it’s perhaps not as efficient as it is in the office and dedicated space, we’re getting by and we’re doing it well, look at the hotel industry it’s been virtually shut down.
Stevel Lamotte, Jr. (16:39):
So you compare all those spaces to multifamily and do it very different. And I left US logistics, industrial space. Out of that comparison, the arch rival, if you will, to multifamily both those spaces were just white, hot pre-Corona and will come out of this remaining white hot, maybe even hotter from an investor standpoint because of what we’ve seen here and how those other sectors have had some struggles mid-Corona back to your, I think what the intention of your question is, what segments of the market do we like what we here and grown, and let’s just talk about collections for a moment. So the, the, the collections you’re, we are you know, middle of second Avenue, the collection data in the A grade space is noticeably better than the collection in the C grade space who are making more income, have the ability to pay those who are paycheck to paycheck, who are among the, among those in the U S that are sitting on $400, any given point in time, that workforce, they, where the market is challenged to pay.
Stevel Lamotte, Jr. (17:50):
So if we’re, if, if the strategy is, is risk avoidance, then that would point investors into the integrated segment of the market. But you want to build an underwriting and investment strategy based on another Corona crisis. Probably not. And most, most folks would look at this and say, this was a, you know, maybe a once in a lifetime type of event, we’re not going to see something like this happen again. We will see, you know, arguably we’ll see an economic recession at some point again, in our, in our relevant future here. But we’ll be like this. No, not necessarily, but I think even in a, in a much more mild economic event that might happen in whatever three years, five years, 20 years, we can expect those that are making more money to be more readily able to pay their rent and those in the C grade space.
Stevel Lamotte, Jr. (18:42):
So I think you can, you can make some inform, some investment decisions on, on that based on what segment of market you might be in. And then maybe you can look at other things like you know, some specialties of multifamily, like student, student housing, senior housing, student housing has been just another white, hot segment of the market with more kids going to college, staying in college longer, or going to grad school and, you know, just needing private off campus or, or just off campus housing, but we’ve all seen what’s happened here at colleges, just like everything else shut down. And today there’s some question about some colleges opening up in the fall. I know some have already announced delays to open first semester is just, it’s going to be online. So now there’s concern in the student segment about what
Stevel Lamotte, Jr. (19:33):
Fall of 2020 revenue looks like? The senior space is, is has been just a phenomenal growth sector inside the apartment you know, category or go last several years as more and more seniors empty nesters are moving out of single family housing and into multifamily housing. But, you know, we now know mid-Corona that those most susceptible to the virus are the elderly. So there’s concern about that. I know, I know that the senior space has been, many operators in the senior space have been just phenomenal about, about, you know, keeping their facilities safe and clean and free of COVID-19. So we haven’t seen the, you know, based on my conversations, we haven’t seen the catastrophes in the senior space that some might have thought possible 30 days ago, but I think, you know, you ask yourself those questions, where do we want to play?
Stevel Lamotte, Jr. (20:29):
If you’re, if you’re playing just right up the fairway then in the conventional multifamily space sort of back to where we were, which is a lot of investor demand for well located not too old asset with limited, or no physical obsolescence, and that are $200 to $300 below the competing properties in the sub market. And I think that once we get through this, we’ll see an enormous demand for that asset classification perhaps with a little bit more a pendulum swinging back toward the core strategies, you know, the class, A strategies where we’ve got high income residents already in place that can weather the storm.
Kent Ritter (21:12):
No, I was just going to, I was going to ask a deeper question there, because as you’ve been talking with, you know, the buyers and sellers and your contacts in the space, have you seen that, that change to a to a higher, more stable asset class? Are people already talking about that? Or are we saying, do we expect to see more deals coming in that, that A space verse C beause I mean, for, for a long time, the bell of the ball was C class value-add. People are going after, you know, high, double digit IRR and higher returns. Do you think there is the shift to more stable class A, as you said, and have you seen that actually happening?
Stevel Lamotte, Jr. (21:55):
Yeah. I can’t say we’ve seen that happening yet. I think you’re right. It’s just a bit too soon, but my guess is that we do see that some shifting of capital toward the stable core place, the pendulum is always swinging. It’s always swinging from core strategies to value add, or from value-add strategies to core strategies. And it tends to, it tends to swing based on where where the capital just got tired of playing and it’s, you know, it goes both ways the returns get so compressed in the core space with institutional capital coming in with the tremendous demand, greater demand, I think today, maybe not mid-corona, but coming out of corona greater demand then for multifamily than ever before and pressing down yields in the core space. And then we see the capitol say, okay, Nope, no more, yields are too skinny. Let’s go create value.
