All Forum Posts by: Vince DeCrow

Hey Jade - Looks like you got some good feedback in this post. In addition, tou may also want to look around for third party reviews on the company. A third party site that conducts these types of interviews on real estate investment companies is InvestorMint.

See link below for a review of investing in Origin Investments Funds

Origin Investments Review

 No problem, I appreciate your interest.  

 Thanks Ronald, I'm glad you like it. What is your opinion on where values/rents are at today in Collin and Tarrant County?

Hi Chris - Thanks for the kind words. Origin's current funds seek to achieve a certain total return versus focusing on COC returns. Annual cash flow is still a factor when we make acquisitions as we typically reinvest the cash that the property throws off in capital improvements in the early years of the investment to be able to raise rents in the future. Since a cap rate is relative to the implied risk of the property (among other things), I think determining whether the cash flow of a property is great or not should be compared with the risk you are willing to take and your particular investment objective. If someone is looking for cash flow only and willing to take the incremental risk of buying and holding a stabilized property in Cleveland, OH at a 9 cap vs a stabilized 5 cap in Denver, then cash flow from a 5 cap probably wouldn't be favorable to them. With that said, we buy properties not based on their cap rates, but rather based on if there room to increase a property's value through conducting value-added business plans and stabilizing the properties. When thinking about selling a stabilized property after adding value, we always consider the implied stabilized cap rate and if a buy-and-hold investor seeking cash only cash flow would be willing to pay that price.

-Vince 

Thanks Travis, I'm glad you liked it.

-Vince

Thanks Terrance. I'm glad to hear you liked the post and your partner is happy Origin's results.

-Vince

In Part I of this post I identified four U.S. markets which I believe to be ripe for commercial real estate investment: Atlanta, Austin, Denver and Durham.

2018 Best Commercial Real Estate Markets to Invest In: Part I

Part II is finally here and contains four additional markets:

• Charlotte
• Dallas
• Orlando
• Phoenix

I used the following fundamentals and indicators to determine a market’s attractiveness for investment:

• Job and population growth
• Access to a talented workforce
• Diversification of the industries that drive the market’s economy
• Rent growth
• Inventory deliveries, absorption, and vacancy rates.

These indicators help paint a clear picture for a real estate market’s health, rent growth expectations, resiliency in an economic downturn, and overall future demand. All these factors are major macro contributors to commercial real estate values and investment returns. The real estate data in this post is leveraged by market research reports from CoStar Group, the leading provider of information and analytics in the real estate industry.

Charlotte

Charlotte has seen population growth over the past 10 years that was 3 times larger than the national average. The population growth has been driven by a constant flow of high-quality job creation, low costs of living, and low costs of doing business. Charlotte created about 55,000 jobs in 2016 and is a major destination for young professionals and retirees. Charlotte is known to some as a low-cost regional financial hub, however, it’s economy is also bolstered by the growing presence of industries such as business services, manufacturing, government, education, and construction. Another factor that is expected to drive growth in Charlotte going forward is the extension of the LYNX Blue Line light-rail. The extension will provide an important link from Charlotte’s city center to the University of North Carolina – Charlotte campus. The extension is estimated to be complete by the summer of 2018 and has the potential to create thousands of jobs from new construction and businesses setting up shop along the light-rail extension corridor.

Charlotte’s apartment market, in aggregate, had a vacancy rate of 8.1% in 2017 and 12-month rent growth rate of 1.9%. Charlotte’s strengths and apartment demand has attracted developers over recent years which led to about 6,700 new apartments being delivered in 2017 with 13,000 more in process as of the end of 2017. Since migration to Charlotte and population growth have remained strong, most new apartments have been leased-up by Charlotte’s relatively young population who prefer renting to buying. Many of the new apartments were delivered in the Uptown and South End submarkets. Going forward, submarkets along the light-rail extension are expected to see an influx of demand from tenants. The increased tenant demand going forward would likely be the demographics that desire higher-scale apartment product that are at lower prices than in the Uptown submarket and in less-dense neighborhoods than Uptown or the South End. As a result, the submarkets surrounding the Charlotte light-rail extension poses attractive opportunities for real estate investors going forward going forward.

