Free Event - Alts Expo on Dec 13th
In this webinar, Peter Ciganik discusses the outlook for various asset classes in the current environment and the reasons why single family rental projects present a compelling investment opportunity.
Interested In Learning More About This Opportunity?
You can visit the Official OpportunityDb Partner Page for the GTIS Opportunity Zone Fund to:
- View beautiful high-resolution images.
- Learn key details about the fund and related projects.
- Request more information from the fund sponsor.
- Economic tailwinds for single family, build-to-rent projects in the current environment.
- Renderings and overview of build-to-rent projects in the GTIS portfolio.
- Summary of the fundamentals in the industrial sector with a recession potentially on the horizon.
- Post-COVID demand drivers for logistics warehouse space.
- Updates and renderings of industrial projects in the GTIS portfolio.
- Live Q&A with OZ Pitch Day attendees.
Industry Spotlight: GTIS Partners
With broad expertise in investing, structuring, design, development and asset management, GTIS professionals oversee projects in residential, industrial/logistics, office and hospitality from concept to completion. Today, GTIS is established as a leading investor in the US residential sector, with a portfolio footprint in more than 35 major markets located predominantly in the Sunbelt.
Learn More About GTIS Partners
- Visit GTISPartners.com
Jimmy: Up next is Peter Ciganik, with GTIS Partners, one of the larger Opportunity Zone Funds, or platforms in the industry. You can learn more at gtispartners.com. They are raising for their GTIS Qualified Opportunity Zone Fund II. There he is. Peter, how you doing?
Peter: I’m good, Jimmy. Hello, and good afternoon.
Jimmy: Good. Good afternoon to you as well.
Peter: Great. Well, thank you very much for having me. It’s always a pleasure. I will present a couple of statistics about our Opportunity Zone Funds, and a few things about the market, as it’s evolved since the program started, back in 2017, 2018.
Well, this shows some of our completed projects in our first Opportunity Zone Fund, apartment and industrial properties, mostly concentrated in big Sun Belt markets, Georgia, Florida, the Carolinas, Texas, and Arizona. And that’s where we have been active as a company over the years. We started the firm in 2005, and historically, we’ve managed capital on behalf of large pension plans and endowments. Some of the largest pension plans in the country are our clients in our institutional funds. And over those 18 years, we’ve done 211 projects, mostly concentrated in single-family, multifamily, and industrial properties We’ve done about 57,000 homes and lots, in master-planned communities around the country, about 10,000 multifamily units, and almost 9 million square feet of industrial space, totaling $14.5 billion of project cost over that time. And we came to Opportunity Zones because we realized there was actually a very good fit for our development platform. We’re all former developers, and that’s what we focus on. And as you know, the conditions of the Opportunity Zone program require that these projects be ground-up, or very substantial redevelopment. And not all fund managers out there actually do that. Most are investors in existing assets. They try to buy low and sell high, which is a great model, but not what we do. Our skill set is in developing properties, ground-up, in locations just like Opportunity Zones. When we looked at the program and the map, back in 2018, we realized that we did a lot of investing in these zones, even prior to the tax abatement being available. So it was a natural fit for us, and a check, if you will, to start looking at these properties, now with the tax abatement that’s available to the underlying investors. And as a developer, we have a perfect fit with that development ground-up requirement of the program.
Of course, the third condition, as you know, is to hold these properties for at least 10 years, in order to get your tax benefit. And that, to us, is a fair compensation for the illiquid, long-term nature of this hold. So, Opportunity Zones, in some ways, are just a tax program, a cherry on top of what should be a fundamentally sound investment, that needs to generate profit and gain in order for that tax abatement to even be effective. As we started looking around the country, and realized that these properties often fall in places like industrial parks, in transforming residential areas, that’s where we’ve committed most of our capital. This shows the 15 properties in our first Opportunity Zone Fund, which was a $630 million pool, diversified across property types, mostly residential, with a good portion of industrial, some student housing, and single-family rentals as well. About $550 million invested, 3000 residential units, and over 2 million square feet of industrial. These projects are now mostly completed, and we are on to our Fund II, which opened a few months ago, and is open to commitment from accredited investor, at $100,000 minimum, pretty accessible, directly through us, without any commissions or load. We’re really trying to make this accessible to accredited investors nationwide. That fund has now about $175 million, and will be investing in the next few years, which should be quite interesting, given the dislocation that’s happening in the market. There may be some opportunities to buy distressed or semi-distressed assets, particularly if their capital structure is out of whack.
