By Amy Sorter

If there is one word that could describe the recent Connect Texas Multifamily conference’s first panel, it would be “spirited,” For more than 50 minutes, the speakers participating in “Investing in Multifamily: The Great Class Divide,” focused on buying, selling, lending – and just about everything else pertaining to multifamily. “Great Divide” could also have described the topic and the panel, which was moderated by David Harrington with Matthews Real Estate Investment Services.

Anthony Tarter with PGIM Real Estate Finance got the ball rolling by discussing the job-to-permit ratio, and its impact on investment decisions, noting that Houston topped in Texas metros with a 12-to-1 ratio. “There is a lot of upside in that market,” he said. “That’s why I’m focused there.”

Carlos Vaz allowed that, while geography and permitting were important, so is affordability. Housing affordability is, in fact what drives his company Conti Investments’ decisions. Furthermore, “Older properties will need more effort,” he said. “But owners need to spend money. Don’t cut corners; that won’t add any value.”

Shravan Parsi didn’t disagree, but introduced a different take. His company, NAP Ventures, renovates only 50% of value-add units to “leave enough meat on the bone for the future owner.” This prompted Anthony Tarter to note that, while NAPA Ventures is smart for leaving that meat, “the people who bought the apartments do pay a premium.”

This then led Pender Capital’s Zach Murphy to question who the next “dumb money” players might be. He defined the concept as investors paying premiums on value-add properties, adding “if you say it’s me, I’m going to walk off the stage,” he said, with a laugh. However, Harrington suggested that the concept wasn’t so much “dumb money” as it was “money taking a different route.” Vaz chimed in, noting that what U.S. investors might consider a poor value-add investment is considered highly safe from a foreign investment perspective. “Even with all of the political turmoil, the U.S. is considered a safe haven,” he said. “The rule of law is so strong here, people invest here, they want capital preservation.”

The panelists did agree that a downturn was coming, but no consensus arose about how value-add investors should prepare for it. Tater’s belief was that social impact tools, such as after-school programs or child care services, were good amenities that would “help keep properties afloat during a downturn.” But fellow lender Murphy didn’t agree, pointing out that “where you buy and how much debt you put on,” would determine a property’s success during a recession. “Socially friendly programs are great for the community,” He added. “But I’d bet my mortgage on these preferred debt buys and mezzanine guys getting burned with those.”

As the discussion got around to challenges facing the Lone Star State, Gary Goodman with Passco Cos. pinpointed future job growth and absorption. “It’s so easy to build there,” he said, citing the low barriers to entry and the amount of available capital. “You guys just keep building and building.” But Vaz contradicted him, pointing out that, after the 1980s debacle, developers have been careful. “It’s interesting when people come to Texas, they assume it’s easy to build here,” he said. “But that’s not necessarily the case.”

The “Great Class Divide” concluded with investment takeaways and, perhaps unsurprisingly, panelist responses differed. Parsi suggested that attendees stick to basics, pointing out that “cash flow is king, and doesn’t lie,” while Vaz noted that demographic trends and operations would remain hugely important, as are operations. Murphy suggested that attendees “draw a clear line between what is sexy and fundamentals. New York, L.A., San Francisco are all sexy. But we were doing stuff in Dallas five years ago, before it was sexy.”

Meanwhile, Goodman stressed considering markets with very low barriers to entry. He pointed to the Atlanta area as one that has Passco’s interest, especially in value add. “What kills us is when we get into markets where a lot of properties are being built,” he said. “Developers will do whatever they can to boost occupancy, and get off their construction loans. As a result, they’re giving away terrible concessions.”

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