Dan Croce, Managing Director, Birgo Capital. Image courtesy of Birgo Capital
The multi-family market in Pittsburgh, with its affordable cost of living and low population density, is in a convenient position to quickly recover from the troubles caused by the health crisis. “In recent years Pittsburgh has become an extremely competitive acquisition environment and the buzz of apartment buildings stemming from the pandemic has once again accelerated investor demand for this product,” said Dan Croce, managing principal at a private equity firm Real estate company Birgo Capital said Multi-Housing News.
Croce believes the greater Pittsburgh area can be a safe haven for investors looking for new markets to capitalize on. As a local investor and operator, he knows all facets of the subway multi-family market. MHN asked him to consider what framework conditions had helped Pittsburgh to overcome the difficulties of the past 12 months.
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Please describe the state of the multi-family market in Pittsburgh one year after the start of the pandemic.
Croce: The Pittsburgh real estate market has proven remarkably resilient to economic downturns in the past, and the COVID-19 pandemic was no exception – especially for apartment buildings. The big headline is that the pandemic is accelerating long-working trends. We have always believed that the disproportionate affordability of Pittsburgh rents, coupled with the region’s economic diversity, makes it an attractive place to invest capital in apartment buildings, and it seems that the markets are reaching that conclusion.
Transaction prices rise as cap rates drop and capital seeks a safe haven. The occupancy rate has been extremely constant and has actually increased slightly in our portfolio over the past 12 months. We are also seeing rents rise in the affordable market as there is increasing demand for inexpensive units. Rents are compressing at the top of the market and occupancy has increased somewhat, which is to be expected in a recessive environment.
For the collections, the tenants paid the rents consistently. We’re a vertically integrated company so we’ve been on the front lines with tenants and the happy reality is that people are generally fine. I think this reflects the current Pittsburgh market – it is very healthy, stable and has its focus on continued growth and opportunity, especially in the tech space.
What are the strengths of the Pittsburgh neighborhoods that have done better in multi-family housing over the past 12 months?
Croce: As in most major metropolitan areas, the suburbs and areas outside the city center performed particularly well. Multi-family products in these areas are affordable and spacious, and these two components of an apartment – affordability and spaciousness – have been prioritized here by renters for the past 12 months. The suburbs are doing well in almost all directions of the city.
There was definitely a softening in the urban core. Downtown has been hit particularly hard and there has been a quick slump for markets like the Strip District and East Liberty, but they have come back strong and are in a great position as we approach spring 2021.
It will be interesting to see how new high-end products are received this year, but all signs point to good results, even at the high end of the market. We believe that this is where the risk lies – a high-end product in the urban core. Spacious, affordable units outside of the city have done well, and we believe they will do well in the years to come.
What can you tell us about the rental income in your portfolio since April 2020?
Craigdell Gardens, a 97-unit community in New Kensington that Birgo Capital purchased in August 2020. With the kind permission of Birgo Capital
Croce: What we saw would have been almost unthinkable at the end of March 2020, when we had just settled into the reality of the pandemic. We’ve written at length about payment patterns in our portfolio, and the punch line is that our renters are paying rent and are paying it in droves. Certainly, those who were criminals before the public health crisis have become more criminal, and the average overdue balance for those who pay late is a good deal higher than it was before COVID-19.
For the vast majority of tenants, however, there were no noticeable changes in payment patterns in the past year. Our tenant base consists mostly of low to middle income workers. It is therefore particularly gratifying to see that this part of the population has been able to pay the rent with such consistency throughout the pandemic.
To what extent have the residential property incentives helped the Pittsburgh multi-family market so far? And what do you think of the new relief bill?
Croce: Stimulus measures have, of course, been helpful to the overall economy, and the trickle-down effect has been very noticeable for the multi-family industry, and Pittsburgh is no exception. However, the region’s economy was not disproportionately affected by the pandemic-triggered economic shutdowns. We are not only exposed to the hotel, travel, entertainment or retail industries, so most targeted stimulus measures were not aimed directly at that region. Even so, Pittsburgh is a city that is largely supported by small businesses. That’s why we keep hearing that the Paycheck Protection Program has been an incredible lifeline for so many.