Charlotte's office market ended 2017 with a vacancy rate of 9.0% and rent growth of about 7.5% over the year. These statistics compare to the national average office vacancy rate of 10.5% and rent growth of about 3.0%. The high rent growth has been supported by low vacancy and a lot of build-to-suit office inventory vs speculative developments. Speculative office development is expected to increase over 2018, which could create a slight uptick in office vacancies in the short-term, however, this should not bear negative impacts for commercial real estate investors. Employers and job creations are expected to remain plentiful in Charlotte, creating demand for new construction over time.

Dallas

The population growth in the Dallas-Fort Worth metroplex was more than double the U.S. average in 2017 due to its abundance of new job creations. Over the next 5 years, the area expects to benefit from a migration of more than 100,000 millennial residents, a demographic that is most likely to rent vs own. The economy and in Dallas is driven by industries such as business and financial services, transportation and logistics, telecom, technology, and natural resources. Examples of companies that make up these industries in the Dallas metroplex are AT&T, American Airlines, Southwest Airlines, JP Morgan, Exxon Mobil, and FedEx. Dallas added over 100,000 jobs in 2017 and a host of different companies have recently announced their plans to continue to create jobs in Dallas over the next 5 years. Some of these companies include State Farm, Toyota, Liberty Mutual, and Charles Schwab.

Dallas’s apartment market had a vacancy rate of 7.8% in 2017 and 12-month rent growth rate of 2.8%. The apartment vacancy in Dallas is expected to remain below historical averages over the next few years due to projected demand created by additional migration to the market. The rent growth should also remain above Dallas’s historical average going forward, however, the growth will depend on the submarket. Hotter submarkets such as Uptown and Park Cities are seeing flat rent growth due to high levels of supply and already pricey rents. Corporations are currently increasing their presence in the Plano and Frisco markets due to the relatively lower costs to operate there and convenient access from downtown Dallas. Due to growing interest from employers and investors, I expect to see a relatively higher level of rent growth in Dallas’s suburban markets such as Plano and Frisco. These submarkets have the ability to provide attractive multifamily investment opportunities going forward as they attract more residents from their growing number of available jobs and excellent school districts.

The Dallas office market had a vacancy rate of 14.7% in 2017 and rent growth of 2.0%. Office vacancies are well below historical averages and poised to be a prime beneficiary from the growing number of office-using jobs in the market. While there is a positive outlook for the Dallas office market, it is important to note that there are several major speculative office developments that are set to be delivered in the next few years. These deliveries will add inventory to the market that doesn’t have pre-arranged absorption, thus creating incremental risk of downward pressure on rent growth that could result from increased competition to fill leases.

Orlando

Orlando’s population growth has more than doubled the U.S. average for each of the past 10 years and continues to earmark Orlando as one of the fastest growing markets in the U.S. Orlando has also experienced job growth that was more than double that of the U.S. for each of the past 3 years. Job growth in Orlando is expected to weaken slightly from current levels over the next 5 years, however, it is likely that it will remain above the U.S. average during this time period. The growth in Orlando is being driven by many factors including a low cost of living, several billion dollars in recently completed and planned infrastructure improvements, large growth in their healthcare services industry, and a booming leisure and hospitality industry. The strength of the leisure and hospitality industry in Orlando is driven by the year-round warm weather luring travelers as well as the large presence of theme parks in the city. Orlando is currently the #1 tourist destination among U.S. cities. Orlando is also a major player in U.S. defense contracting and poised to capture growth in this industry going forward from the recent increase in the US military spending budget.

