Multifamily real estate investor Carmel Partners is using artificial intelligence to find the best markets to invest in for its recently closed $1.35 billion fund, the company’s founder and CEO tells Mergers & Acquisitions.
According to Ron Zeff, the company has invested heavily in its five person data science and research team that is leveraging AI to predict submarket rent growth, using proprietary data. Historically, available information on rent growth data has been poor, not accurate and hard to rely on, he notes.
“This is giving us a key advantage,” he says, adding that the firm predicted that San Francisco would see rent growth and purchased three assets in the Bay Area in its latest fund. “San Francisco is now the number one rent growth market in the country,” Zeff says, adding that “limited supply is driving rent growth” and “demand is being driven by income growth.”
There is also less transaction volume in these markets and ground-up development is harder because of construction costs and hard to obtain entitlements, he says.
San Francisco-based Carmel Partners, which focuses on value-add and ground up multifamily development in coastal gateway cities and Denver, closed its ninth fund at $1.35 billion earlier in April with $477 million in committed equity. The firm invests in existing operating assets, development projects and opportunistically, debt.
“We are focused on finding high quality assets to add value to, from B+ to A- to A, and then increasing rents, and we are underwriting 18 percent to 19 percent gross returns doing this,” Zeff says.
The firm has acquired nine operating assets with the new fund, and has two more in the pipeline, one in Manhattan and the second in Seattle, with a combined equity commitment of $120 million, Zeff says. The nine operating assets are in Northern Virginia, Boston, Los Angeles, Seattle and the San Francisco Bay Area. Zeff says that this is the most attractive multifamily market his firm has seen in 30 years.
Factors for Rent Growth
There is significant rent growth or expected significant rent growth in these markets, Zeff explains. In comparison, the Sunbelt region has had falling rents for the past three years, a huge amount of vacancy in the lease-up properties and new supply has only backed down to 2019 levels. Meanwhile, supply has backed down to 2013 levels in the coastal gateway cities.
“Supply is the biggest factor in predicting rent growth at the market and submarket levels,” Zeff says. “Every time there is oversupply, it limits rent growth on the Class A properties, and then they lower their rents to the B level, and then the B level has to lower their rents. Once the supply is absorbed and there are no more concessions in the market, Class A properties typically lead the rent growth because they aren’t competing with new supply.”
At the same time, high construction costs have meant that properties built even a few years ago have a cost basis that is lower than the replacement costs, so sellers of Class A- and B+ apartments are breaking even. Carmel Partners has been able to find Class A- and B+ properties that they can add value to at a 20 percent to 40 percent discount to replacement costs, Zeff says.
“Covid distorted typical demand patterns,” Zeff explans. “People moved out of urban areas and into suburban areas, and investors saw better performance in garden style apartments in the suburbs and worse performance in high-rise urban apartments. Demand has shifted back to the urban core as back-to-office occurs, and this is creating opportunities for us as there is less competition for this product since institutional capital hasn’t materially returned to the market.”
Reach Zeff at: [email protected]
