This is Jonathan Aceves with Meybohm Commercial Real Estate, advising business leaders and helping them make wise real estate decisions. Today we’re going to be discussing Multifamily Rent Curves.
How does one set out to study multifamily rental rates? We do this by building a rent curve. Let’s say you want to study the rental rates for housing in Martinez, GA. We would do a survey of rental rates at apartment complexes in the area, and plot them on a graph. The graph would start out looking like this:
Then we would separate them by class. Class is a ranking system given to multifamily properties by investors, generally A, B, C, and D. A properties are generally newer, amenitized, and really nice. B properties are usually good, but maybe a little older, maybe not the same level of amenities. C properties are in not-so-great areas, in fair condition, usually schools aren’t so good. D properties are in bad condition and really rough areas, these are the kind that you wouldn’t go to at night. Once you’ve broken them apart by class, you draw a curve over them. You would end up with something like this:
It is interesting to note the steepness of the curve, and the distance between the different curves. Another thing to note is that market changes shift the curves. This is what we see in rapidly gentrifying areas—the entire curve moves out.
So how do you use the rent curve? Well this helps investors identify opportunities for repositioning. It also helps you identify management problems. If I see a complex with below-market rents, I try to figure out why. Is it a problem that an investor can fix?
Thanks for reading! Please like and share with those you think might benefit from this. We’d love to hear from you! What are your thoughts about rental rates?
Today we’re going to talk about SharedSpace and Coworking with John Cates, COO and General Counsel at Meybohm Real Estate.
Jonathan Aceves (JA): Tell us a little about your prior experience with the coworking business model.
John Cates (JC): When i was in Atlanta, coworking was just starting to take off. Not just from a office space model but also as a model of entrepreneurship. Coworking space like WeWork and others that were purely office tenant landlords but also incubator space. We were involved with helping the Atlanta Technology Village to get started. We got to see in Atlanta over a six or seven year period, the coworking model take shape in all its different forms.
JA: What was your connection to SharedSpace?
JC: I was approached by the SharedSpace group before they got started as they were looking for different space in Downtown Augusta. We had some mutual connections from my time in Atlanta. And they really reached out to me to try to get some advice as to pricing and location and what I thought would work and what wouldn’t work here. I guess a little bit like a sounding board. They actually approached us about potentially getting involved both from a personal and company standpoint.
JA: What was your advice at the time in setting up that business?
I think the first thing is that coworking takes different forms depending on the area that you’re in. So coworking in place like Augusta or you call a secondary market is very different from coworking in Atlanta. Your pricing needs to be different. Your sizing needs to be different. The companies yo are going to attract are very different. And pricing is probably the most important because when you’re dealing with a space like SharedSpace over on Greene Street when you can go over to Broad Street and get a comparable office space. So i think Coworking is an asset class in and of itself outside of office space and is very unique. And one of the things I really tried to explain to them was that Augusta is not like Atlanta. That’s not a good or bad thing–it’s just a fact. Some of the other things were that you need to be really, really careful about how you program the space, because coworking space really only works when it’s programmed properly. Nobody wants to be in a coworking space by themselves. You have to create a pretty inviting and exciting entrepreneurial community where you’ve got several people doing different things. There has to be a good energy there. And so i think that you really have to do a good job of programming certain events to give people a reason to want to be there, because a lot of people who are there are likely either working at home or they’re working somewhere else. So you want to build that community, I think that was it. And one of the parts where I initially tried to offer some advice in addition to that was getting the size correct.
JA: Do you think we’re seeing a paradigm shift in the coworking space? Are consumers changing the way they office? We’ve seen the fall of WeWork, and now this. What are your thoughts in general about the coworking model?
JC: I don’t think so. I don’t think it’s the model. I don’t think wework’s struggles through their IPO are really a true reflection of the health of the coworking space and the coworking industry. Again i think it works, but it has got to be done smaller, then growing larger. That was one of the biggest things that I didn’t necessarily agree with about SharedSpace was that I thought they went too big too fast. Nobody wants to go into one of these spaces to be alone and what my advice was initially was pick a smaller space, maybe 3000, 4000, 5000 square feet–to be bursting at the seams. Program it, get people in there, and have a waiting list. Then once you’ve got that demand there and that community built, then you can transport it to a bigger space. But by not having the right programming up front, by taking a space that was too big, I think this deincentivized people from wanting to be in there, because nobody wanted to be in there and hear their own voices echo. So you’ve got to balance the cultural aspect of coworking space with the size of it itself. Then the other thing is that if someone can go to Broad street, which is two blocks from there and a potentially more desirable location than Greene Street, and get a location for about the same price for a company of three or four people, then that’s what they’re going to do. So there’s still a decent amount of good office like that one on Broad Street. So I don’t know how appealing it would be to me as a small business or as a freelancer to locate my business in there. And I think what happened was that they ended up getting a few smaller versions of call centers. And that goes against the whole entrepreneurial atmosphere that you’re trying to create.
