Why We Invest in Southeast Workforce Multifamily Real Estate

Charleston, SC | May 18, 2024

We are often asked why the focus for Ballast Rock’s Sunbelt funds has been exclusively on workforce multifamily housing in the Southeast. Why not diversify into other types of commercial real estate? Why not focus on the Southwest or the Northeast?

Given the recent launch of our Sunbelt Multifamily Fund III (“SB3”), we feel it is again important to share our investment thesis as to why we have been so disciplined in investing in this geography and sector of the real estate market.

Differing Risk Profile

It is often tempting to look at historic returns in areas such as commercial office space and try to chase that past performance. Since the launch of our first Sunbelt Multifamily Fund, we believe we were wise to avoid commercial real estate investment because of the risk profile. As the market has seen since the disruptions from COVID-19, one or two commercial tenants who stop paying rent can wipe out income for an individual property, commercial tenants can be extremely costly to replace, and both can materially change an asset’s value. With a fund like SB3, we can spread the risk of any individual resident defaulting on rent payment across the expected approximate 2,000+ apartment units in the portfolio, unit turn costs are relatively small, and unit turns are counted in days.

Opportunity for Value-Add

Ballast Rock owns its own property management company, Sunbelt Properties, which has deep experience in assessing and improving the value of the workforce apartment units and the properties our Sunbelt Funds own. Many of the properties we buy need significant work, and having an in-house team allows us to be very efficient in the way we make improvements and manage our properties. Their expertise in workforce housing, we believe, gives us a benefit over some other sponsors who outsource their property management.

The Supply-Demand Mismatch

We have always liked the Southeast because it has been a region with relatively high demographic, employment, and wage growth. According to the Federal Reserve Bank of Atlanta, the Southeast has long outperformed other regions in the U.S., and its lead widened since 2019 and through the pandemic. This growth has kept demand for workforce multifamily high, as reflected in the rents charged and occupancy rates of these properties. This has allowed our properties to remain competitive in the marketplace.

Disciplined Investing

While the above represents some of the core drivers of our investment thesis, discipline is still critical, and our recent experience underwriting deals confirmed this. We had wanted to launch SB3 more than a year ago but were unwilling to deploy capital because we felt that the pricing we were seeing in the market was not attractive enough. Over the last year and a half, we saw sellers try to sell assets at near market peak levels seen in 2021, but buyers needed to buy at prices based on current increased costs of borrowing and insurance. In 2023 we typically saw the difference between where sellers wanted to sell and buyers wanted to buy being anywhere between 15% to 25%, leading to a huge drop-off in transaction volumes, and highlighting to us that it was not an adequately attractive environment into which we should be deploying investor capital.

In 2024 we have seen a material change in seller expectations for a variety of reasons that we will discuss in next week’s email.

Ultimately, we believe our patience has paid off and, with the identification of the first property that meets our quantitative and qualitative underwriting standards, we feel the time is right to launch our third fund, with the continued focus on workforce multifamily in the Southeast.

Prior Sunbelt Multifamily Funds

Ballast Rock launched Sunbelt Multifamily Fund I (“SB1”) in 2019 and between February 2019 and January 2021 acquired nine properties totaling 1,110 apartment units for $63,630,000. SB1 began dispositions in early 2022, generating gross proceeds of $60,450,000 from the first four properties sold. The 593 apartment units involved were acquired at an average cost of $53,583 per unit and sold at an average cost of $101,939 per unit. Ballast Rock anticipates exiting the remaining five assets in SB1 opportunistically over the next 12 to 18 months.

Sunbelt Multifamily Fund II (“SB2”), launched in 2021 and between February 2021 and January 2023 acquired nine properties totaling $101,408,000, with 1,039 apartment units.

In April of 2023 Ballast Rock launched Ballast Rock Capital, its broker-dealer. Ballast Rock Capital is a member of the Financial Regulatory Authority (FINRA) and the Securities Investor Protection Corporation (SIPC) and is registered with the Securities and Exchange Commission (SEC).