At Ballast Rock, we specialize in investing in real estate in small- to medium-sized cities across the Southeastern USA because our experience shows properties in these cities often offer better opportunities to add value (i.e. “alpha”) and increasingly more significant market rent growth potential in the current market environment. As demonstrated in the graphs below, we have been able to outperform our own underwriting on our current portfolio both in terms of cap-rate and rent growth because - in our experience - the demand/supply constraints in real estate are often particularly acute in smaller markets compared to primary markets. In this article we will highlight some of the quantitative data that explain our investment thesis and provide some qualitative reasoning for this opportunity.
These two graphs were built using Ballast Rock internal data, comparing our expectations with the realized performance over two years since acquisition for all assets in Sunbelt Fund I and Sunbelt Multifamily Fund II thus far.
Costar (one of the main real estate industry data providers) has sales indexes that track two segments:
i) “value-weighted,” meaning big sales in the largest markets, and,
ii) “equal-weighted,” made up of more numerous but lower-priced sales in smaller areas.
Both moved higher in October, but the equal-weighted U.S. composite index advanced at a stronger pace:
The above data demonstrates that pricing of smaller deals in smaller markets has outpaced larger deals in larger markets since the onset of the pandemic. Given the above, we wanted to provide some qualitative rationale as to why we believe we are able to add more value add in smaller markets compared to larger markets.
Some of our success stories (Huntingdon, Holiday Cove, Spring Lake, Amelia West) have come when buying properties that are owned by ‘mom and pop’ owners. Whether it is a single real estate owner/operator, a couple that is managing their nest egg, or a family that has owned the property for years, there are frequently immediate avenues for upside when buying from these types of sellers.
To provide a concrete example we can look at Huntingdon in Albany, GA. The prior owner was a family that had owned the property for 30+ years. The below bullet points highlight the types of mismanagement that we frequently see when buying from mom-and-pop sellers:
Fayetteville, NC is an example of a city in which Ballast Rock invests.
Less Competition from Other Buyers:
In our experience, there is a smaller buyer pool in secondary/tertiary markets than in primary markets. Because of this smaller buyer pool, we see fewer bidding wars during fully marketed processes, and we are frequently able to acquire assets at a discount relative to the cap rates at which similar vintage/sized properties would have traded in primary markets (based on CoStar data).
No Daily Pricing Software for Rents:
In larger urban markets with more competition, many larger operators tend to use daily pricing software to set their rental levels. This daily pricing software tracks the rental levels of other comparable properties and will frequently undercut prices in order to better generate demand for properties. In smaller markets without daily pricing software, we can manually set our rents on a monthly or bi-monthly basis without having to worry about daily/weekly shifts in rental levels.
Columbia, SC is another example of a city in which Ballast Rock invests.
Brokers Not Maximizing Sale Proceeds:
Typically, price per unit (and total deal size) in secondary/tertiary markets trails that of primary markets according to Costar data. As a result, there are fewer brokers competing for business and listing agreements in these markets. Because of the reduced competition, we have found that brokers will fall short on pricing for a variety of reasons:
At Ballast Rock we help originate and distribute countercyclical and recession resilient real estate funds. Please feel free to connect to learn more about how we work with experienced real estate professionals to offer investors the opportunity to invest in income producing assets with a positive social impact.
A Comprehensive Look at Underwriting Process
At Ballast Rock we pride ourselves in our process-oriented approach to sourcing, underwriting, and acquiring real estate. The “secret sauce” to our success comes from our deep relationships with sellers and brokers in the Southeast, our attention to detail, and our boots on the ground approach to acquisition and management. In this educational article, we briefly discuss each of the steps involved from the moment we hear about opportunities to getting to the closing table and putting the property under management.
What began in 2005 as an invitation from then UN Secretary-General Kofi Annan to a group of the world’s largest investors (1), has turned into a global movement in “Sustainable Investing” with combined assets under management of over $17 trillion in the US alone. (2)
2020 Census data has now been released and we wanted to highlight relevant data about the continued demographic growth in the Southeast. In this article, we will review several key statistics and how they relate to the Ballast Rock Real Estate strategies.
Both governments and companies have increasing started publicizing steps they are taking to reduce our carbon footprint and ultimately get to “net zero” emissions, but what does that actually mean?
