The multifamily sector has long been one of the darlings of investors looking for a place to sink their dollars. And, yes, this commercial sector did face challenges last year in the face of rising interest rates. But what will happen in 2024? Will a more stabilized interest-rate environment lead to an increase in multifamily investment throughout the Midwest?
We recently spoke with Amy Rubenstein, chief executive officer of Chicago-based Clear Investment Group, about the state of multifamily in 2024. Here is some of what she had to say.
Amy Rubenstein, Clear Investment Group
(Photo courtesy of Clear Investment Group.)
Last year was a challenging year for all commercial classes. Do you think we’ll see more multifamily sales in 2024?
Amy Rubenstein: I’ve already been feeling a bubbling up of interest. I am seeing more people talking about new transactions. But people are still waiting for an actual interest rate drop to make a deal. There are many people waiting on the sidelines with cash. As soon as we see that first drop in interest rates, we’ll see a pick-up of sales activity.
The fundamentals of real estate have remained strong. I don’t think there is any crash coming. There is enough money on the sidelines that when people see that drop in interest rates, transactions will pick up.
How have the higher interest rates impacted Clear Investment Group?
Rubenstein: We focus on Class-C and workforce housing. In our asset class, the problems in the economy have helped us. When you get those high interest rates, it makes renting more affordable than buying. That helps us.
Also, when you start to see rents going up in even in the B-class of properties, that pushes more renters into the C-class group, where we do most of our business.
How strong is the demand from tenants for multifamily properties in the Midwest?
Rubenstein: Demand is strong, especially in the Midwest. There has been so much growth and development of multifamily product in some of the Sunbelt cities and Southern cities. These areas now have an excess of housing. In the Midwest, you didn’t see all that development.
The housing demand in the Midwest, then, is higher. That is leading to rent increases. It is interesting to look at: People are projecting rent decreases in other markets. But they are projecting increases in Midwest markets and for vacancies to remain low.
Demand is also still high for workforce housing. That is where we get an edge. There is a lack of good affordable housing. It’s not just a lack of affordable housing, it’s a lack of quality affordable housing. We provide that type of housing. We step in and create solid, quality workforce housing, which gives us an edge in today’s market.
When you purchase a property that might be struggling, what changes do you make to transform it into quality workforce housing?
Rubenstein: What we see with a lot of the properties that we take over are high vacancy rates and high delinquency rates. Why is that? We must determine why that is happening and what we can do to change it.
Sometimes the management of the property has allowed it to fall apart. A building might have a lot of crime. The common areas might have deteriorated. Crime is one of the bigger concerns that we focus on cleaning up. We come into a property and identify what is causing the crime. Then we are very strict about cleaning it up. It takes some time, but usually in about two years, we can clean up the crime problems.
From the managerial side, we often see properties in which all the units aren’t even being made available for rent. The staff might not know how to lease the space. The staff might not be showing the units. Or the units need work and aren’t ready to be rented. The landlord might not have had the bandwidth to wrap everything up. No one gave that final push. We will work on cleaning that up and getting those units ready to rent.
We invest in additional staff, too. We try not to displace anyone when we buy a property, staff members or tenants. We want people to stay. But a lot of the properties we buy might have been understaffed for years. The staff might not have had the proper leadership to guide them. If we take over a property that is understaffed, we’ll keep the existing staff and start hiring additional staff members locally. Then we’ll bring in our Chicago-based staff to train everybody and help them get through the next six to 12 months.
I know that you buy throughout the Midwest and country. What makes a property a good fit for Clear Investment Group?
Rubenstein: We try to find properties that need us. That is where we find the best economics. When a property in our area of expertise needs us, that’s when a deal tends to work out.
We will look at the economics of the deal itself. How is the property performing today and how would it perform if everything was functioning well? Then we underwrite the difference. How much money will it take us to get from where we are today to where we want to be?
Once we decide that a deal is a good fit, we underwrite the submarket itself. We look for stability in the submarket. We don’t need a lot of population growth. But we do want to see a stable population. We are making sure that there is a high enough volume of renters in the market, that there is enough employment in the market. We want the employment to come from multiple sources, not just one industry or one company. We don’t want a market that is overly dependent on the success of one industry or company.
We also look at crime in a market. We are OK if there is crime at a property we are considering purchasing. We can clean that up. But we don’t want a lot of crime in the surrounding community itself. If the crime is coming from a building that we buy, we can handle it. We can change it. If it’s the neighboring properties that have a lot of crime, there is not much that we can do. We can clean up our property, but not theirs.
We also look at the income in an area. We want to buy the right property for that market so that we have enough renters who can become residents of a building.
Are you looking to further build your multifamily portfolio in 2024?
Rubenstein: We are looking all over the country. We do like the Midwest quite a bit. We are trying to expand. Our goal is to purchase quite a few more complexes this year. We think that this is a great time to buy. We are happy with the market.