Orlando’s apartment market had a vacancy rate of 5.7% in 2017 and 12-month rent growth rate of 6.8%. Orlando’s low apartment vacancy rate is a result of the massive population growth the market has seen, the constant flow of rental demand by University of Central Florida (UCF) students, and their thriving leisure and hospitality industry. UCF is the nation’s second largest university which has over 65,000 students enrolled today and is expected to grow by over 2% through 2019. The leisure and hospitality industry is currently Orlando’s largest creator of new jobs which provides a steady stream of 20-34-year-olds that remain in the apartment renter pool due to their relatively lower wages preventing them from homeownership. Orlando delivered 6,665 new apartment units in 2017 and the market promptly absorbed 6,589 of the new inventory. The rent growth of 6.8% in 2017 is expected to cool off in the next few years due to an abundant level of new supply coming online, however I expect the rent growth to remain well above the national average through 2018 and the following years. Value-added multi-family investment in Orlando is currently an attractive way to enter this market due to supply of older vintage multi-family properties that could benefit from capital improvement.

Orlando’s office vacancy rate was 6.9% in 2017 with office rent growth that was just under 2.0%. New office supply in Orlando has been relatively absent despite the large rise in job creations and demand for office space. Orlando delivered about 500,000 square feet of new office space in 2017 and absorbed over 1,000,000 square feet. Orlando has been providing financial incentives for major corporations to relocate to the market and is expected to continue providing these incentives going forward, which will continue to increase the demand for office space in the market. Orlando’s vacancy rate of 6.9% is the lowest the market has seen in nearly 20 years and is expected to continue compressing over the next few years. The office market absorption in Orlando in the near term will likely be driven the by an increased military spending budget creating high numbers of new office-using defense jobs, major corporate relocations, and a growing number of technology and STEM companies looking to relocate to Orlando to take advantage of the city’s low cost of living. In 2017, Orlando led the nation in technology and STEM job growth with an 8.0% increase in jobs. With about 1,000,000 square feet of traditional office space currently under construction in Orlando, one opportunity for investors going forward could be to focus on providing non-traditional and creative office space to technology companies, which is favored over more traditional office space by these types of companies.

Phoenix

Phoenix is well known in the U.S. for its warm weather and overall affordability which have created a population in the city that is growing at about 3 times the rate of the U.S. population. The employment growth in Phoenix also continues to outpace the national average and is being driven by corporate relocations and expansions in the financial services, healthcare services, transportation, and technology industries. Some examples of corporations that are expanding in Phoenix include US Airways, Northern Trust, ADP, Uber, ADP, and State Farm Insurance. Historically, Phoenix was particularly prone to the effects of boom-and-bust cycles due to its reliance on consumption-driven industries, however, the recent growth of more diversified industries in Phoenix is quickly building the city’s resiliency to economic cycles. The uptick in Phoenix’s economy is being driven by its business-friendly environment, its advantageous geographical location, and its large employment talent pool. Part of this talent pool is made up of graduates from Phoenix’s Arizona State University (ASU), the largest public university in the country with roughly 83,000 students enrolled. ASU has a large focus on producing graduates that are well prepared to perform in high value-add jobs and was ranked by U.S. News and World Report in 2017 as one of the nation’s most innovative schools.

The Phoenix apartment market has a 5.7% vacancy rate and 12 month rent growth of 4.2%. The population and job growth in Phoenix will continue to drive demand for apartments in the metro area. Deliveries of new apartments in Phoenix are expected to peak in 2018 and have a promising level of demand to absorb these new units. Rent growth in Phoenix has started to slow down over the past few years due to the competition among a growing number of landlords, however in 2017 the metro area’s rent growth of 4.2% was still among the top 10 for cities nationally. While many submarkets in Phoenix have vacancy rates below 5.0%, one idea for investment is focusing on submarkets that have relatively less planned apartment deliveries and tight vacancy rates at or below 5.0%.

