Matthew Garcia, Besen & AssociatesAs the supply of properties for sale has tightened further over the past year, we’ve started to observe certain trends emerge in an effort to maintain activity and one of the most notable has been investors shifting their geographic focus.
Typically, geographic concentration has always been on the priority list for investors. For management efficiencies such as sharing supers through coordinating city inspections, it will always allow for better operations. Even when a principal wants to inspect their own properties, they many not want to battle the morning rush of the FDR followed by the gridlock on the BQE. However, when faced with the reality of ‘doing nothing’ because deal flow has become constrained, the reality is something has to give. That choice lately seems to be augmenting a firm’s geographic radius.
We could provide numerous examples of this dynamic shift, but the most evident (without disclosing identities) is when a firm whose name is eponymous with a certain borough or neighborhood is transacting in a totally unexpected zip code.
It might create a little more strain on management capabilities and travel times are not as friendly, but those are simply necessary tradeoffs for staying active and finding value. It stands to reason that a change in location is less risky than investing in a new asset class. That may require multiple new relationships such as leasing brokers or new equity partners more comfortable with those particular property types.
The techniques in terms of renovating and repositioning apartments don’t change. A multifamily investor may not go with higher-end finishes in certain neighborhoods, but those adjustments are easily accounted for.
Ultimately, the shift in geographic focus may only yield a 50 basis point cap difference in entry pricing. However when competition drives aggressive pricing, this can translate to a meaningful difference. After all, as long as the return on investment meets the benchmark thresholds, it may not matter too much if the underlying asset is in Washington Heights, Williamsburg or the Upper West side.
Matthew Garcia is a director at Besen & Associates, New York, N.Y.
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