Harvest Creative

So, the big story in the spring was that cap rates were suddenly neck-and-neck for garden- style and high-rise apartments. Generally, you find mid-rise and high-rise buildings in urban locations and garden-style apartments (and mid-rise) in the suburbs.

What’s happening is one of two things – or maybe a bit of both. Either high rises are cheap on a relative trade basis or the suburban markets are outperforming the urban markets. It’s hard to say which of those is driving cap rates to come together.

At some point, the cost advantages of the substantially less expensive Southeast markets may diminish because prices have risen a lot. Even though the quality of life is still very attractive, the affordability component may become less compelling.

On the other hand, some of the urban centers are really struggling with things that have diminished their quality of life such as crime and homelessness. In addition, commercial employment and corresponding retail have disappeared from many urban locations.

I try not to make too many forecasts, but generally I think suburban markets will continue to outperform most urban markets. We think that valuations of suburban multifamily buildings, especially in the Southeast, remain compelling.

But what’s more important is this: it doesn’t matter. If you’re a smart investor, you’ll come out ahead whether the forecast is right or wrong.

We like to buy and hold apartments in the Southeast. If you’re holding your property for a long time and don’t have a pending maturity, it doesn’t matter if cap rates rise. It’s not a real issue if your cash flow is still good. Cap rates really only matter if you have to sell or refinance a property.

We’ll continue to stick with our strategy. We play a long game and that works for us.

But if we’re wrong, that’s OK. We’re cash flow-based investors. If cap rates do rise, that’s OK, too. Our cash flow will continue to rise. Values will eventually increase again, too. Better yet, we just don’t have to worry about loan maturities.

Cap rates for garden-style apartments and mid-rise and high-rise apartments may revert to past performance and diverge. Whether cap rates end up higher for garden-style apartments or not, our investment strategy will stay the same.

The truth is investors need to be mindful of the fact that no one will know until they look into the rear-view mirror which forecast was correct. The better approach is a strategy that lets you win no matter what the forecast says. No one who ever saved for a rainy day was upset when the sun came out.

At Bonaventure we focus on long-term returns, not short-term churn. But that doesn’t mean we ignore trends in our industry and in the economy. In fact, we track the news voraciously so we can take our own path – sometimes in a different direction than everyone else.

Even though apartment performance is down from the peak of 2021 and early 2022, fundamentals remain strong. Capital markets are slowly readjusting to a new normal. People are accepting that the days before the Fed stated raising rates are gone for good.

We recognized that 2020 and 2021 were an aberration and we expected the future to look like the long-term past, so we were quick to adapt.

Here’s what we expected: Rent NOI growth would decelerate from its peak. The development pipeline would halt once the units currently underway are delivered.

Here’s what we did: We adjusted course immediately. We focused on reducing expenses to drive NOI instead of focusing solely on revenue growth. We got control of sites with long- term rights so we’re ready when development economics make sense again.

But in the interest of putting some daylight on things we missed, here’s something that surprised us: the resilience of the single-family home market. We didn’t think about the fact that everybody refinanced their house into 2% and 3% mortgage rates. Now that rates are 6% and 7%, people just decided not to sell.

So, while we looked at the demand side for houses, we didn’t look at the supply side, which was affected just as much by higher rates. Of course, there are fewer people buying houses when rates are high, but there are even fewer selling them. Home prices remain elevated and new home construction is robust since they’re not competing with very many resale houses.

What does this have to do with apartments? A couple of things – and the good news is that they’re both positive. First, the price of housing remains high and interest rates are higher, which means homes are less affordable. We provide an alternative to homeownership, and in many markets it’s much more cost effective to rent today. Even if you want to buy, there’s a crimped amount of supply.

