Earlier this year, RREAF Holdings LLC acquired a portfolio of 10 multifamily properties with more than 2,755 units. Two of those properties are located in suburban Indianapolis, a departure for RREAF, which usually focuses its acquisitions in the southern portion of the country.
But RREAF’s move provides yet more evidence that Indianapolis and its surrounding communities are blessed with a thriving multifamily market, one that is attractive to even the most active real estate investment firms in the country.
Just ask Graham Sowden, a partner with RREAF Holdings and the company’s director of acquisitions. He said that the Indianapolis market has long been on his company’s radar, and the properties it purchased – both with the potential for value-add investments – will provide a boost to RREAF’s bottom line.
“Historically, we have focused on buying properties in the secondary and tertiary markets in the south and southeast,” Sowden said. “The two properties we got in Indianapolis, though, exhibit some of the same economic demand drivers that we are always looking for. They are in markets with a high-growth population. And there is a need for this type of multifamily product in these markets.”
RREAF Holdings, working in partnership with 3650 REIT and real estate investment and financial services firm DLP Capital, announced the acquisition of its Southeast Multifamily Portfolio III in early October. The portfolio’s other eight properties are in Arkansas, Georgia, Mississippi, North Carolina, Oklahoma and South Carolina.
The acquisition marks the trio of companies’ third portfolio acquisition in less than 12 months.
Sowden said that demand for multifamily properties remains especially high in suburbs located near major cities. That is the case for the Indianapolis-area properties that RREAF acquired: There is a lack of affordable housing options in these areas, and the properties that RREAF purchased can help fill this need.
Sowden said that after acquiring multifamily properties, RREAF typically renovates apartment buildings that were built in the ‘80s, ‘90s and early 2000s.
“We’re looking to improve the buildings that haven’t been touched for a long time,” Sowden said.
RREAF also brings in professional property management firms to run the properties, something that Sowden says enhances the experience of residents.
Contractors will tear out old carpeting in units and replace it with vinyl plank flooring. They’ll replace Formica countertops with stone and install subway tile backsplashes. They’ll add modern light fixtures and stainless-steel appliances, all to modernize the living spaces.
The key, though, is that even after these updates, the monthly rents at these units will still fit in the affordable category.
“Those are the types of improvements that renters are looking for as they are looking for a place to live,” Sowden said. “They want to have more modern features. Having those amenities helps attract more residents to our apartments versus others in the area.”
Demand still strong
Before, throughout and now in the end stages of the pandemic, the demand for multifamily housing has remained high. What’s behind such long-lasting demand?
There are demographic reasons, of course: Both older Boomers who want to downsize and younger generations are choosing to rent instead of taking on the financial and upkeep responsibilities of owning a home.
Then there are rising mortgage interest rates, which make it more difficult for many to afford a single-family home. This has forced many potential homebuyers into renting.
COVID has played a role, too. With so many people working from home, many tenants can rent just about anywhere. They can choose more affordable markets – such as Indianapolis – while still working for an employer based in a more expensive city.
“We have seen tons of demand for multifamily housing,” Sowden said. “We have seen it on both sides of the country. We are also seeing more people migrating to the south and southeast and more affordable markets in the Midwest. People are looking for a more affordable lifestyle. The product that we are focused on buying and renovating is very appealing to a large segment of the population.”
Because of this, Sowden said, RREAF will continue to look for new Midwest markets. The company’s acquisitions team is already looking for additional product to acquire in Indianapolis and its surrounding areas, he said.
The push for suburban apartments
Another change that has come about because of COVID? Sowden said that many renters are focusing today on apartment properties in the suburbs.
Many of these are more affordable than multifamily developments located in the middle of major cities. Renters also want more space if they will work from home.
“People are able to move away from major metros,” Sowden said. “More people are certainly looking at more affordable apartments, the garden-style apartments, not the high-rise, Class-A multifamily stuff. In a downturn, people do not want to pay $3 a square foot to live in a high-rise in downtown. They want to live in a nicely renovated garden-style apartment.”
These renters also want certain amenities, such as an on-site gym, playground for their kids and a swimming pool. Many also want in-unit or on-site laundry facilities. Mail rooms and package-delivery systems have become more important, too, Sowden said.
Affordability, though, is key, Sowden said. The challenge is that there aren’t nearly enough affordable rental units as there is demand for them.
To help close this gap? Sowden said that government intervention is key. This means that tax credit or abatement programs are necessary to encourage developers to build new affordable multifamily product.
“Developers are more apt to build affordable when a tax credit or abatement program is involved,” Sowden said. “Otherwise, they can’t keep rents low while still building a quality product. The costs of construction have gone through the roof. A lot of times it doesn’t make financial sense for developers to build for affordable. We need to see some government intervention.”
The good news? Sowden says that he sees more government incentives already in place to encourage developers to enter the affordable-housing market. And as demand for this type of product increases, these incentives and abatements should continue to pop up across the country.