I wanted to point out something that came out of the Novogradac survey of Opportunity Zone investments. Vast majority, it seems, is actually in multifamily properties, which have been great, and have had a great run, especially during the pandemic. But interestingly, we find that many Opportunity Zones are really located in areas that don’t have households. By definition, those are more easily qualifiable for Opportunity Zones, because you have to be 80% or below the median area income. And if you have no households, and no income, you find that there are actually many industrial areas that qualify. And so we’ve really focused our efforts in the first fund, and even more recently, in the second pool, on industrial properties, logistics parks, that offer some of the best locations in the country for locating them, and they happen to be in Opportunity Zones. Interestingly, there’s not a lot on offer out there, according to Novogradac at least, in terms of industrial properties in Opportunity Zones.
When you look at the apartment sector, the other consideration today is that it probably has peaked. And we will continue to invest in residential. It’s a great asset class, very long-term hold, but right now we’re seeing a record level of new deliveries for apartments. Never seen this way before, and vacancies are starting to creep up on us, so, in the next few years, there will be some settling in that apartment market. Longer-term, great investment, but in the near term, probably other sectors will offer better risk-adjusted opportunities. Of course, it varies by market. This just shows rent growth since the pandemic, and you have places like the Bay Area, unfortunately, not even back up to pre-pandemic levels, versus the Sun Belt, places like Tampa and Dallas and Atlanta, where rents have almost doubled, in some cases. So there is variability across markets, and we’ll be able to find residential opportunities. But one area in particular is actually interesting within residential, as it continues to grow, and that’s single-family rentals. If you have never heard of that, these are individual homes in communities of homes that are built specifically for rent. This has become a large and growing institutional asset class since the global financial crisis, when investor groups, such as us, were one of the pioneers, back in 2008 and ’09, acquired a lot of homes out there in foreclosure, and instead of selling them, we rented them out. And it turned out to be a great investment thesis. These were double-digit yields, and continue to be pretty solid rental yields, even today.
This shows the deliveries of build-to-rent communities over time, and you can see that just in the last decade, this area has really grown. This shows the resilience of that asset class across cycles. Comparing multifamily and single-family rents, you can see that multifamily does well most of the time, but when we have a deep recession, such as in 2001, or 2008 and ’09, you do tend to get a little drop, a negative rent growth in apartments. That, according to the record here, has never happened to single-family rentals. And it seems like we’re heading into one of those periods now, when apartments will take a breather, but single-family rentals, we believe, will outperform. So we’re allocating our residential dollars these days to build-to-rent single-family communities, in large regional markets in the Sun Belt. This is an example of one that we completed, in Phoenix. It’s in Mesa, a large, suburban, very nice market outside of Phoenix, where we had a community of about 1500 homes that we were building, regardless of the Opportunity Zone benefit. We’ve owned this area and this parcel of land since 2012, and had been building, really, a new city here for quite some time, when the Opportunity Zone program came up. Because it used to be a piece of desert before we acquired it, in the 2010 census tract that was used for Opportunity Zones, it actually became qualified, even though, admittedly, today, we’re building $800,000 homes here.
But we carved out a piece of about 200 units that we developed specifically to rental specifications. And this community is now built and operating at about a 7% rental yield. It’s on a pad that looks kind of like an institutional apartment, but these are individual, single homes, Casita-style, two and three-bedrooms, clustered around a central amenity, with a nice pool, a clubhouse, and a leasing center professionally managed like an apartment. These are not scattered single-family rental homes, all over the city. This is an institutional asset, but it offers that single-family lifestyle that people like. Instead of owning a house in this master plan, however, you can rent it for about the same rent as a humdrum 1970s apartment in downtown Phoenix. This is what it looks like. Little homes with a backyard, just big enough for your dog to take a run, but, we offer extensive amenities in these communities, and that’s what our renters come for. These beautiful, resort-style pools, clubhouse, pool, and a new school that we built just for the community. Again, they can rent this at about the same level as a three-bedroom apartment, and for those who maybe aspire to live in a house, but have student debt, can’t get a mortgage these days, or just simply don’t want to buy, this is the best option.
