Potential Headwinds in 2017 for Investors

[Sean Kirkham]

Please provide your insight into any potential headwinds investors may face in 2017. Specifically in the DFW area.

[David Thompson]

Sean,

I'm sure it depends on your business model but if you are talking large apartments in Dallas of the B/C value add type we don't see a lot of concerns to our business model.  We have purchased 6 large communities there in the past 12 months with an experienced team that has been through cycles and has invested in Dallas for many years.  This partner has invested all over the nation but said Dallas was the most resilient economy during the last downturn and remains so.  One apartment purchased by this group has returned 46% to investors in just a mere 16 months and that property was in Houston of all places supposed to be suffering from an oil slump economy.

I just got done raising $2m on a deal in Dallas and got through the holidays, Trump election just fine.  There certainly is a bit more news on interest rates but again, things got way ahead of themselves and are starting to pull back a bit already.  I saw just yesterday that one of the key Fed Reserve chairman mentioned perhaps one increase this year so we are starting to see more cool heads prevail.  We think demand for Dallas apartments will continue, jobs and population growth have been there and are expected to be there in the future.  The trends are much more powerful than who is president and interest rates policies.  Think rust belt to sun belt (a super cycle), think east/west coast high company costs looking to relocate to Dallas to reduce employee costs and be close to key strategic transportation routes (DFW, interstates) linking coast to coast in a few hours.

The long term trend of more renters has a lot of legs left (millennials, boomers), cost of a house is going up as well as higher rates so that will continue to keep people renting as well.  Where we could see headwinds first would be in the class A apartment market but again, savvy BP investors and syndicated know better.  We don't buy new, we buy value add deals where you force appreciation.  This is not buying on residential comparisons but on commercial valuation models.  Cap rates are always worth watching but they will do what they do.  You need to expect rates to increase somewhat with a rising interest rate environment but not panic if you are in strong markets because demand for apartments compress cap rates as well.  Occupancy at all our locations are at 95% or greater while sub markets in Dallas are in the 95 to 97% range.  So, we're not concerned about absorption when we renovate almost like new interiors on 1980s apartments and get $1K/month while Class A charges $2K/month.  They don't compete with each other.  There is no demand shortage for renovated Class B.  We don't even track absorption. There isn't enough as it is.