Best Multifamily Markets and Hidden Gems
Commonly used key parameters to select a multifamily market
Large MSA (Metropolitan Statistical Area)
Population Growth
Job Growth
Industry Diversification
Affordability
Landlord Friendly
Matching all these criteria will result in a few very competitive markets where deals with attractive returns become rare. What if you find a deal in a market location that does not match all these criteria?
Case Study: Memphis, TN
Memphis has a bad reputation with investors, some of them do not even want to consider this market.
Yes, Memphis, TN is not a market with double digit population and job growth, it is not a primary market like NYC or Atlanta. Memphis has the image of rough neighborhoods and high crime. But let's review the characteristics of the Memphis market:
1. Memphis is a large stable market
The MSA (metropolitan statistical area) is 1.3 million people. Its population did not change significantly through recessions. The population increased 3.8% between 2010 and 2018.
2. Employers and industries are diverse
Logistics (FedEx, Amazon), healthcare (Baptist Memorial, St Jude), other industries (Technicolor, International Paper). There is not a single primary employer in a single industry.
3. Companies are investing
Spending on new downtown Memphis development projects are projected to surpass $2.9 billion in the next several years. Over 250 revitalization projects, valued at $13 billion have been completed in the last 4 years. FedEx has pledged $1 billion to modernize its Memphis SuperHub. St. Jude’s Children’s Research Hospital has announced plans for a $1 billion downtown expansion. Nike and Amazon recently broke ground or opened distribution centers.
4. Landlord friendly laws
Termination notice for nonpayment of rent is 14 days.
5. Cost per unit
The cost per multifamily unit for B/C class asset is affordable due to high cap rates: $30-$50K/unit.
6. Neighborhoods
There are thriving class A neighborhoods: Downtown, Cooper-Young, Overton Square, University District, East Memphis, Crosstown, Germantown. And more quiet residential solid class B neighborhoods like Raleigh and Southeast Memphis.
7. Real Estate Tax Incentive
If capital is invested in a property, the PILOT program may apply. The Payment In-Lieu-of Tax (PILOT) Program is an incentive program to expand / attract businesses to Shelby County and to Memphis area by encouraging the renovation of existing buildings and the creation of new jobs. Property taxes are frozen the predevelopment level for a set amount of time as determined by a grading system are frozen (typically 10 years).
8. Crime Reporting
Memphis reports crime differently than most cities. Memphis reports all crime: you call the police it is recorded. A husband-wife minor disturbance can go down as assault, someone steals your child’s tricycle and you call the cops it goes down as a theft, many cities have a limit on property value before they report it as theft. If someone breaks into your home, beats you up and shoots your dog Memphis reports three crimes, many cities may report all as one break in. Bottom line, the scales should be leveled when the crime is reported equally across the US. This will change in about 4 years when all cities will have to report crime using the same Federal metrics.
Here is a link to a much more thorough presentation of the Memphis, TN MSA prepared by Steve Woodyard or www.WoodyardRealty.com, a local commercial real estate agent. Memphis Multifamily Market and Construction Update 2019
In conclusion
Some overlooked markets offer great investment opportunities. Memphis is a stable market from the population standpoint but it offers many attractive facets and it has a vibrant economy.
We are co-sponsor in several commercial multifamily deals in Memphis along with operators / sponsors who now own large portfolios including thousands of units in Memphis. Not all deals are home-runs, but all deals make money.
Our experience shows that if you select the right area (ex. class B neighborhoods), the right property size (ex. 100+ units) and the right property management company, Memphis is a solid market to invest in. We have many properties where the business plan we anticipated is matched with results, if not improved upon.