Going back to industrial real quick, it’s had a great run as well, and these days, we’re focused on industrial properties more than before, because we are still seeing rent growth and very strong fundamentals, even as the economy perhaps enters a recession next year. This chart shows the completions on industrial space versus net absorption, how much space is being absorbed in demand. And you can see that for years now, there have been more absorptions than completions. It’s slowing down for sure, but we are really at such a low vacancy level, at about 4%, that we have a really strong runway. Even this quarter, and last year, rents in the industrial space are up double digits, so there is a reserve of rent growth that’s being built up here because of that fundamentally strong demand that still exists.
And it’s driven by three main factors. Really quickly, e-commerce, it’s here to stay. After the pandemic, we are buying everything online, and even populations, elderly and so forth, who maybe were not on Amazon are now buying everything through their e-commerce site. Well, when you do that, you need three times as much space, because you need space for return logistics, you need space for more SKUs, as they call them, more variety of product. You expect to find a hundred different pairs of shoes, instead of maybe three or four, like in your local store, and you need space for that. And there’s been a realignment in the supply chain and logistics, whereby distributors don’t want to rely on just one source of product in China, and they’re bringing product through Mexico, from Europe, from Thailand, from Vietnam, and you need new spaces to accommodate those. Well, interestingly, they’ve been on the east side of the country, and in the southern part. Ports like Houston, Savannah, Charleston have really grown way faster than the West Coast. With the perennial strikes in LA and Long Beach, you can see why that is. Interesting fact, about 30% of the country today lives in the Southeast, 100 million people, but only 10% of logistics space is located there. It’s the reverse of, for instance, Chicago, which has been the industrial distribution hub for many decades, but is losing population. They have about 10% of the population, but 30% of the space. So, even if the country slows down, even if we move into a recession, there’ll be a geographical dispersion, and areas like the Southeast and the Gulf will benefit more than the rest.
That’s why we are confident that we can still build warehouses like this. This is located in Goodyear, Arizona, a completed asset, 7.5% yield on cost, that’s fully leased to two clients. One of them is HelloFresh, the frozen distributor, and they fit out the warehouse with a lot of equipment, which is very expensive, so it’s a great lease to have, with a corporate guarantee. It’s right next to Amazon’s largest warehouse in that region, where they supply all of Phoenix, and we have a better location. Smaller warehouse. We don’t work with Amazon. They don’t pay quite as much rent as our tenants do, because they have the heft to command better conditions, but we locate next to them, in the same industrial park. And this is just a couple of pictures of that asset, that is now completed, fully-leased, in our Fund I. So, with that, I think I covered the ground on property types. I’m not sure if we have time to take any questions, but if you’d like to contact us, my name is Peter, and my contact is gtispartners.com. You’ll find me there.
Jimmy: Perfect. Thank you, Peter. Thank you to you and GTIS Partners for being a great partner with us at OpportunityDb and OZ Pitch Day. We got time for one question here. This comes from an anonymous attendee. This person asks, “I know you touched on this, but could you review what are you seeing in rent growth for SFRs in the geographic areas of your project? Is the rent for SFR outperforming multifamily in 2023?” What do you see there, Peter?
Peter: Definitely outperforming, because apartment rent growth is turning negative. We’re seeing some markets, particularly those that were the darlings of the pandemic era, the Austins, Denvers, to some extent, markets in Texas, where apartment rents are now turning negative. They are still positive on the single-family rental side, although flattening out in places like Phoenix, which has quite a bit of supply, but still growing in the Southeast. Our Tampa and Orlando markets are still growing. We’re increasing rents every month.
Jimmy: Very good. Well, Peter, we’re at time. Thank you for participating today. Really appreciate hearing from GTIS Partners. Have a great rest of your day. We’ll see you on one of these in 2024, I hope.
Peter: Thank you, Jimmy. Everyone, have a great day.
Jimmy: Thanks, Peter.