The start of a new year, and the coinciding break in the action around the holidays, always provides a great time for reflection. As we entered into the twilight of 2019, we sat down to chart our course for 2020 and review what went right and what went wrong last year. This is an exercise we do (and I think most people do) every year. You can see the 2019 version here.
Looking back on 2019, we’re proud of the year we had. Yes, it was slower on the acquisitions front, as we only bought 2 deals. The market remains competitive, cap rates remain compressed and capital continues to flow into multifamily–especially the big Texas markets. That means deals are tougher to come by.
We’re proud of the fact we haven’t deviated from our business plan or our belief system. We aren’t tweaking our underwriting just to make deals pencil, and we’re confident the deals we have bought will result in wins for our investors. If that means we only do a deal or two each year, so be it. One of the benefits of being a boutique shop with little overhead is we don’t have to do deals. We don’t need the fees to feed a corporate beast with teams of salaries so we can stay diligent looking for good opportunities, and will continue to do so as we head into 2020.
As we continue our reflection, there are two other key learnings from 2019.
- Investor expectations are adjusting to the market.
As cap rates remain compressed, the return profile of deals is changing. What was once an 18% IRR several years ago now looks like a 12% IRR today. And seeing how the transaction volume in Austin and San Antonio was on par for 2019 compared to previous years, investors aren’t shying away from Multifamily. What does that mean? Investors are ok with slightly lower returns–still believing in the foundations of multifamily, the fundamentals and continued growth of Texas markets and the fact their principal is backed by a less volatile hard asset. We’ve seen this to be true in our conversations with investors throughout the last year as well. Time and again people ask to see deals in Austin with a slightly lower marketed return vs seeing us venture into tertiary markets where we might find higher marketed returns and much higher risk. It seems the general consensus is investors are moving towards safety as the longest bull market in history continues, and want the protection of placing their capital in deals and locations they really believe in.
- Keep grinding.
Every day we’re plugging away looking for new opportunities. Underwriting deals. Touring potential new assets. Meeting with and talking to brokers and owners. When you look at so many deals and continuously pass on them, or get passed by (from another group going crazy with their underwriting) it can be a bit disheartening. Again, we’re not going to change who we are–but that doesn’t mean frustration doesn’t happen. However, we keep plugging away. Turning over rocks. Talking to brokers. Doing what we do. And holding onto the belief that by staying the course, good things will happen.
That belief was reaffirmed for us in December when we got a call from a broker about an off-market deal in Austin. No one else was getting a look at this deal. The location was incredible. The numbers worked. We pounced–and enter 2020 with a stellar Austin deal under contract. The takeaway is to just keep your head down. The fruits of your labor will happen-if you put in the consistent work. While 2019 was perhaps slower than we’d want, the consistent effort and energy we put in every day is now going to pay dividends early in 2020. The work you do today will pay off tomorrow-we’ll continue to put in the work.
So what does 2020 have in store for Wildhorn?
The fun part of this business is we never know. We don’t put a target number of units or deals out there, because we never know what we’ll find. We might do a single deal, we might do 5–but we’ll let the market and our relationships dictate that, knowing we’ll hold true to our fundamental beliefs and underwriting principles.
The one thing we do continue to believe in for 2020 is Central Texas. And we’re committed to staying focused on primary markets close to home in Austin and San Antonio. In our constant monitoring of market data across the country, it’s plain to us that Central Texas continues to lead the pack in most of the key metrics we monitor–job growth, corporate relocations, population growth, cost of living, etc (make sure to follow us on Facebook to see some of our updates). We’re fortunate to live here, to be from here–and it doesn’t make sense to deviate from our home turf. We’re also firm believers in staying in primary markets–big metro areas–rather than looking in smaller towns with smaller populations and more risk.
To that end, one thing we will be exploring in 2020 is variations to our core business plan at home in Central Texas. What opportunities exist and can we uncover that are real estate related, but perhaps one standard deviation away from the down the fairway value-add plan? We’re already on record saying we live in the best market out there–does it make sense to jump on a plane, start from scratch building relationships and go in knowing we won’t have a competitive advantage? AND, know the deals we’re likely to find aren’t any better than what we see here? By no means are we walking away from value-add, but we’re more open to seeing tangential opportunities happening at home. Things like opportunity zones. Student housing. Newer development deals.
We aren’t sure what we’ll find, but in our continued efforts to scour the market for value-add deals we’re not going to ignore other opportunities that would create a win for our investors. There’s a feeling within the team that 2020 is going to be a pretty great year.