How Real Estate Funds Mix Multifamily and Office to Boost Returns
Multifamily and office real estate can be a potent combination in an investment portfolio, which is why our real estate funds have always included both types of properties. Their different leasing terms and fundamentals work well together to produce a combination that can achieve consistently high performance.
In Forbes, Origin co-founder Michael Episcope explains the underlying market forces that make office and multifamily real estate a smart pairing. It’s worth reading. Examples of how multifamily and office real estate complement each other in Origin’s real estate funds show how the pairing works firsthand:
In Houston, Multifamily and Office Balance Stability and Growth
Houston is rebounding strongly from Hurricane Harvey and oil price shocks, according to Dallas Fed indicators. Origin has historically owned both office and multifamily real estate projects in Houston. A look at these properties will show how the two asset classes performed, given the region’s economy.
In a typical office building, leases have a five-to-seven year duration, sometimes longer. Rent increases are negotiated in advance and are contractually locked-in. But, in some cases, there are other opportunities that allow investors to benefit from a rising market on the buy-side. We acquired Kingwood Medical Arts, a 90,000 square-foot medical office building, in a bankruptcy auction at less than its market value. This was due, in part, to its well below-average occupancy rate. With the nearby Kingwood Medical Center as an anchor for this building, we were able to increase its occupancy to 90 percent in four years.
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Complementing the Kingwood Medical Arts office building, we also invested in the Arium Edgewater apartments, a multifamily project southeast of Houston in Webster. The operations at Arium Edgewater were much more stable; as typical in most apartment projects, tenants had shorter, one-year leases. This short duration provided opportunity to quickly raise rents to market rates and to test whether unit improvements could generate even higher rents. While long office leases lend stability to a portfolio as tenants are contractually obligated to pay pre-established rent escalations, multifamily rents respond more quickly to an improving market.
In four up-and-down years, the two investment properties turned in profitable results. Kingwood Medical Arts earned a 25% internal rate of return and a 2.5x equity multiple, which are both measures of how properties can create substantial profit. Real estate fund investors realized a 26% IRR and 1.7x multiple from the Arium Edgewater apartments. Taken together—both were holdings in Origin’s first private equity real estate fund– the properties were less exposed to economic shocks than either investment on its own.
In Atlanta, A High Job Growth Rate Fuels Office and Multifamily
The Atlanta and Dallas-Fort Worth metro areas—both target markets for Origin—have been locked in battle for the fastest job growth rate nationally, according to the Bureau of Labor Statistics. Atlanta’s employment growth is good for the Central Perimeter and Buckhead office buildings in Origin’s real estate funds, Centrum at Glenridge and the City Center Buckhead. They are projected to return 1.5 and 2.9 multiples respectively.
But the speedy pace of job creation is also mirrored in Atlanta’s suburban population gains and the results of Origin’s multifamily properties. The upwardly mobile millennial workforce doesn’t necessarily want to be tied down to a mortgage, points out Bloomberg. Downsizing Baby Boomers share their preference for a low-maintenance lifestyle, with no yard work and nothing to fix. Millennials and Boomers are two sizable groups that desire the multifamily lifestyle with condo-style amenities. This heightened demand provides opportunities for investors to pursue value-add strategies that unlock a property’s trapped value.
A case in point is Arium Northpoint in Atlanta. With a 3 ½ year investment in the 236-unit property in Roswell, about 25 miles north of downtown, Origin investors realized a 45% IRR and a 2.6x multiple. We put our resources to use updating the exterior, clubhouse and many of the 236 apartment units. The improvements helped bring the property in line with its other amenities, such as wooded grounds and access to desirable schools in metro Atlanta’s fastest-growing county. These improvements and underlying characteristics ultimately allowed Origin to generate higher rents and greater resident retention.
Origin’s Multifamily And Office Properties Underscore The Case For Diversification
Investors can explore the track records of our multifamily and office properties in all of our markets on our investor web portal. Some rental properties are recent acquisitions; others have sold at a considerable profit. For example, the Bay Club apartments south of Seattle fetched three times the property’s acquisition cost.
These assets are essential to building wealth through diversification. Our real estate funds aren’t multifamily or office only–we have two asset classes that unite to maximize returns and minimize risks. It’s a marriage that has endured, to the benefit of our investors.