Climate change has and will continue to affect everyone on earth, and the challenge to arrest this process - while operating within the constraints of a modern economy - falls on all of us. Electric Vehicles and renewable power sources like Wind and Solar undeniably create cleaner energy over the long run. However, the process of manufacturing wind and solar farms, as well as the batteries used in electric vehicles, are significant sources of Greenhouse Gas emissions as well as causing other environmental, national security, and labor issues.
Wednesday September 16th’s Federal Open Market Committee (“FOMC”) telegraphing of their hyper accommodative future policy strategy(1) should prove a boon for multifamily real estate investors, not only keeping interest rates lower for longer, but shifting to prioritizing growth and employment over the Fed’s prior dual focus of growth and inflation management.(2) It is small wonder that the Fed has taken this marked change in stance on inflation, not only to allow for more rapid growth but also to diminish the long-term burden of managing the massively bourgeoning national debt required to fund pandemic rescue packages.(3)
As the COVID-19 pandemic has forced much of the global workforce to work from home, many have suddenly started to work full-time outside the protections of corporate security programs. Just as we have all become experts in social distancing and hand washing, we also need to be just as vigorous about our “cyber-hygiene”. As we all pull together to “flatten the curve”, many high net worth individuals and small businesses need to quickly get up the learning curve to become more cyber-secure. This article is an interview with cybersecurity expert and policy advisor Megan Stifel (Executive Director, Americas at the Global Cyber Alliance – the “GCA”) about how to do exactly that and the direction of cybersecurity policy around the globe.
Creating a Flight to Safety or just Operational Turbulence?
A number of investors have inquired about our view of the effect of this new coronavirus strain on their real estate investments, workforce multifamily specifically, and real estate in general. Frankly, it is still too early to tell. That said, based on the limited real-time information available in real estate, below are some factors and our thoughts on what we believe will be significant over the next 6-12 months.
I recently had the pleasure of presenting to a large group of real estate investors in Dallas at the annual 506 Group Investor Forum. As a participant in a panel about late cycle investing, it was apparent that this subject is top of mind for many investors. Most investors have benefited from a ten-year bull run after the longest uninterrupted economic expansion in U.S. history. Many are now looking across the U.S. economy and globally at frothy prices in many asset classes and questioning how to position themselves and their portfolios for what is to come. In this article we will frame the stages of the business cycle, attempt to ascertain where the U.S. economy is in that cycle, and ultimately discuss things to consider when positioning one’s portfolio for late cycle investing and beyond. (1) I will make the case that though we are “late cycle,” we are not “end cycle.” As such, portfolio positioning should start to contemplate recession resilience, yet not let the hangover of the Great Recession drive us to fear-based investing, in particular when it comes to real estate.
Commercial Real Estate (CRE) regularly tops the list for industries with clear gender disparity. The numbers are substantial: per the 2015 CREW Network White Paper,1 white men represent 58.5% of all professional CRE positions, 68.9% of mid-level positions, and 77.6% of senior executive positions.2 The imbalance extends beyond just opportunities, as the 2015 median annual compensation for men was $150,000 while the 2015 median compensation for women was $115,000, a 23.3% gap.3 A significant portion of this wage gap may be attributable to gender wage disparity in general, but it may also be attributable up to the types of roles that women tend to occupy within the industry.
Even for those with the earnings, wealth, and foresight to capably prepare, being financially ready for retirement can be a daunting task. Research on the subject is widespread and can become a winding labyrinth of vendors pitching their specific product solution. In this article we attempt to summarize some of what we believe to be the most relevant and interesting materials out there and provide the perspective that educates our investing decisions.
Millennials (born 1981 to 1997) are renting far more than prior generations. In this article, we explore why and understand if it is by necessity or by choice. Millennials are the largest generation in U.S. history, at approximately 79 million strong — surpassing Baby Boomers by about 4 million. Millennials (also known as Gen-Y) comprise 50% of all renters in the U.S., and are 8% less likely to own homes (when aged between 25 and 34yrs old) when compared to Gen-X and Baby Boomers at a similar age. The median age of today's renter is 32 with a median household income of $37,500, and most (60%) make less than $50,000. By comparison, 57 is the median age of today’s homeowner who have a median household income of $62,500.