Stevel Lamotte, Jr. (22:48):
So it swings back toward the value add space and then the value add returns, getting inverted and become lower than the core returns that we see the capitol or some of the capital say that’s a little too aggressive for the risk we’re taking almost go back toward core strategies. And so I would say that we are, we’re probably, we’re probably early in that curve that I’ve just described where the yields have become so compressed in the value-add space that we’re seeing some groups, you know, pre Corona and mid chronic to saying we take on the risk of, having to execute a flawless renovation plan in order to achieve our, our investment returns when we can get that same return or maybe even a better going in return in the core space. So some of those conversations are happening and then having in the lastd 6-12 months or so maybe a little bit more emphasis in getting back into the stable core assets base.
Kent Ritter (23:43):
So you see it more as continuing with the same, but, but perhaps accelerating into where you are thinking
Stevel Lamotte, Jr. (23:50):
We were all we were already going into more of that core. Is that right? I think that’s a better way to say it. Yes. I think they’ll, I think there’ll be profound change or viewpoints in other sectors of commercial us commercial real estate, but you’re multifamily, we’re providing a need that is is not going away. People, people aren’t all of a sudden, we’re going to say for whatever reason, well, now we need to buy a house post credit. It’s not happening. And then, so I think that the space becomes even, even more desirable from an investment standpoint coming out of this crisis. But no, I don’t see it. I don’t see viewpoints changing dramatically inside the space. We’ve never been through this before. And so nobody knows we’re all, we’re all figure. We’ll all learn together.
Kent Ritter (24:33):
Sure. Yeah. I mean go, going back to just the pure supply and demand dynamics. I mean, when I, when things are complicated, that’s what I try to do is keep it simple and say, okay, if you know, I mean, you were, you’re IU Kelly guy just, just like me, right? And we were taught this stuff. If, if supply is higher than demand, prices move down, demands higher than supply prices will move up. Right. And I think that, that’s what we’re seeing. We, I’ve seen studies that say we’re four and a half million units short by 2030, for example, of demand versus supply. And it seems as if that, that could even be exacerbated now based on, based on one, just the effect that this has had on people’s economics. Right? And the ability to afford a house. And as we’ve, we’ve already seen housing prices continued to increase. But just that constrainted supply. I mean, it seems to me that there, like you said, there could be even more of a need for a rental situation than even before
Stevel Lamotte, Jr. (25:44):
I agree I think that as you envision look at supply and many secondary markets, I would agree with your kind of the theme of your comment that we are potentially under supply. That’s not a primary market story. A lot of the primary markets have been overbuilt, particularly in the CBDs over the last three to four years. But I haven’t seen that in the secondaries and, you know, what’s what’s issue here sort of case in point to that, as I’m talking to investors, you know, five years ago, it’s almost irrelevant what happened five years ago, but there’s an interesting contrast here. We had to spend a lot of time defending supply levels in Indianapolis five years ago and in investor conversations. And that was the one weak spot in Indy folks that were new to town that were thinking about investing in Indy would poke on supply.
Stevel Lamotte, Jr. (26:33):
I mean, inevitably came up and virtually every new capital source conversation, it was supply we built to many apartments in Indianapolis. And it felt like that was a correct assessment, but I don’t have that conversation today. We’re just not defending supply today because I think a lot of things have shifted. We’re not building in every corn field in the, in the Metro today, like we were years past, it’s very strategic, it’s smart supply. It’s built in downtown Indiana. It’s built in Keystone, at the crossing, or it’s built in and Caramel where we’ve got jobs and amenities that people want to be here, downtown Fishers, where we’ve got jobs and amenities and people want to be. So we’re building product in places where we have demand and we’re finding an audience for it. It’s being absorbed. And we’ve got that happening while mindsets have shifted radically over the last several years about single family versus multifamily. So I think that you can think you can make a case and many markets in many sub markets that we are potentially under supplied or what we would expect and look like. And that’s just holding, that’s holding the rentership ratios constant. If you continue to trend the rentership rates up over the next 10 years even more the case that can be made that we are potentially undersupplied
Stevel Lamotte, Jr. (27:52):
Meaning that you expect the more people as a percentage to be renting versus owning, it’s going to continue to escalate into the future. I think we could expect the rentership rates to increase. Yeah, I don’t, especially, like you said, in the wake of this national global crisis, we could expect that to happen, but it was all renters, those rentership rates were still treading. It’s not as if we, it’s not as if we’ve plateaued, you know, pick your market, your number 34%. Rentership it’s not, I don’t think any markets nationally are very few. If, if plateau we’re still seeing that rentership rate increase to the detriment of single family home ownership rates.
Kent Ritter (28:38):
Gotcha. Thanks for listening to another great episode of Ritter on real estate hit the subscribe button to make sure you don’t miss out on the content that will make you a better investor. Also visit kent.ritter.com for articles, videos, and tools curated just for passive investors. Until next time. This is Kent Ritter with Ritter on Real Estate, now go out and invest like a pro.