Rent Growth Stabilizing, Value Investing Back in Vogue

May 2022

Due Diligence, Atlanta, GA

Happy Tuesday!  Hope you had a nice Mother’s Day Weekend.  I tried to get some honey-dos knocked off the list while managing the kids as much as possible so my wife could get some time to do a few things stress free.  In general I’m a little more structured while my wife is a little more free-spirited.  With a larger family, less structure can also mean more stress. I try to help balance things out so she can be the best mom she can be.  What I appreciate most about my wife is her heart – she loves to give the kids lots of hugs and quality time.  I’m very thankful for her nurturing nature, and I try to do my best to keep her from getting burned out.  Burn out is something that any good leader should be cognizant of in their team. 


Which brings me to a bigger thought I had this week.  There are two ways to be successful in life – servant leadership or selective usership. I might have made that one up but here goes.  Selective usership requires the ability to identify and use the people around you to skillfully get what you want while appearing thoughtful of others.  It’s a skill that usually brings quite a lot of success in life.  It’s usually pretty carefree since others are seen as stepping stones for the greater good – i.e. one’s own success.  At the end of the day, you really only have to look out for one person.  Servant leadership, on the other hand, tends to be way more complicated, nuanced, and long term.  It requires the ability to put others first, consider the other side of the argument, be humble, and seek compromise.  Who wants that? 

Over my short 16+ years of marriage, I’ve learned that servant leadership brings about lasting happiness.  Over my 20+ years in real estate I’ve learned that servant leadership brings about long term success.  My role as CEO of REM has challenged me in many ways because I don’t prefer the limelight and yet being a good leader requires communicating a vision, direction, and culture.  It requires a public face for a growing company.  As a striving servant leader, I’m always re-assessing how I can best serve my employees and investors today in my role as the leader of our company.  I’m extremely blessed to be surrounded with so many wonderful, dedicated people on this journey. 


We wrapped up our post DD underwriting review and made a few tweaks to the model.  Numbers stayed the same, and I just signed a term sheet to get the loan process rolling.  The plan is to have the slide deck ready next week!  Here we go!


Despite some doom and gloom about rent growth coming to a halt, much of this is simply the flip side to a post-pandemic market that accelerated out of the lock downs and will now settle back into a normal growth rate.  Those who underwrote 5-10% growth rates forever may be sweating.  In my opinion, a healthy pull back in the overall market would be extremely positive and set us up for another 5+ years of solid multifamily performance.  


At a global level, keep your eye on China.  As COVID lockdowns are removed and shipping from Shanghai picks up, it will be up to our US ports to accommodate the increased supply – and if we do, it will go a long way towards easing one of our major supply constraints and open up GDP growth.  Employment is strong and wages are growing (as is inflation) so while our purchasing power is being squeezed, an offsetting supply increase could help alleviate some of this imbalance. 


At the local level, we recently looked at the rent growth in Atlanta, which has had quite a bit of new supply, and continue to see outperformance due to economic growth.  Blue-collar suburban neighborhoods continue to bolster multifamily demand and keep occupancy at near record highs.  Lease trade outs continue to be very strong.  We believe that – as in past downturns – if we’re headed into a recession, those who spent, or are spending, CAPEX money to improve their property will weather any storms better because when product becomes a commodity, the properties with a better product and better service always perform best. 

I recently stress tested our new Atlanta deal at 6.5% interest, with a 20% vacancy, AND assuming we only got 50% of our projected rent bumps (the ones that are being achieved today without any renovations) and we will still cash flow positive!  Not saying I want to go there but sure does feel nice to know we’ve got the fudge factor to weather the unknown. 

That’s all for now.  Have a great week!