Real Estate Investing in Build-to-Rent Housing Communities

Elana Margulies-Snyderman:

Hi, Josh. Thank you so much for being with me today.

Josh Hartmann:

Thank you so much. It's great to be here.

Elana Margulies-Snyderman:

Absolutely, Josh. So, to kick off the conversation, tell us a little about the firm and how you got to where you are today.

Josh Hartmann:

Sure. So, NexMetro the concept of our, which Avilla Homes is our brand, started really in 2010 in Tucson, Arizona. One of my partners decided to build a community of cottage-style multifamily, which is essentially the concept that we're building today, which are individual homes, but built under a multifamily regime. We call it a hybrid model where you have four walls of freedom, you have your own cottage-style home, but it has an onsite leasing, onsite property management, et cetera. So, they built a project in 2010, they thought it would be a point in time, and then as they started building additional properties, they realized that they were really onto something that was really missing in the housing market and they decided to form NexMetro in 2012 and that's where I came on board when they wanted to grow the business across the Sun Belt states and really create a model that was replicatable throughout the U.S.

So, fast-forward to today, we're now in eight Sun Belt markets. We've delivered 9,000 Avilla Homes, which translates into about 40 properties. We have 4,000 homes under construction with 2024 construction starts, and our total investment to date is about 3.5 billion. So, we've come a long way in the last 11 years and grown substantially. And I think what's notable to this discussion is that this has all been accomplished with our network of individual investors. So, we don't have an institutional capital backer. We have friends and family, so to speak, and they've been great investors with us along the entire way, and we're happy to be a really privately held close-knit group of investors who have found a niche in the housing space.

Elana Margulies-Snyderman:

Josh, that segues nicely into the question I have for you. I would love to hear your high-level overall outlook for investing in build-to-rent housing communities.

Josh Hartmann:

Absolutely. It probably won't surprise you that I'm very bullish on build-to-rent space and also on housing in general. But I really think that there's four key areas that are tailwinds for the industry in general and specifically for build-to-rent. And the first one is really there's a systematic housing shortage in the United States. And depending on who you talk to, there's somewhere between 3-4 million housing units short. And what's interesting about that is even though we are short on housing in the U.S., housing starts because of what's happening in the market, are down 40% this year. So, we're not gaining on that shortfall currently, and it's going to get worse in the next three to five years because any projects that are... The only way to deliver new housing units in the next two to three years is to start them today. And so, we know because of that shortfall of starts, there's going to be an even greater shortfall in the next two to three years.

I think the second thing, as we all know, is there's really a housing affordability challenge in the United States. And this is something that just blows my mind that the average home value in the United States is $450,000, which just, I don't know, maybe I'm getting old, but it seems like it was just $250,000, $260,000 a couple of years ago, and now it's already $400,000, $450,000, which if you think about that from a purchase standpoint, that's a $50,000 to a $100,000 down payment. And then you've got probably a $3,500 a month mortgage payment plus expenses, etc. So, that's a pretty big thing for especially a new home buyer to overcome.

Whereas with our Avilla Home product, we're looking at average rents around $2,000 a month, and that includes most of those expenses that would be included in owning a home. And then if you think of it from an investment standpoint, if you took the difference, so call it the $50,000 down payment and $1,500 a month and you invested that in a mutual fund or an index fund, you could have an investment account of $200,000 in five years. So, there's different options today for making investments. I don't think people consider housing to be the biggest opportunity. And then housing is just getting completely unaffordable.

And then I think another leg to that four-part stool was institutional dry powder. So, transaction volume from institutional investors on multifamily investments is down 70% in 2024 versus 2022. And it's been that way since basically the end of 2022. So, there's all these institutional groups with their funds built up, but they have no place to place it. And that translates into about $250 billion of dry powder sitting on the sideline that's going to need to get allocated because, of course, allocators only get paid when they allocate, so it's follow the money. There's all these institutional groups that are going to want to invest and they're just waiting for the right time. And I think that time is coming in the next, call it, two to three years, and they're going to rush in all at the same time.

And then the final one, which is particular to BTR, is there's just a really strong interest in the BTR sector right now, especially from those institutional funds. And NexMetro is one of the largest developers of this kind of product in the United States. There's just not a lot of other options out there. So, there's a very small market with a lot of capital chasing it, and we think that's a great opportunity.