The other thing that’s positive for apartment fundamentals is the strength of new construction. We mostly build mid-rise buildings, which are common in the markets we serve. Just like single-family home builders, we use wood frame construction. Normally, when interest rates are high, home construction falls off and that relieves the pressure on apartment construction costs. This hasn’t happened, and that’s not bad. It just means the supply spigot will be off for longer, which is encouraging for apartment economic fundamentals and will keep rents elevated.

Depending on where you live, it may seem like someone finally listened to that guy who said the “rent’s too damn high.” But really, rents follow market fluctuations, not consumer complaints. (Unless you rent in a city with rent control, but that’s a different story.) So, what’s really happening with rents?

Like everything, it depends. It depends on the market, the submarket, supply and demand. It depends on how the local economy is doing and it depends on the for-sale housing market.

One thing that’s certain: we’re always vigilant in watching the factors that influence rents in our markets and submarkets.

And here’s another certainty: we don’t take for granted that rents will go up forever. In fact, we anticipate that one way or another, we’ll have a recession or rent or revenue reductions at some point during our hold period. That’s what happens when you hold property for decades like we do. We know we’ll see more than one economic cycle during the years we own and operate any particular building.

Whether it’s a general economic recession, things got overheated in a particular market in terms of demand or the market got ahead of itself and created too much supply too quickly, we know there’s always something that can impact rent growth.

Our method to handle the “expected unexpected” is to monitor all the submarkets where we’re invested. We continue to make investments where we believe there will be more sustained pricing power.

In submarkets where we anticipate potential oversupply, we double down on our marketing so potential residents know what we have to offer. We’ll make sure our product is so compelling that residents will choose us and stay with us so we can corner a greater share of market demand.

We’re always observant. We wouldn’t have been successful apartment owners, operators and investors for such a long time if we weren’t. We know, too, that vigilance becomes even more pressing when revenue growth isn’t as strong.

It’s a lot easier to be vigilant when you know your business from bottom to top. We’re not just investors, just developers or just property managers. We do it all, which means we evaluate a market from a developer’s point of view, then we design and construct our own buildings, then we manage them. So, when factors come into play that may impact the rent in our communities, we’re ready with our decades of experience, our deep market knowledge and our innovations in property management to adapt and meet our investment goals – no matter whether the rent spikes up, drifts down or remains level. We’ve got this.

Back in 1960, my family owned a property that was zoned for multifamily development and suddenly worth more than the purchase price. A good problem to have, right? But they didn’t have the cash to pay the taxes. Instead of selling it like most people would, my family decided to bring in a partner and develop it themselves. In other words, they zigged instead of zagged. The result: 40 years of positive cash flow.

That focus on long-term investing in solid assets hasn’t changed for six decades and neither has the Dunton family’s ability to take the road less traveled. In 2000, that joint venture partner had become a large developer who viewed the original multifamily building, our family’s crown jewel, as a Class C asset in a Class C location that needed millions of dollars of renovation – and managed it accordingly. We saw it differently. Once again, when the market told us to go left, we went right. We found the capital we needed and bought the asset so we could position it for long-term value.

While we may zig and zag, our values and our strategy are consistent. When a problem needs solving, we develop the capability to take care of it ourselves. Our vertically integrated solutions now include our own construction company and in-house property management.

We know that if you want something done right, you do it yourself. We developed our own capabilities, which turned into departments. Now some of those departments are similar in scale to an entire business.

When the world serves a curveball to our business plan, we’re ready to catch it, to react and still accomplish our goals. We look far beyond the outfield when we make our plans, but we also keep our eye on the ball.

Back when the housing market was on fire in 2006, everyone was building condos and you couldn’t buy a piece of land to build an apartment complex. We realized that at some point the music stops and then buying land and developing apartments would make economic sense again. So, what did we do to prep for that new tune? We created our own development company to be ready when the laws of economics kicked in as we anticipated.

Our investment management business offers one more way to continue the 60-year history of the Dunton family’s approach. We’re taking our decades of experience, our long-term approach and our insight into when to zig and when to zag and sharing them with investors to help them meet their long-term needs. Our family traits – taking the long view and the road less traveled – ensure that we manage risk and accomplish our objectives no matter what happens with the economic landscape.

