Competition for multifamily assets is white-hot, and no one knows that better than Thomas Foley, co-founder and CEO of Archer. To help small to mid-size investors compete against the biggest private equity players, Archer developed its own proprietary technology. Dubbed AIM by Archer, the technology allows the firm to source off-market apartment deals by identifying owners that are most likely to sell. Small to mid-size investors are bolstering their in-house acquisitions team by working with Archer to find actionable investment opportunities in new markets and expand their existing footprint.
Connect CRE: It seems that there’s a new fund announcement every day. Is there really that much more capital looking for investment opportunities in real estate? How does that impact the overall market in terms of supply and demand, as well as pricing?
Foley: It is an incredibly exciting time for real estate as investors continue to shift into alternative assets. Whether it be private funds or Public REITs, real estate has come into its own. More funds and more institutions are entering the real estate space, and while some are taking a cookie cutter approach, there is a lot of innovation coming in.
Simply put, there is much more demand for certain types of assets than the supply that exists. This is driving robust pricing for industrial, as well as multifamily assets, especially in markets that have experienced attractive demographic shifts. Places like Austin, Nashville, and Raleigh are hotter than ever.
Connect CRE: Where are you seeing the most competition in the multifamily market?
Foley: Multifamily, in particular, is more competitive than ever. As it is one of the few green-lit asset classes, capital that previously may have been allocated for office, retail or hotels is now flowing towards it.
A lot of funds have raised capital that promises higher returns related to value-add, opportunistic and distress-related strategies. Most of the competition is currently concentrated in these areas, which is causing groups to struggle to efficiently deploy capital as competition heats up for a limited set of good investment opportunities.
With government programs and lenders helping mitigate financial distress caused by the pandemic and with investors demanding high investment returns for these strategies, there is a gap between the promise of high returns and many groups’ ability to capture these returns in this competitive environment.
The pandemic has highlighted a major new challenge for real estate investors – simply put, the speed at which situations are changing across markets and property types is faster than we’ve seen before. This is an incredibly challenging, but important change, and I believe it is a paradigm shift for the slow-as-molasses pace at which real estate trends previously moved.
Connect CRE: What do you see as the main difference between multifamily investors that are able to find acquisition opportunities and execute on them versus those that cannot?
Foley: It’s harder than ever to find and execute on great acquisitions. Because of the pandemic, everyone expected distressed buying opportunities, but they haven’t materialized. Instead, the Fed (and in turn, lenders) prioritized liquidity, and asset prices continue to go up.
I think smaller, local firms are better suited to add value to their investors and to their tenants than large mega funds. In general, local firms have better insight into their markets and the nuance in each market, which often allows them to make better decisions than the mega scale of large funds. However, mega funds have the edge in the use of data and technology to streamline processes and find more opportunities for investment. At Archer, we’re working to flip that script by taking our proprietary technology and partnering with local groups who understand their markets better than anyone to build the best of both world – the local operator empowered with the tech advantage of mega funds.
The biggest difference between successful acquisitions teams vs others is speed and conviction. Whenever you win a deal – whether through a marketed process or off-market – you typically had to pay the highest price. That takes conviction, particularly around which assets and assumptions are worth stretching for.
For many investors, this becomes a numbers game – the more deals a team wants to win, the more deals they need to evaluate and pursue simply to win the select few where there is high conviction. There is so much wasted effort in this approach and it results in acquisition teams becoming inundated with potential opportunities that quickly outstrips their limited bandwidth. Small to mid-size firms feel this problem most acutely. The best groups can screen more assets more quickly and spend more of their time focused on the best assets with the highest probability of success. This is an area where data-driven solutions like Archer’s AIM platform can streamline efforts.
Connect CRE: How can investors edge out their competition and close deals in such a hot market?
Foley: That’s just it – investors that are closing deals generally have some advantage that allows them to win the deal. Data and technology are a definite advantage. For example, automated processes and focused analytics (so you waste less time looking at things that don’t matter) can really help teams hone their edge and “do more with less’” to compete with mega funds that have near-unlimited resources.
I believe the best firms are constantly pushing themselves and the boundaries to improve at and invest in every area they might have an advantage. This ranges from better data and technology systems, optimizing processes, improving local and national relationships, decreasing costs of capital, and identifying subjective sources of bias that might cloud assumptions.
Firms that continuously invest in technology and process improvement are the winners over time. Unfortunately, most firms don’t have the time and resources – neither people nor financial – to focus on continuous improvement. Instead, it’s all hands on deck for wrangling the next deal.
Connect CRE: What are some innovative ways that multifamily investors can use technology and data to execute their investment strategies?
Foley: If investors haven’t incorporated data and technology into their investment approach, they’re falling further and further behind. To be successful, investors should use technology and data in two primary ways:
- Efficiency – To do things they are already doing, but faster and with less effort, for example:
- How do you cut down the time it takes to underwrite a deal?
- How do you visualize all the information from multiple sources related to your current portfolio?
- How do you benchmark your operating expenses better?
- Effectiveness – To influence and advise on things they could be doing better and with more confidence, for example:
- How do you incorporate an AI recommendation engine in order to determine which submarkets to focus on based on where you’ve previously invested?
- How do you use predictive analytics to automatically generate and constantly update your asset management strategies and business plans based on lessons being incorporated real-time throughout the entire market?
Most of PropTech innovation has been focused on #1 – “Optimizing for Efficiency” within existing portfolios, but #2 – “Effectiveness through AI” is where Archer has spent as much or even more of our time and resources. That is where we believe the outsized opportunities await.
While these concepts can be applied across all property types, we’ve discovered the largest initial yields in the multifamily space. Part of the reason for that is the fact that the data is better and more comprehensive to start.
Connect CRE: How does Archer’s investment strategy differ from other firms?
Foley: The biggest difference between Archer and every other real estate investment firm is that everything starts with the investor, their needs and their unique strategy, not the other way around.
Most firms are reactive to what deals are coming across their plate and then trying to sell those deals to their investors. Archer builds custom strategies with its investors and then proactively identifies and acquires the assets that fit that strategy, whether marketed or off-market
We’re building Archer on the concept that property type and geography make all the difference for real estate returns. Getting the right city and property type pairing drives much of the return. For example, owning apartments might have returned 7.8% overall from 2014 to 2019, but owning apartments in Las Vegas or Sarasota would post returns of 17.5% to 0.2%, respectively, according to NCREIF. This is the same for all property types and is constantly changing.
Additionally, Archer has prioritized multifamily investment strategies. While other firms may be chasing the next shiny object or trend, we believe that multifamily still offers the best risk-adjusted returns compared to everything else.
This is because there is more visibility within the data, the need for housing is not going away, and the WFH movement has only accelerated the upswing of multiple new markets.