JA: What implications does this business case have for downtown business and retail?
JC: Well I think the first thing is to understand why it happened. Just because the concept didn’t work, doesn’t mean that coworking can’t work in Augusta. There’s a significant demand for it. And I think one of the things that we saw when I was involved in the Augusta Innovation Zone was that we also got to the point where we were almost going to be in a place that was too big. And that’s why it didn’t work in the Woolworth building when we were were looking at that a few years ago, and we felt that there was a huge need for it. And we had a waiting list. But you had to start smaller to prove out the concept. So I don’t want people to take away that this model doesn’t work in a market like Augusta. It does. You just cannot start to big and your pricing needs to be reflective of the market–it’s got to be lower than what you can otherwise get on Broad street or somewhere else. The other thing is that the model really should work when you’re trying to also use the space to create new businesses. So i think it’s one thing that the Clubhou.se has done really well. And you know–they’re bursting at the seams, and as you know they’re located in the Cyber Center and doing great. But that’s because the pricing is right. The location is right, and I think they’ve proven that if you can partner with the right people and get entrepreneurs in that space and activated, that it works. So that would be my only big takeaway is don’t look at this and say that the concept doesn’t work because it is working. It just has to be done right. The Clubhou.se has done a really good job proving that the concept does work.
JA: Those are great lessons.
A big lesson is the value of good advice–and how important it is as advisors to tell the hard truth to our clients. What other lessons can you learn from this business case? What are your thoughts about Coworkign in Augusta? What is working? What are lessons you’ve learned in launching a new enterprise?
Georgia Power is starting off 2020 with a pledge of $50,000 toward storefront improvements in downtown Augusta. This is more than triple what they have donated in the past. For the previous two years they have donated $15,000 each year which was used to create a facade matching-grant program. It has helped with projects but it has gone quickly.
The company’s regional external affairs manager, Stephen King, presented the Augusta Downtown Development Authority with the symbolic check. He said, “It doesn’t come with any stipulations other than for the growth and development of downtown.” The program developed is a matching-grant program that offers up to $5,000 to downtown business owners who invest an equal amount in exterior improvements to their spaces.
Today the Augusta Chronicle reported that it looks like the proposed $94 million dollar Augusta Riverfront Depot project is teetering on the edge of collapse. Bloc Global, the developer, has asked for the return of their $50,000 held in escrow, or they will terminate from the deal.
In 2016, the commission authorized the city DDA to market a 6.3-acre riverfront parcel at the corner of Reynolds and Sixth streets and we later learned of a pretty major conflict over the employee parking lot at the site that was provided for Unisys Corp the year before.
What are your thoughts on this project? What do you think will be the result?
What’s going on: Prices are rising–homes bought at retail (livable, decent condition) have risen from about $63/SF on average to just under $80/SF on average over four years–that’s about a 26% increase. As a whole, the average price has risen from about $30/SF to about $57/SF–almost double–over the past four years.
Part of what’s happening is that there are lots of abandoned and derelict homes that have been purchased, along with the rise of young professionals moving downtown. The average buyer in Olde Town today is a young, single, professional female. She is educated, trendy, and wants to be connected to the neighborhood and the downtown.
In 2010 when I bought my home in Olde Town, things were much different. The neighborhood was ‘busier’–more foot traffic, and there was a significantly higher percentage of section 8 housing in the neighborhood. Over the past ten years families have moved downtown–many connected to First Presbyterian Church and Christ Community Health Services (a non-profit heath center located in the middle of Olde Town). The rents started rising, investors started buying and renovating the homes, and soon things started changing.
In the past two years is when I’d say I’ve seen the most change. The main section 8 property in our neighborhood, Olde Town Apartments, had their tax credit expire and has been renting and selling their properties at market rate (primarily to young professionals). Many of the derelict properties on the southern edge of the neighborhood have been demolished, and plans are underway for new homes to be built.
My prediction is that the trends we see will continue, and that home values will continue to climb. I think that if the trend continues, in the next two years prices/SF for homes sold at retail will surpass $100/ft, at which time we will hit a tipping point which will open the neighborhood to new construction, and we will see many of the functionally obsolete homes demolished and new homes built. All this is great for our city, and for the greater urban community in Augusta, GA.
What are your thoughts? Where do you see the market downtown headed?
Overall, we’ve seen the rental rates in Olde Town (Downtown Augusta’s primary residential neighborhood) climb from an average of $.67/SF to just under a dollar per SF over the past four years. That’s a 32% increase, about 8% per year. What’s going on?
Well, as we’ve already mentioned, Cyber and Medical young professionals are choosing to live downtown. That’s driving up rents and housing prices. Also, investors are renovating properties, and so we are seeing more available rental properties that are in in decent condition.
