While some asset classes during the pandemic took a one-two punch that even Muhammad Ali would’ve struggled to get up from, investment appetite for other property types reached a fever pitch as panicked investors sought out capital safe havens.
Multifamily, deemed a safe bet long before COVID-19 hit, became the undisputed darling of the real estate sector overnight.
“What I imagined would happen during the midst of COVID certainly did happen,” Jeffrey Simpson, a partner and co-founder of Arch Companies, said. “Investors who were concerned about shopping malls, retail facilities and office space raced to multifamily as a place to invest. I can’t tell you how many different people I’ve heard say that they believe the multifamily asset class is the most desirable, and the least risky, of any asset class in real estate. We’ve been investing in it for about a decade now, and I have never seen such a sharp increase happen so quickly.”
Many of those who pivoted investment strategies to target the multifamily sector now find themselves embroiled in a different battle: a red-hot bidding war for multifamily acquisitions.
But, they won’t do battle with Arch Companies.
Multifamily comprises more than 70 percent of the firm’s portfolio, which has doubled in the past 18 months, but “we don’t bid on properties — we never have in our entire career and we never will,” Jared Chassen, also a partner and co-founder at Arch Companies, said. “We’re never going to be the highest bidder. We’re competitive when there’s a compelling story to an asset, or we find somebody who needs our strengths and help.”
Arch was founded in 2018, although its two founders have been investing in multifamily properties for more than a decade. Steering clear of stabilized properties, the firm instead focuses on assets that are in some stage of transition — for example, where a change in partnership has taken place, debt is coming due or some capital markets need exists.
But, even the hairier scenarios that require niche expertise drawn from battle scars acquired in the tranches — uh, trenches — are drawing some competition these days.
“It’s harder now than it’s ever been,” Simpson said. “There are so many people in the market that are buying who just don’t know what they’re doing. We acquired just under 2,000 units in the last four months, so it’s OK for us if we don’t buy another multifamily property this year — we want to, but it’s also OK if we don’t.”
Indeed, the firm’s tactical approach in targeting underperforming assets that are ripe for repositioning, or tackling special situations where it can add value through its expertise, has already paid off.
During 2020 and 2021, Arch grew its portfolio to 5,000 multifamily units and 600,000 square feet of office space across nine states. To accommodate its rapid growth, it tripled the size of its headquarters, moving from SoHo to NoMad.
“We have a team mentality where everybody has their strengths, and we foster those strengths,” Chassen said. “I think that we are very entrepreneurial and we work really hard. The opportunities are out there, but only if you’re working hard enough to find them, and we are working hard to find them.”
Arch is dedicated to its home base of New York City, while also focusing its attention on acquiring assets in the Southeast and on the West Coast.
Its investment strategy dates back long before the pandemic inspired similar paths among its peers (although, it was undoubtedly further validated by COVID-19). Instead, it’s driven by the key fundamentals underlying the markets it’s active in.
Arch began making multifamily acquisitions in the Southeast in 2018, despite a few raised eyebrows in the early days.
Simpson recalls being at a conference where an industry peer asked what he was working on. He replied that he was acquiring properties in Charlotte, N.C., and Alabama. “”This guy said, “‘What? Why?’” A similar interaction took place at a different conference a year later. Fast-forward another year, however, and the reply was, “Oh, yeah, we’re doing that, too.”
Despite being ahead of the curve in many respects — no pun intended — “We’re not smarter than anybody else,” Chassen said. “We’re just trying to use data to help guide our investments.”
Recent acquisitions include The Park at Forestdale, a 486-unit, multifamily property in Birmingham, Ala.; and a four-property portfolio of garden-style, multifamily assets in Columbia, S.C., totaling 672 units.
“Our view on the investment side is we’re going to continue to pursue what we can in the South. Things are changing dynamically, and it’s definitely harder to find value because prices are inflated,” Simpson said. “Our property in Birmingham has performed amazingly well, and we bought it in the midst of COVID. So, we’re really very happy with what we’ve done.”
The frenzied rush to invest in multifamily product has brought a rabble of new investors to Southeast markets, however, with a few unfortunate consequences, including inflated valuations and deals that simply don’t make sense.
“I don’t want to be a pariah, but this happens when an asset class is really coveted and people are willing to pay more,” Chassen said. “We’re selling a multifamily building in Alabama. It’s very small, 60 units, but the bid list was 50 people long. Now, 25 percent of those people are multifamily investors, they understand it. But, there’s a lot of people who have never invested in this before. And, just like any other investment, whether it’s in real estate or not real estate, it’s very nuanced.”
The crux of the problem, Chassen said, is that some people are investing in an asset class that they don’t understand. Further, Alabama multifamily is not the same animal as New York City multifamily. “When you have people running to get to that product who don’t understand it, you will absolutely see future distress, because they’re paying a price that the loan can’t support and equity investors are expecting something that they see in a pro forma that won’t happen,” he said.
