A message from CPI Capital CEO Ava Benesocky on adapting to the current market cycle and opportunities which exist for our firm and our valued investor partners. She further discussed the next steps for CPI Capital and how we are focusing on BTR-SFR for our next investment opportunity.
Dear Valued Investors,
I trust you are all well and continuing to look forward positively in these relatively uncertain times.
As concerns about the pandemic continue to subside, we now have the spectre of some form of economic downturn, or possible “quasi-recession” as August, our COO, prefers to call it.
Yet, as we all well know, the world keeps turning…. And economic and real estate cycles come and go—it’s just how effectively and creatively you deal with the potential ups and downs!
As we are just over halfway through the year, I thought it might be helpful to all to have an update of what we have been doing in 2022 and how we see the near-term future, as well as introduce an exciting new opportunity which is on the way.
Our investors are keen to continue investing
We receive calls daily from some of the over 2600 investors and/or 600 accredited investors who have put their trust in us and invested in our last three projects—as well as from new enquirers wondering when our next investment will be, and wanting to be part of the deal!
As you can imagine, we get offered potential deals every day, from all across the country.
However, our strategy is to be patient—and as sure as we can be about making the right, most rewarding investment for our investors!
We analyse markets and trends on a daily basis
We are carefully watching the economy, inflation, interest rates and other factors which affect real estate returns and values. Being a relatively new firm, our already well-established reputation is paramount, and capital preservation is our most important goal. We are certainly not in a rush to do a deal just for the sake of doing it—the project has to be right!
We also continue to observe other multi-family syndication groups closely and see some taking risks with higher LTVs or with no interest rate cap (insurance policies to cover increasing interest rates) and/or overly optimistic growth projections.
We were not prepared to take such risks which may adversely affect our investors given the uncertainty about a possible economic downturn. The consensus seems to be that there will be an economic slowdown of sorts, but, as the experts agree, no two recessions are ever the same, so we have to make our own professional judgments about this.
Our outlook is positive but cautious
Hence, we still remain positive about investment in multi-family and real estate generally, but also cautious. We constantly look at changes in the market and revise our investment strategies. After all, even though there may be a recession looming, there are tremendous opportunities to make profits in these sorts of environments. You can see proof of such optimism in the recent fund just launched by Blackstone.
We understand that many of our investors remain keen to deploy their capital as inflation is eroding its purchasing power and we are still searching for the next, suitable multi-family project, waiting and watching, ready for the time to be opportunistic.
Maintaining a core investment strategy
It’s well known that, in most real estate situations, you need to stay with the core fundamentals of real estate investing such as:
- investing in a great asset(s);
- investing in a great area showing consistent growth metrics such as job, population, income and rental growth;
- avoiding becoming too highly leveraged; and
- Executing the project business plan completely and competently.
Adapting to the current market situation
Having said the above, it’s important to be dynamic in a changing economic or real estate environment and oftentimes we need to evolve to survive…, otherwise it’s easy to become extinct!
So, whilst we will always adhere to our core investment strategy, it’s worth to remember that we are not a firm which solely invests in multi-family nor are we limited to investing in one asset class—it really depends on where the best returns can be achieved.
Indeed, in our last three transactions we have opportunistically acquired class A and class B multi-family properties which offered the best risk adjusted returns and highest yields for our investors.
Investment opportunity in “Build to Rent, Single Family Residences” (“BTR-SFR”)
The build to rent-single family residence sector has always been of interest and intrigued us; indeed, our COO, wrote a newsletter about this BTR-SFR asset class back in December 2021. Furthermore, over the last two years we have seen large institutional investors such as Blackstone invest in or acquire BTR-SFR projects.
Currently, we have an excellent opportunity to invest in the BTR-SFR sector and, in our view, for a multitude of reasons, it is not the type of opportunity to ignore.
Not only are the fundamentals, attractive, but this is a unique, off-market opportunity to acquire a BTR-SFR portfolio of homes at Certificate of Occupancy which eliminates most of the risks involved with this asset class which relates to the entitlement and development of the project (in Canada known as “rezoning”). What’s more, the development costs have already been established (an “all-in” price) and any potential overruns will be mitigated by our agreement with the builder.
Finally, we are so confident about this opportunity that CPI Capital as the General Partner is planning to invest 10% of the equity into the project.
For now, let’s recap what BTR investment is all about with just a taster of the key fundamentals (in one of our next newsletters, we’ll make the compelling case!)
BTR as an asset class
Build-to-rent property is not a new asset class and there have been developers who have focussed on this sector as their core business for many years. However, for a variety of reasons, there has been a significant uplift in both demand for rented accommodation and the quality of the product and associated amenities and facilities on offer over the last 4-5 years.
BTR refers to purpose-built housing designed and operated for rent, rather than for sale. It can comprise multi-family accommodation or single family residences (“SFR”). Such projects usually offer longer tenancy agreements and are invariably professionally managed by the owner or operator, in many cases providing a wider range of occupier based series or amenities than just renting space.
Key demand drivers
Demand for BTR-SFR properties has surged partly due to demographic shifts and, as we have all probably heard from the media, partly due to the pandemic.
On the demographic side, it is reported that some 89% of millennials who do not already own a home plan to own property at some point in their lives. However, with median home prices currently at all-time highs and high student debt, homeownership is a major challenge
As a result, many millennials are renting SFRs as such properties provide the feeling of owning a home, but with greater flexibility; for example, the tenant can leave at the end of their lease term if they want, and is not responsible for key maintenance costs.
People aged 25 to 44 comprise about 48% of SFR renters, and earn an average of about $100,000 in annual income.
Then there is the huge growth in demand for SFR from retirees (the “silver tsunami”) who have cashed out from their own homes, have cash to spend, and want to enjoy their retirement by being able to travel without the burdens of home ownership.
During the pandemic many people sought more space for remote working and/or learning and BTR-SFR communities offered far more flexible and affordable options compared to buying a new home.
Furthermore, people wanted more privacy or space for social distancing. As a result, there was significant migration away from dense urban cores to smaller cities and suburbs where SFRs are more likely to be found.
Over the next decade or so, the BTR-SFR market is likely to remain popular amongst millennials, ageing baby boomers and remote workers, with such strong demand drivers and an overall undersupply of rental homes boosting rental growth.
As interest rates continue to creep higher, this will slow single-family sales and keep would-be buyers priced out of the single-family market and in the renter pool.
Overall, there is still plenty of room for the BTR-SFR sector to grow and it is expected that such homes will form a double-digit share of new construction by 2024, compared to only 6% currently.
We will shortly be providing further investment information about our exciting, new BTR-SFR project, as well as details about how to invest.
As part of the process, we will also hold two webinars, one with our leadership team presenting the case for investment into the asset and the other with the builder to discuss development costs.
Keep looking out for our next update, we’ll be in touch again shortly!
CEO, Co-Founder CPI Capital