A decent case study is 107/105 Fourth Street. We recently helped a buyer from Virginia acquire those apartments. The previous owner had owned them for over 15 years, and they were in pretty rough condition with low rents. The new owner is going to make an investment into renovating the units, and with the help of professional property management, they will lease them at market rates. The location of the property is great–the condition was terrible. Now that complex (surrounded by young, professional homeowners) will probably target young professional or medical tenants, and we’ll see it on our rent study next year, my guess is on the higher end of our graphs.
You’ll also see in the graph a strong correlation between the “Score” and the price per foot. Our scoring system is a somewhat arbitrary numbering of properties by both location and condition from 1 to 5, and then averaging these two numbers together. Thus, a property with location of 4 and condition of 5 scores a 4.5 in this measure. The number again is somewhat arbitrary, but the correlation is quite strong. So I would assign a property in rough condition and poor location an estimated rental rate of .65/ft, while a property with a good location and great condition an estimated rental rate of .95/ft. Note that this measure doesn’t take into consideration size, which the first graph makes clear is highly correlated with the rental rate.
I think this is great news for our Downtown rental market. Augusta is changing, and I believe that the rising tide will lift all ships.
What are your thoughts? What has your experience been in the rental market?
SharedSpace announced last week that they were closing their 15,000 SF facility on Greene Street. The Atlanta-Based co-working company still has two facilities in Atlanta. The property is located on the corner of Greene Street at ninth, and has been listed for sale at 3.975M, or roughly $260/SF, and advertised for lease at $23.95/SF/Yr. This is a beautiful facility, fully renovated, with 63 parking spaces.
I think the situation is instructive about the true cost of occupancy downtown. The number many use to calculate historic renovations is ~$150/SF. If you purchase shell space at $50/SF, and have to find parking, you could end up with $250/SF invested in a space very quickly.
For more information, see Damon Cline’s Article: https://www.augustachronicle.com/business/20191230/sharedspace-closes-augusta-office
What are your thoughts about the Downtown Market? Or Co-working in general?
The primary Class A Complex in our study was Nine Two Six West, at 926 Stevens Creek Road. Nine Two Six averaged $1.26/foot/month asking rent. Rocky Creek and Iron Horse we considered Class B, which averaged at .84 cents. Fountainhead we considered Class C, and averaged $.69.
Takeaways: It does make a difference who the management company is, where it is advertised, and having good photos and floor plans.
If you are a multifamily investor with north of 20 units, you should sit down with the guys at Doorpost Management. They can give you the same economy of scale as the as the 200+ unit complexes with their integrated maintenance. Also the quality of their financial reporting is critical for owners that may be considering sales in the next few years. It’s hard to get a professional investor to take a serious look at your property when your manager can’t provide clean financials and rent rolls.
Overall, well-located and in good condition, medical office space in Augusta is leasing for around $18/SF, and selling for around $150/SF. As expected, offices in Evans commanded a premium (around $200/SF), and offices around Trinity sold at a discount ($120/SF). This is slightly higher than standard office space, and tends to be clustered around hospital facilities:University, Doctors, AU Health,andTrinity(University Hospital Summerville)
One outlier that we see is with the rise of Urgent and Prompt Care clinics, which tend to lease in line with NNN leased retail space. We are seeing them leasing at around $30/SF NNN and trading at corporately-guaranteed retail cap rates. There has definitely been a rise in Medical/Dental/Physical Therapy providers taking space in shopping centers and even developing practices on retail out-parcels. The impact is that these lease rates fall in line with their competitors for these spaces.
POB Buildings. The POB buildingsare a good milestone–what would it cost a physician to locate inside the hospital complex, with a full-service lease? Asking rates there tend to be around $25/SF Full Service, potentially you could lease space there between $20-21/SF. If we back out the full-service items, it’s a helpful comparison. That might get us to a rate around 18/SF.
Renovation of office buildings. Another helpful number is what would it cost a physician or dentist to purchase a 4000 SF building and convert it to a medical practice? Our guess is that in good condition, it would cost around $25/SF. so in theory an office building could be purchased and 100-150K invested in it to make the conversion. Alternatively, an office could be leased, and the improvements amortized into the rent, which would equate to 4-5/SF/YR on the rate. At those numbers, it is slightly more cost-efficient to lease or purchase an existing medical office than to convert an office building into a practice (which makes sense).
On a related note, we are seeing a large demand for purchase of NNN leased medical office space. If you own a practice and the real estate, it may be a great retirement planning tool to investigate the value of leasing back the building and selling the real estate. Also if you are selling your practice or looking towards retirement, it might be a good idea to sell the practice along with a lease on the building, and then sell the leased building. That may be a great way to cash out of your investment and give your new partners a fixed and budgetable cost.