The last-mile distribution and industrial sector saw a similar trend during COVID, as new faces rushed into the space. “All of a sudden, it was the hottest item, but I didn’t jump into it, because I didn’t understand it,” Chassen said. “Sure, I could build [an industrial property], but I don’t know how to operate one. I’m sure the people who bought those facilities may be doing well for now. But, when things aren’t going so well, or the market gets saturated, are they going to be competing with the people who are logistics companies that really understand it?”
Simpson gave another example of a multifamily property in Alabama that was in deep distress and worth less than the debt on it. Arch passed on the acquisition opportunity, but others did not.
“The market paid a considerable amount of money for that asset. And it made no sense,” Simpson said. “There was no way to justify the price. I mean, it’s great for that seller, they got their money and then some. But I looked at where that property traded, prior to this uptick in multi and the whole story of COVID, and there’s no way they can even cover the cost of the debt.”
Arch has also been busy making strides in, perhaps, the most coveted market of all: South Florida. The firm recently announced a joint venture with Infinity Real Estate to build a mixed-use multifamily project on a one-acre site in Miami’s Edgewater.
“I believe that now is the chance that Miami has to create the business environment that it really deserves,” Simpson said. “It has good office space, it has infrastructure, it has great transportation with the airports, and now we have major employers that are establishing headquarters there.”
“South Florida multifamily is just really hot,” Chassen said. “Orlando and Tampa have been really sought after for years. The price per unit for a similar product in Orlando versus somewhere in North Carolina could be three to four times as much. And Miami is the same way. It’s really on the tip of people’s tongues right now.”
Again, there are savvy investors eyeing the market; then, there are those who just want to put dollars into Florida real estate. “Unfortunately, it puts pricing off a little bit, because people will pay prices that don’t make sense,” Chassen said. “We’re not falling into those traps. But, again, if you have long-term investment goals and you invest based on analytics, you can still get some great transactions.“
In addition to pursuing its value-add strategy in multifamily, and development deals that make sense, Arch is also focused on providing capital market solutions on troubled assets.
“We continue to see [special situations], which is not unusual during a time like this — although how many of them are actually being vocalized is a different matter,” Simpson said.
But, distressed multifamily opportunities are few and far between. “It’s almost like, even if you did the worst job ever, your multifamily property is still worth so much money right now,” he said.
In terms of a typical special situation he is seeing outside of the multifamily sector, Simpson gave the example of an asset that has some sort of deferment or forbearance on its loan and the property itself is still recovering. “Those borrowers may be stuck in the same position with their lender, if the lender continued to give them a deferment or forbearance, but nothing has happened to bring that property fully back to where it needs to be to perform,” he explained.
Empire state of mind
Despite increasing its activities in the Southeast, Arch is keeping equally busy in New York City.
In April, the company closed $106 million in ground-up construction financing for Myrtle Point, the firm’s 17-story, mixed-use building at 3-50 St. Nicholas Avenue, along the border of Bushwick, Brooklyn, and Ridgewood, Queens. The project will include 130,000 square feet of retail space and 133 residential units, 30 percent of which will be affordable.
The same month, the firm announced it had partnered with Ryan Serhant’s SERHANT brokerage to start leasing at 11 Greene, Arch’s luxury rental building in the heart of SoHo, to which the tenant response has been “amazing,” Simpson said.
Even during the pandemic, Arch’s faith in New York City didn’t waver, Chassen said. “Even when everybody said, ‘New York is dead, New York is gone,’ I knew it was a fad. And, look at New York now. It took me 20 minutes to get to work during the pandemic, now it’s back to an hour and a half. You could get a three-month concession on an apartment six months ago, and now I have a few new employees here who can’t even find an apartment.”
“New York has seen a major uptick in the right direction, since probably February,” Simpson added. “There are properties we’ve looked at, where someone else has shown up and offered a number that we couldn’t believe. That’s not surprising for New York, but it was surprising for us that it happened so early this year. It’s a sign in our view that there are people that are coming back to invest in New York.”
Now that the worst of the pandemic is presumably behind us, have we learned anything?
“I would say yes and no,” Simpson said. “I think there were lessons learned in the last downturn and, three years later, a lot of the same elements were occurring all over again, especially in the development space. Properties take years to build and cycles only last — let’s call it — eight to 10 years. So, you have to hit the right point in the cycle on the head to be successful, especially with high-end properties. Something more mainstream, like a regular office building in Midtown or regular apartment building, is different. But, if you go for that starchitect, high-end property, you have to hit it hard. There are a number of those that are now struggling or have been given back to lenders. Those properties could have done fantastic, but it was just a matter of timing.”
For Arch, the biggest lesson for its team of 50 professionals is the interconnectivity of their business and the product they’re building and operating.
“From the team sitting here in New York that’s working on a transaction, all the way down to the resident that’s living in a unit in South Carolina, it’s a wheel and it all works together,” Chassen said. “During the pandemic, if we didn’t look out for all parts of that wheel, then the whole investment model failed.”
Chassen said that he’d heard stories of landlords who had the attitude of, “So what if it’s a pandemic? Pay me, I don’t care about you,” during COVID’s darkest days.
“We all have to cover debt service and we all have our own issues,” Chassen said. “But, if everybody comes to the table humbly, and realizes that times get hard, that’s where we all can be the most effective.”