Michael Lynd On The Ever-Widening Gulf Between Class-A & Class-B

While high-end multifamily is facing a slowdown, Class-B properties are experiencing real growth. Lynd CEO Mike Lynd tells us the gulf between the profitability of Class-A and Class-B multifamily is growing. Before he speaks at Bisnow’s Multifamily Annual Conference – South on July 21, we sat down with Mike for a peek into multifamily fundamentals.

Mike (shown here on the left) says this is the widest rent gap he’s ever seen between Class-A, B and C. To attract more renters, the top end typically offers concessions and grows by pulling people up from Class-B. A common concession is offering two free months, which is a 16% discount on rent—but that's not working this cycle because the spread between the asset classes is wider than 16%.

Meanwhile, Class-A has some challenges. Mike is concerned we might be at the end of the cycle for rent growth for upper end product. He is seeing a dramatic slowing of rent growth, testing the depth at the top tier of the market. On top of that, some Central Texas urban core areas are possibly in oversupply. That doesn't mean these projects are not going to do well over time, but there is more than can be absorbed at once in many markets, Mike tells us.

Because of these trends, Mike is focusing on acquiring well-located Class-B projects—maybe from the '90s —in Class-A locations.

There are some bright spots, Mike (left, with NRP Group's Dan Markson at a Bisnow event) says. Debt is much harder to procure. Banks are being more careful and conservative with construction loans. Even the equity side is showing some conservatism. That constraint is regulating development.

Workforce housing is experiencing really good rent growth—the demand for it seems never-ending. But it's tough to build workforce housing. It's a numbers problem, Mike says. With high construction costs, there’s no way to build to serve the lower income range conventionally. Building affordable these days usually means building farther away from the urban core.

As for geographical focuses, Mike says Austin has always performed despite concerns about supply. There have been short periods where rent growth was flat, but it has rarely deteriorated with the exception being the tech bubble in the late '90s, when jobs were artificial. Austin continues to attract strong tech corporate presence and its culture and lifestyle is drawing a highly educated workforce. The macro picture in Austin continues as one of the best in the country.

Hear more from Mike at Bisnow's annual multifamily summit in Dallas, with multiple panels running all day on July 14. Get your tickets here.