It’s not often that people get excited when you talk about the IRS. In fact, most people’s eyes glaze over a bit at tax talk. But the 1031 Exchange program is such a powerful tool that it deserves some lively conversation.

Basically, a 1031 Exchange, which is unique to real estate, allows a property owner to sell an asset and not recognize the gain on the sale as long as they reinvest the proceeds into a new property. Like anything related to the tax code, it has lots of ins-and-outs and rules that must be followed to make it work, which is why at Bonaventure we’ve become experts in the nuances of 1031 Exchanges. We’ve got tools and widgets to facilitate the process.

One of the key components to building wealth is tax efficiency. Real estate offers a great opportunity to build wealth and this tool adds to that opportunity by making it extremely tax efficient.

Here’s how it works: When you sell a property (called the relinquished property), you have 45 days to identify the property you want to buy (called the replacement property). Then you need to close on that new property within 180 days from the time you sold the relinquished property.

That sounds simple, right? But it can get pretty complex to meet all the rules, especially for a property with multiple owners.

Besides the timeline, the main requirement is that you exchange real estate for real estate. It can be any kind of real estate, too. You can sell an office building or a retail site and buy an apartment building or sell land and buy a vacation property for rental income.

Another requirement is that the price of the replacement property must be equal to or more than the value of the relinquished property. In addition, there must be the same or more debt on the replacement property.

For example, you could be a landlord who owns and manages a $1 million triplex and you’re getting tired of “toilets, tenants and trash”. We can move you from that situation into an institutional quality asset. You can buy an entire building or you can do a fractional exchange and buy $1 million of a $50 million or $100 million Class A apartment that’s institutionally managed and owned.

Our focus has always been on long-term tax-efficient compounding. The 1031 Exchange is a valuable mechanism that helps people maximize their total return. Our expertise with this program and with apartments provides people with the means to move out of active management while remaining invested in one of the largest, most liquid and most stable asset classes in real estate.

Whether they’re more likely to know the song “No Shirt, No Shoes, No Problems” by Kenny Chesney or “Champagne Problems” by Taylor Swift, everyone needs someone to help them manage life’s challenges. While most people would assume that at Bonaventure we’re in the business of solving real estate problems, we know we’re dealing with real life, too.

Whether the challenge is to sell, buy, develop or manage a property, our team of experienced real estate experts can solve difficult issues that matter to people and to their families. Thorny issues can surround any real estate transaction, including succession planning, asset transformation, tax management, investment diversification and planning for generational wealth transfers.

As a company, we’re used to going against the grain and looking at the big picture, long-term outlook to solve problems no matter how complex they seem. In fact, some of our clients come to us with what they think is a simple real estate transaction. They don’t even know they have a problem. But we can give them an outside the box kind of solution that results in something that helps them and their families in ways they didn’t anticipate.

Here’s an example: A family we work with owned a retail site and, since the patriarch passed away, has been owned by a trust. The heirs need to sell it, but they also need to manage their taxes on an asset that’s been in the family for generations. We’ll help them transition this property through a 1031 Exchange and replace it with a fractional piece of a larger apartment building. They’ll go from being active investors into passive investors in an institutional quality building.

We have an array of solutions that we can tailor to solve people’s real problems. Say you own a piece of land that you want to keep but you lack development experience. We can do a joint venture and develop it for you.

Or maybe you own an apartment complex but you’re not happy with the management services. We can provide third party property management services to really make that community shine and maximize your returns.

We’ve helped another family that has a big concentration of property in one geographic area, so they need to diversify. No one in the next generation in the family is passionate about managing their real estate portfolio, so another goal is to provide flexibility for each member of the family to use their portion of the family wealth in ways that work for them.

Whatever the issue, we can concoct the perfect solution for you.