Executive Insight: Kevin Finkel, Resource Real Estate

By Liviu Oltean, Associate Editor

Phoenix’s multi-family market is on the rise. This year the metro area climbed five positions to 17^th place in Marcus & Millichap’s National Apartment Index. Job growth is a critical factor in Phoenix’s improved standing. According to a CBRE Econometric Advisors forecast, more than 66,800 office-using jobs will be added locally in the next five years. And the good times should continue for several years, as CBRE estimates that the recovery of Phoenix’s job market has only recently reached its midpoint.

For a closer look into the dynamics of Phoenix’s multi-family opportunities, CPE turned to Resource Real Estate. A Philadelphia-based trust specializing in distressed assets, the firm has three major business lines: direct investment, commercial lending and global securities. After establishing a track record in the area by financing Phoenix assets, the firm made its local debut as an equity investor in March when Resource Real Estate Opportunity REIT Inc., a non-traded REIT, acquired The Springs at Gilbert Meadows, a 459-unit property located in Gilbert.

Kevin Finkel, Executive Vice President of Resource Real Estate Opportunity REIT, recently discussed the Phoenix market with CPE.

CPE: The recent acquisition of the Springs at Gilbert Meadows Apartments marks Resource Real Estate’s first equity investment in the Phoenix market. What was behind that move?

Finkel: We see a supply and demand imbalance in Phoenix, as well as in many other cities in the United States, for affordable, renovated and well-located rental apartments. The supply of new apartment communities fell off a cliff after the recession. Today, as more former homeowners and Millennials seek apartment rentals, they are often finding that the supply of apartments are either old and neglected, but cheap, or recently built, often urban, and upscale, but very expensive. There is very little supply of something in-between, which is renovated, well-located and affordable for the workforce. We seek to renovate apartment properties that are well-located to meet this unmet need, and the Springs clearly met this criteria.

The Springs is extremely well-located in the heart of Gilbert, and in one of the best school districts in the Phoenix-Mesa-Glendale metropolitan area. The Neely Traditional Academy, which is a highly desirable magnet public school (pre-kindergarten through sixth grade) is located adjacent to the Springs.

The asset is also within walking distance of the Downtown Gilbert Heritage District, “Old Town Gilbert,” which is home to a collection of restaurants, retail, and cultural venues. Vaughn Basin Park and trails is located just south of the property. Also within walking distance is the soon-to-be- completed St. Xavier College satellite campus, which will offer classes to approximately 500 students.

CPE: What are the market’s strong points and pitfalls?

Finkel: Phoenix continues its long history of attracting new residents, albeit a far cry from pre-recession levels, and creating new jobs, albeit a far cry from pre-recession levels of job creation. We prefer the more restrained and predictable growth in Phoenix, as one of its greatest pitfalls has been its tendency to engage in irrational exuberance that can cause pricing inefficiencies due to the lack of incomes to support rapid increases in property values. Today, we believe that the Phoenix apartment sales market is well priced and balanced, and provides an excellent opportunity for Resource Real Estate to enter the market as equity investors.

We view Phoenix as a growing, lower-cost, Sun Belt city attracting renters due to its great lifestyle and significant business opportunities. We believe continued growth of Phoenix’s aerospace and defense, high-tech, bioscience, solar, healthcare and advanced business service industries will support its employment base expansion and income growth for renters.

CPE: How do you expect the Phoenix multi-family market to perform in 2015?

Finkel: In 2015, the greater Phoenix apartment market will receive a wave of new high-end, luxury apartment deliveries. This will slow overall rent growth; however, even with this additional supply, we still expect asking and effective rents to increase by more than three percent on an annualized basis due to population inflow and increasing household formation.

The outlook for the Chandler/Gilbert submarket is stronger, with apartment deliveries in 2015 being outpaced by demand from household formation. Chandler/Gilbert should outperform the overall Phoenix market due to its high household formation and more subdued supply of new apartments.

The real story in the Phoenix apartment market is the lack of well-priced, well-located, affordable apartments servicing the workforce. There is a very strong demand for such apartments from households making between $50,000 and $75,000, and a small supply available. Therefore, throughout greater Phoenix, we expect that this type of apartment will significantly outperform newer Class A apartments in terms of long-term sustainable rent growth.

CPE: What should the residents of the Springs at Gilbert Meadows expect from the new owners?

Finkel: The Springs is in need of a complete renovation to make it more attractive to Gilbert’s workforce. To begin with, we are considering an architectural and interior redesign of the leasing office/clubhouse and business center, a conversion of the racquetball court into a 24-hour fitness center, a remodeling of both swimming pool areas, the addition of an outdoor kitchen to the primary pool, and a future re-use of the laundry facility adjacent to the secondary pool.

We also plan to improve landscaping, add outdoor kitchen facilities in the four large courtyard areas and add a dog park. Interior renovations are anticipated to include adding washers and dryers, black appliances, faux wood flooring, new carpeting, faux granite countertops, new shaker-style cabinets, built-in microwaves, double stainless-steel kitchen sinks, two-inch faux wood blinds, new paint, new ceiling fans, modern lighting fixtures, and new plumbing fixtures.

We believe that our extensive renovations will provide a much-needed renovated apartment community to Gilbert’s renters who seek an upscale living option at an affordable price within walking distance of Old Town Gilbert.

CPE: What is Resource Real Estate’s next step?

Finkel: We are managing the Springs at Gilbert Meadows to make sure that our residents are extremely satisfied, and to begin the process of renovations. Concurrently, we are looking for similar opportunities in other strong locations throughout Phoenix.