The Phoenix office market has a vacancy rate of 14.6% with 12-month rent growth of 3.6%. The rent growth in Phoenix has been driven by the relative lack of new office space delivery coupled with increased demand for office space by Phoenix’s expanding corporations. New office construction in Phoenix is currently below the city’s historical average and has been largely concentrated in the southeastern suburbs over the past several years. The strong employment market in Phoenix combined with the concentration of recent office deliveries in certain areas is creating attractive opportunity for office investment in some of Phoenix’s emerging submarkets. 

After taking office, the Trump administration reversed a regulatory effort that put a spotlight on the fees that investment advisors received for managing retirement accounts, which forced the Department of Labor (DOL) to put its “fiduciary rule” on hold. The fiduciary rule is the concept that professionals who manage money should work in their client’s best interest, regardless of fee arrangements.

The term “investment fiduciary” is broad, referring to anyone who has the legal responsibility for managing somebody else’s money. They can be financial advisors, bankers, investment managers, accountants…etc. Fiduciaries are legally and ethically bound to act in their client’s best interests.

This rule is important for anyone paying someone else to invest their money on their own behalf, and especially important for high net worth investors. The person who you entrust with your money should be committed to putting you in investments that meet your investment goals. While the pending fiduciary rule is meant to hold fiduciaries to this standard, alignment of interests is necessary for every investor and successful investment.

Unfortunately, many investment professionals today are not fiduciaries and are only held to the “suitability” standard, which could negatively affect the returns of high net worth investors. This means that they can legally recommend investments that generate the highest commissions for them, as long as it’s suitable for you, the client, but not necessarily in your best interest. For example, advisors at companies such as Goldman Sachs and JPMorgan sell many of their own commission-driven products because they are incentivized to do so. Some of the most efficient investment products in the market today, such as Vanguard Funds, don’t pay any commissions to sell their products. If operating under a broker, investors may miss out on these types of these opportunities since the broker would not be incentivized to put their client in that investment.

A fairly recent Financial Industry Regulatory Authority (FINRA) investor alert pointed out the importance of investors giving careful review to public and private real estate funds in particular, as these managers are not legally obligated to do what is in an investor’s best interest. As an investor relations employee of a private real estate fund, I’ve spent a significant amount of time talking to our high net worth investors who have taken this message very seriously and are interested in how real estate fund fees affect their returns. For this reason, we tell high net worth and accredited investors to look for the three defining features to determine if someone managing their money has their best interests in mind:

1. Skin in the Game: Investment managers should stand to gain only if their investors are also successful. The best alignment of interests exists when managers invest in the same products they sell to investors, or when their personal payout depends on performance of the investments they are recommending.

2. Commissions: Beware of real estate products that are sold. Non-traded REITs pay advisors large commissions to sell their products and can have a front end load as high as 18%, meaning that in those cases only 82 cents of every dollar is put to work for the investor. I would not personally make an investment knowing that I am at a 18% loss on day one.

3. Strong risk management controls: A disciplined investment team has controls in place to minimize risk. Some examples of real estate risk management would be:

• Using debt responsibly by not over-borrowing or putting up multiple properties as collateral for a single loan
• Conservative and defensible investment underwriting assumptions
• Well-defined investment strategies that are transparent to investors and able to be continually monitored through investor reporting

Changes in the regulatory landscape make it clear that investors must be proactive when vetting potential real estate investments. A firm understanding of wealth-building goals and a willingness to screen investment managers using the three points made above can help when choosing investment professionals who are best aligned with your goals and will work to your benefit.

Hi Ali - Are you referring to a specific property in Denver that's lacking cash flow, or the Denver market itself? The level of cash flow an investor gets is directly related to the asset itself and not necessarily the market as a whole. Denver overall is a strong market and a property here would likely be lacking cash flow if the investor overpaid for the asset and has too high of debt service, has a comparatively high expense ratio, or if they are having a hard time leasing. We don't play the guessing game of market level property appreciation, but rather we invest in properties that we can create forced appreciation through value-add business plans and we actually underwrite cap rate expansion throughout the investment period to remain conservative. I agree that making the numbers work with assumptions that aligned with the market is imperative. 

-Vince