Elana Margulies-Snyderman:

Josh, I know you touched on this briefly, but love to hear more specifically some of the greatest challenges you face in your space and why.

Josh Hartmann:

I think right now the biggest challenge that the industry is facing is our short-term liquidity issues that are caused by the Fed actions. And whether you think that the Fed actions on increasing rates is a good or bad thing, it definitely is a negative for residential housing development, and especially properties that are in lease up because they were underwritten two years ago when rents were going up even double digits per year and cap rates were much lower. And now those projects are struggling to get completed and interest rates are increasing, and so they're really having a pinch on trying to get out of their construction loans or get into some more permanent financing. That's a short-term issue. I think that's going to work its way out in the next 6 to 12 months. But if there's sponsors out there, NexMetro being a sponsor of development, but we have a really strong balance sheet, there's a lot of groups out there that don't have that, and they're going to be struggling to keep those assets and not have to give them back or come up with really out-of-the-box strategies to hold onto those assets.

Elana Margulies-Snyderman:

Josh, to shift gears a bit, ESG has been top of mind for an industry like yours and wanted to see how NexMetro is addressing this topic.

Josh Hartmann:

This one's going to be tough for me to keep in the timeframe, but I'll do my best to be brief about it. I could talk about ESG for an hour in and of itself. So, I think that ESG is really something that is just good business practice. And so that's the way we think about it at NexMetro. I'll hit on just a couple of items. There's a long list of things that we do in this area. And by the way, my background, I'm an environmental engineer, that's my degree, so I'm very passionate about that part of the business. So, we'll start with that.

From an environmental standpoint, we definitely integrate the latest building technologies into our homes, which minimizes waste and provides a better living experience, in addition to being a positive thing for the environment. All of our homes, for example, are certified EPA Indoor airPlus, which basically means that they are designed to improve the air quality within the home through the use of low VOC, volatile organic compounds, materials for low formaldehyde cabinets. We design the air conditioning system and heating system to be very efficient and reduce humidity, so you don't have mold issues. So, that's something we integrated to all of our homes. And then we also participate in Energy Star program in many of our homes, and we're looking to also roll that out across the U.S., but that addresses just the energy portion of the home. So, that's just one example, but I think it's a really pertinent one.

The S or societal, I think we have our NexMetro Foundation, which was created to really give back in the communities that we build in, and we focus on homelessness and encouraging individuals from diverse backgrounds to pursue careers in real estate. And I think that's a really important thing because a lot of individuals that are in school right now in university, they may not know about real estate and how it works, especially if you're coming from, quite frankly, Midwestern states because they just don't have the kind of real estate development that you have in the Southern United States in terms of master planned communities and all these types of things. And so, educating people on that as an opportunity is really important to us, and we participate in some things doing that, as well as our homelessness initiatives.

And then finally, from a governance standpoint, the G in ESG, we're very formalized in terms of our board governance. And we have a board of directors, six directors of which I'm one. We have formalized meetings. We have committees that act on behalf of our owners, including our audit, compensation, financing governance committees. For a relatively new company, we're 12 years old and privately held, we try and hold ourselves to a high bar on governance and making sure that we're acting in the best interest of our owners.

Elana Margulies-Snyderman:

Josh, we've covered a lot of ground today and wanted to see if there are any final thoughts you would like to share with us.

Josh Hartmann:

I think the main thing that I'd probably convey is really our future plans for the company, which one of the things that makes NexMetro unique is our discipline to our Avilla Homes brand. And so all of our communities are Avilla, the same one-, two-, and three-bedroom floor plans, the same amenity package. It's really a rinse and repeat model. And our strategy as we go forward is to continue to do that, not get distracted by shiny things, I like to say, and doing different types of products. We're going to continue to build our Avilla homes and grow that in our existing markets and a few targeted expansion markets, but really, we're going to keep on doing the same thing and we've been successful doing it in the past, and we think that's the right strategy for moving into the future.

Elana Margulies-Snyderman:

Josh, I want to thank you so much for sharing your perspective with our listeners.

Josh Hartmann:

Thank you for having me. This has been really fun, and I appreciate your time.

Elana Margulies-Snyderman:

And thank you for listening to the EisnerAmper podcast series. Visit eisneramper.com for more information on this and a host of other topics. And join us for our next EisnerAmper podcast when we get down to business.