BSW recently hosted a “Meet the Managers” event at the historic Highland School building in Boulder, CO with Bob Nicolls, owner of Monarch Investment Management Group. The event showcased Monarch’s process and people and enabled clients to hear on-the-ground observations and insights regarding the apartment market.
Monarch buys apartments in “institutional flyover” markets in states like Iowa, Nebraska, Michigan, Ohio and Missouri, which typically do not receive as much attention from real estate investment trusts, insurance companies and pension funds. For patient, value-conscious investors though, these flyover markets can be rewarding investments.The B and C class properties which Monarch buys generally cater to renters who are less likely to purchase a house. This is especially true now as lending standards have tightened since the days of no-doc, no-money-down home loans.
A larger pool of renters isn’t the only reason Monarch favors these type of apartment investments. Economic activity in markets like Michigan and Ohio is also improving dramatically as manufacturing returns to the United States due to lower cost inputs, existing infrastructure and skilled labor.
According to Bob, “The new supply of apartments in our segment is non-existent.” Existing apartment communities are selling at significant discounts to replacement cost, generally in a range of 50% – 80% in these markets. This makes it very hard for apartment builders to justify investing in new construction.
Bob explained that a shortage of qualified maintenance workers has been a strain on operations in the apartment industry. Also as the economy improves lending standards may loosen further. His biggest concern is the return of no-doc, no-down home loans. Even though he assesses this as unlikely, it would be a headwind for apartment demand not to mention the broader economic risks associated with relaxed lending standards.
Apartments continue to be a meaningful component of the BSW real estate allocation. We continue to believe they provide investors a hedge against potential inflation while also benefiting from an improving economy.
-Elias Bachmann, Senior Portfolio Manager