Spring 2024 Operational and Acquisition Insights: Improving Fundamentals & Surprisingly Strong Investor Demand
Operational Highlights:
Spring typically marks the start of prime leasing season for many of our properties, so we want to share a timely update for you on what Breneman Capital is seeing on the ground operationally.
Chicago:
Our properties in Chicago continue to perform exceptionally, achieving new all-time highs in rental rates while maintaining nearly 100% occupancy and collections. Our 2023 acquisitions of Ashland Place and Adams Laflin Place are off to a strong start.
Year to date, across our entire 14-property Chicago portfolio, we have executed the following:
99 renewals with an average increase of 4.45%
45 new leases with an average increase of 11.33%
Phoenix:
Starting in February of 2024, we’ve experienced an abrupt fundamental shift in the market for the better after a painfully slow second half of 2023. After averaging 1 new lease per week at The Quin in the second half of 2023, we are now leasing 2 to 5 units per week at the property and have increased rents by $100 for each unit type. At Echo Tempe, we had 8 vacant units going into the month of February before renting 6 units in a single week while leasing the remaining 2 vacant units the following week to reach 100% occupancy.
Many investors (and we are starting to come around to this belief as well) are of the opinion that the Phoenix market has bottomed operationally and will lead the nation in rent growth when the market recovers.
Over the last 12 months, Phoenix absorbed (move-ins minus move-outs) over 14,000 apartment units, which was the third highest amount of any market in the country after only Dallas-Fort Worth and Houston (RealPage Data), so the demand is still strong in Phoenix. Over the last two years, the market’s absorption rate has not been able to keep pace with new construction deliveries as the market faces record-high new supply. However, new construction deliveries are set to fall precipitously in Phoenix and nationally starting in 2025. Nationwide deliveries are expected to decline 42% from 2024 to 2025 and then fall another 44% from 2025 to 2026 (RealPage Data).
Investment and Acquisition Insights:
Many brokers and sellers tell us they are pricing their properties to neutral leverage (i.e. having a cap rate equal to prevailing interest rates on senior loans). However, once we underwrite the property to our standards (more conservative expenses, property taxes and insurance adjustments, realistic growth rates, more conservative other income, etc.), we are typically well below the asking price. We are routinely valuing prospective acquisitions 10% below or more off asking prices and where properties are still transacting.
As you know, we have prolific off-market deal flow and this is how we have sourced the majority of our acquisitions. We did, however, bid on a deal in Q1 2024 that was for sale on the open market in a Chicago suburb. It was a mixed-use asset, and it was put under contract by a competitor at a 5.06% cap rate (residential only) and garnered about 15 offers. We were very surprised at how strong the pricing and activity level was for the property. If you read many of the headlines in real estate news today, you may be under the impression that there are no buyers and that every property is priced at a bargain today. We can tell you that is not the case. Prices have certainly declined, but when properties are available on the market, buyers are still aggressively pursuing them.
It’s worth noting that we are describing our experience in pursuing higher-quality multifamily assets (great affordability, functionally relevant, top locations, etc.). It’s possible that buyers of older and less well-located properties do not see the same level of demand, but we do not invest in these types of properties, so we cannot speak to them.
Breneman Capital maintains our commitment to investors by ruthlessly examining market fundamentals and diligently sourcing new investment opportunities. Investors are always encouraged to schedule a time to speak with our team.
Connect with Us:
Interested in deeper insights or considering an investment with Breneman Capital?
Schedule a discussion with our team today and explore how we can help you achieve your real estate investment objectives.
With strategic initiatives and a firm grasp of market dynamics, Breneman Capital is poised to continue delivering exceptional value to our investors. Stay tuned for more updates as we advance through 2024, continually adapting to market trends and enhancing our investment portfolio.
Sincerely,
The Breneman Capital Team