The tides have turned to some degree on surging market dynamics, especially in 18-hour cities, a trend that immediately followed the COVID-19 pandemic. We are now honing our focus on cities that we view as well positioned to provide opportunities in a market that is actively normalizing. Within these cities, we are zooming in further on micro markets or submarkets where deals make sense in the current high interest rate environment.
Our strategy is to go “back to the basics” when approaching markets to invest. By keeping a close eye on short-term concerns related to high inflation, tempered rent growth, oversupply risk, and high cost of capital, we will prioritize pockets where we see potential for stable rent growth, strong absorption rates, continued job growth, and strong median household income growth.
To counter some of the headwinds in the current environment, first and foremost, we prefer markets that rank higher in relative affordability, which brings our focus to Texas markets – Houston and San Antonio, and coastal markets – San Diego, Fort Lauderdale, and Tampa among others.
While affordability is one major factor, we are also cautious about rent growth prospects in certain markets, especially in many of our perennial secondary markets such as Austin, Atlanta, and Nashville, which had experienced outsized rent growth and asset appreciation after the pandemic and are now showing an outlook of tempered rent growth. Although future growth potential remains relatively attractive for these markets, in the short-term we are approaching selective assets based on strong NOI projections.
We are also seeking appropriate discounts relative to peak pricing when considering these locations. Furthermore, we are sensitive to the increase in supply in many of the previously high-growth markets and are tracking the possibility of some of them overshooting in the short-term which can be a concern from a demand standpoint. The long-term outlook still appears attractive for some of the previously growing markets but the current market dynamic must be priced in.
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Lastly, our strategy is to focus back on certain primary markets, especially Boston, and New York, which have witnessed tremendous cap rate compression in the last three to five years. Now that some of these markets have repriced, we are discovering a re-emergence of relative value or “better bang for the buck”.
Such markets also benefit from stronger in-place infrastructure which can serve them well when other markets pause or slow their growth. All boats rise in a rising tide, but in a correction scenario, secondary and tertiary markets tend to get hit harder while primary markets tend to provide safety due to their inherent economic stability.
