Class-B Assets Are The ‘Sweet Spot’ In Multifamily Right Now

As the multifamily sector continues to showcase its resiliency during an economic downturn, one asset type is outpacing the rest in Houston: Class-B apartment communities.

“The great thing about being in the B space is, when times get hard like they are, A falls into B. So they're looking for that renovated B product that we have on the market,” Rockstar Capital Director of Operations Ian Douglas said during a Bisnow webinar Sept. 22.

“We really fall in that sweet spot of when times are good, people move into us; when times are bad, people move into us. So it really plays out that we do well, either way it goes.”

Class-A multifamily developments in Houston have suffered on both the occupancy and rent fronts in 2020, according to ALN Apartment Data Market Analyst Jordan Brooks. That’s partially due to new supply coming online and because in the wake of the coronavirus pandemic, demand “pretty much cratered” this year for Class-A apartments, he said.

On the other end of the scale, Class-C and Class-D apartments have defended their occupancy rates, but at the expense of rent growth. As a result, there has been some rent retraction within those lower tiers.

“Class-B … is a nice middle ground. They've basically been essentially flat on both fronts, which isn't something that we've grown accustomed to in Texas. And that's certainly not what we'd like to see. But in the context of this year, that really has been the best result year to date,” Brooks said.

The summer months are typically a period of strength in the multifamily sector, particularly on the rent front. Brooks said Class-B properties have rebounded stronger than the other three asset classes, looking at demand, occupancies and rent.

As an investor in the Class-B space, the key is trying to capture renters that plan on staying a while, according to Rockstar Capital founder and CEO Robert Martinez. He looks for multifamily properties in areas that have good school districts, with the goal of attracting families.

“Remember, the name of the game in the B market is not new leases. That's why I don't worry about rent, I worry about keeping heads in beds. The name of the game is renewals,” Martinez said.

LMI Capital Managing Director Jamie Mullin said he isn’t seeing any heavily discounted multifamily deals in the market, but there is plenty of debt available from a variety of lenders, including banks.

The firm, which acts as a mortgage broker, finances all types of commercial real estate. Over the last several years, about 75% of its business has been in the multifamily sector, according to Mullin. This year, in particular, multifamily has proven itself to be resilient, which is attracting more capital to the market.

“It's a great time for us to continue to push some of our sponsors out to new banks and create new banking relationships,” Mullins said. “We have a pipeline filled with bank loans right now.”