As for the new bill, there is no doubt that direct paycheck to paycheck payments of $ 1,400 per person for a tenant base living from paycheck to paycheck can be a tremendous splash of cash. Pittsburgh is deeply affordable, and since the direct payments are not tied to the cost of living in any particular region, they are very common in Pittsburgh. That’s over two months’ rent for most of our renters, and if they have four or five people in a household, an injection of more than $ 5,000 provides an incredible amount of runway for low-income families.
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The pandemic has sparked a wave of resettlements to smaller, less dense U.S. cities. How has Pittsburgh benefited from this trend?
Croce: This trend has been absolutely beneficial for Pittsburgh. There are many colleges and universities in Pittsburgh. So there are a significant number of people who went to school here and have roots here looking to return to Pittsburgh to promote the affordability, culture and lifestyle that come with them. Remote working makes this possible for so many, but there are also many local businesses that are growing incredibly quickly and that offer attractive job opportunities here in this market. So the net migration of young people to Pittsburgh is very noticeable and contributes enormously to the growth of the local economy.
The tech sector is growing in importance in Pittsburgh, and universities continue to encourage high-tech companies to switch to the subway. What is the impact of this sector on the subway multi-family market?
Croce: There is much more demand for high-end products in Pittsburgh than there was five years ago. It’s almost like it happened overnight – expansion of East Liberty, development in the Strip District, resurgence of downtown life, and now the North Side / North Shore which is becoming so much of a residential destination because of its proximity to so much. These trends are clearly supported by the growth of the technology sector.
The region’s impact of Carnegie Mellon University cannot be overstated either – this is where world-class talent is developed, and since that talent develops an affinity for the city and an appreciation for its affordability, this is where it wants to stay. We anticipate this will further accelerate the demand for quality housing, so the Pittsburghers will continue to feel new and different.
Has the pandemic changed your investment strategy?
Downtown Pittsburgh. Image courtesy of Birgo Capital
Croce: We have always focused on stabilized but underutilized housing for workers because we believe that is where we can get the best risk-adjusted returns, and the pandemic has just got us to double our core beliefs. The societal prioritization of affordable housing has been underlined over the past 12 months, and we have to think that this bodes well for long-term demand.
The pandemic has brought to light a number of new risks for income disruption. Hence, we think more critically about the tenant mix and the location of our target acquisitions so that we can play a good defense if we find ourselves in a scenario similar to the future.
We are also very careful with valuation – because current borrowing costs are so low that they are easy to pay and still generate a decent return, however, we are very cautious of long-term changes in interest rates and the effects that will affect the exit Reviews will have an impact. The interest rate environment that triggered the pandemic certainly affects how we think about capital employed. Otherwise things are going as usual for us and we still believe that now is always the best time to buy multi-family homes.
Are you planning acquisitions in the first half of 2021?
Croce: Yes, we are closing some deals that we closed in the second half of 2020. There are two acquisitions that we are pretty sure will complete in the first half of the year, and both are on the right track for us: Stabilized housing within 30 minutes of the central business district with very low rents and lots of upside potential. In line with trends, we’re paying a lower cap rate for this type of product than in the past – 6.75 percent – but with interest rates today, we can get a really strong return even with a slightly lower cap rate.
What do you expect for the multi-family industry in Pittsburgh this year?
Croce: It’s always a sellers’ market in Pittsburgh as the trading volume here is unusually low, even if the markets are moving fast overall. In recent years, Pittsburgh has become an extremely competitive acquisition environment, and the buzz of apartment buildings stemming from the pandemic has once again accelerated investor demand for this product.
I therefore assume that prices will continue to rise, cap rates will continue to fall, and new acquisitions will be difficult to come by, especially for unknown buyers. Pittsburgh is a blue-collar relationship city, so I think those who have proven themselves will be able to capitalize on using this track record to win deals.