In an environment where apartment investors have been circling Southeastern metros, Northland stands out for its focus on Atlanta.
Since 2020, the Newton, Massachusetts-based national real estate private equity firm has acquired 1,300 apartments, totaling $270 million, and $250 million in land for future development in Georgia.
Atlanta “has a tremendous story with varying industries growing there at a rapid pace since the global financial crisis, a diverse economy, a diverse population and the continued inward migration from nearby states and other high-cost jurisdictions,” said Mike Campbell, Northland’s associate vice president of investments. “It has set itself apart as one of the top destinations in the Southeast.”
But Northland — which ranked No. 47 with 25,519 units on the most recent National Multifamily Housing Council Top 50 — has its sights set beyond just Atlanta and the Southeast. It also owns properties in Texas, New Mexico, Arizona, Colorado, Connecticut and Massachusetts, including a large development project in its hometown.
Here, Campbell talks with Multifamily Dive about overbuilding, the hunt for yield and where cap rates are going.
This interview has been edited for brevity and clarity.
MULTIFAMILY DIVE: For years, the Southeastern markets were considered commodity metros that could easily be overbuilt. Has something changed there, structurally, to make that less of a concern?
Mike Campbell: Houston would be a great example of a market that does concern us in terms of oversupply. In Dallas, we have similar beliefs. Specifically, in Houston, there's no zoning code. You can build wherever you want, wherever you want.
Atlanta has taken a very pragmatic and thoughtful approach to how things get approved and how it’s developing neighborhoods. Working within metros like that is more of our focus. As operators throughout the U.S., we know the number one thing that will slow down rents is development.
Has the transaction market cooled at all recently?
The biggest thing we're seeing is that brokers aren't blowing through their guidance the same way that they were for the last 18 months. Deals that were running 10% to 15% over their asking guidance are coming in at like 3% to 5% below guidance, but it's still within their ranges.
It also varies by product type. Some of the core class A stuff has fared better because a lot of those buyers are the same buyers that were always there. They weren't chasing short-term flips and high-yield value-add projects.
So, for companies that are buying on a basis play and looking at the cost per unit or cost per square foot, it might be light compared to where we were in Q4 2021. But that's still 30% over 2019. So when you put it into perspective, it's not like we've seen a dramatic correction from the massive price run-up through the pandemic.
Have cap rates been moving up?
There was a point in time last year where we were seeing a lot of trades in the low to mid threes. And now I'd say they are probably mid threes to high fours on average. But trying to find a four is still pretty tough just because of the competitive nature of core product. It's very low-leverage borrowers who are looking at that. They're not as impacted by the interest rates hitting them. We've seen better pricing and a lot of adjustments across the market on the value-add space.
The Southeast has been hot. Are the other regions you’re in just as competitive?
Through last year, the competition was pretty aggressive everywhere — even in the Midwest. One of the things that we found as we started to look through the Midwest was that many buyers who were either coastal buyers or who used to invest either in the Southeast, Southwest or Mountain States were getting priced out of those areas and starting to look towards the Midwestern states.
We saw large institutional groups in Kansas City, Missouri; Minneapolis; Madison, Wisconsin or Milwaukee, Wisconsin. We were seeing these groups that we regularly saw throughout Texas and Florida in the prior year. It seems like a lot of groups of our size and investment scope started trying to go where there would be a bit more yield. Even in Kansas City, we've seen deals trading for sub-four caps.
How did you adjust?
There came a point in time when we started to refocus and pick our markets very carefully because there was almost no pricing spread for risk between markets. That's how we started to pivot and allocate more towards Atlanta because it is a stable Southeastern market that we believe in for the very long term.
Rochester, Minnesota, [another place Northland recently made a purchase] is anchored by the Mayo Clinic. The likelihood of them shutting down and leaving that market is incredibly low. In the Northeast, we're typically developing because it’s where we're based and where we got our start. But we're looking at contrarian plays out as far west as California — in the Bay Area and at areas that haven't recovered fully.
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