The Golden Age of Multifamily Investing, With James Brunger

With an ongoing housing shortage and high growth markets all over the country, are we in the golden age of multifamily investing? James Brunger, Chief Sales Officer for Capital Square, joins the podcast to discuss.

This episode was recorded live from the ADISA Spring Conference 2022 in Orlando, Florida.

Click the play button above to listen to the conversation.

Episode Highlights

  • Why we are in the golden age of multifamily real estate investing.
  • The story behind Capital Square, and where they fit into the multifamily landscape in general.
  • What specific markets James likes for multifamily investing.
  • What specific aspects about James’ favorite multifamily markets are most compelling to him.
  • An overview of Capital Square’s DST strategy.
  • What kinds of investors make up the capital base for Capital Square.
  • How James might try to get an investor sitting on the sidelines to reconsider and explore passive multifamily investing.

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Capital Square is a national investment sponsor specializing in tax-advantaged real estate offerings, including Delaware statutory trusts and qualified opportunity funds. Founded in 2012, the investor-centric company has quickly grown to have completed more than $5.6 billion in transaction volume. Capital Square is a leading sponsor of Delaware statutory trust offerings for cash investors and those seeking replacement property as part of a Section 1031 exchange. Based on current market conditions, Capital Square strategically focuses on healthcare and multifamily properties for the majority of its DST offerings.

About The Multifamily Investor Podcast

The Multifamily Investor Podcast covers trends and opportunities in the multifamily real estate universe. Host Scott Hawksworth discusses attractive offerings in the space, including direct investments, DSTs, opportunity zones, REITs, and more.

Show Transcript

Scott: Hello. I am Scott Hawksworth, here for, and we are live at the ADISA Conference, Spring Edition, in sunny Orlando, Florida. And I am joined today by James Brunger, who is the chief sales officer for Capital Square. We’re going to be talking about multifamily and covering a lot of ground here. So to dive in, I always like to, I guess, begin with a big overall question.

So are we in the golden age of multifamily investing?

James: Well, first of all, thanks, Scott, for having me. Really appreciate it. Obviously, great to be here. Great to be in Orlando. Great to be at ADISA. We’re talking a lot about, you know, multifamily and just investing in general here at this conference. And, yeah, the short answer is yes, we are in the golden age.

And in the last few years, especially, we’ve seen why multifamily is a great asset class. Stable. We had a global pandemic, you know, housing shifted a little bit as far as some of the markets and the conditions, but overall, especially multifamily, collection state, exceptionally high, occupancy state, exceptionally high, demand increased.

And through that, we’ve also seen rents really go up across kind of the entire spectrum. Housing in general, in the United States, has obviously had a good run, if you will, but that really has flowed through to multifamily as well. And so, yeah, we’re in a great spot. Golden age, going forward, seems to be a little bit more of concern. We can get to some of that.

You know, at the same time, we still see a really positive traction going forward, mainly based on supply and demand.

Scott: Absolutely. You know, and when folks ask me, you know, “Why are you so bullish on multifamily?” The word that comes to mind always is resilient. So I think even if there may be concerns, and, again, we’ll touch on some of that, it’s just been proven over time just how resilient multifamily really is.

James: Absolutely.

Scott: So, okay, before we dive into all of that, can you tell us a bit about the story behind Capital Square and where do you guys really fit into the multifamily landscape?

James: Yeah, no. So we are a tax-advantaged real estate sponsor, headquartered in Richmond, Virginia, about 90 employees now, which is phenomenal. It’s been great growth. About $4 billion in assets under management, of which 65% are a Class A, Class B multifamily. So a very large concentration of what we’ve done, specifically in the 1031 and DST space as well as our development side of the company, we focus on multifamily.

Really core of what we do. Southeast tertiary, secondary marketplaces, really not gateway focused, but we’ve seen…you know, we had a 10-year thesis and general value for some of these markets, has continued to be that way, but for us, multifamily really is core of what we do.

Scott: Right. Right. You said 65%, right?

James: Yeah. Out of our $4 billion in assets. So it’s actually probably about 2.7 billion on asset value in the multifamily space.

Scott: Sure. Sure. As we look across, you know, the markets for multifamily, I’m curious what markets you like in general and what you might like about them, what are attractive about them to you?

James: Absolutely. So headquartered in Richmond, Virginia. We’re the number one buyer of multifamily property in Central Virginia, out to Virginia Beach for the last three years in a row. So, obviously, love Richmond. [crosstalk] Virginia.

Scott: Flag is planted firmly there. Yeah.

James: Virginia was ranked one of the best…I think it actually was number one states to do business last year. Always parentally in the top five states to do business in. For us in the Central Virginia, not only do we know it so well, it’s got the attributes of the trend line that we like. Specifically, in Richmond, where we invest around Richmond, state capital, diversified economy, a lot of big business, a lot of legacy business, mainly tied to the tobacco industry, which has now shifted its focus.

But in addition to that, a lot of technology companies, a lot of companies moving to Central Virginia for value. As those jobs have moved, we’ve also seen a lot of interest in people who want access to good high-quality lifestyle at a more affordable value set, which you really get out of a city like Richmond. We are also the number one buyer last year and a half of multifamily in Chattanooga, Tennessee.

The same type of attribute, not a state capital, but not as popular, as expensive as entry point as Nashville, say.

Scott: Right. Yeah. You always hear the hype about Nashville, but Chattanooga.

James: And we saw all of the growth, a lot of great diversified economy. We started on our trend there about two years ago, and then we’ve just kept buying, and buying, and buying. So we’ve really bought everything that’s hitting the market in Chattanooga. We’ve been very large in suburb cities of Atlanta. So, again, non-gateway, not core downtown Atlanta, but cities like Lawrenceville, cities such as Alpharetta, like, any of those suburban cities, which are really their own ecosystem, just because Atlanta is so big.

Lot of great job growth, lot of great population growth. And really, those have been kind of some of our core of what we do. We do like Florida. But Florida’s entry point’s a little bit different. So most of what we’ve been focusing on outside of those is going to be in North Carolina. Really like the Carolinas’ Georgia.

We did recently have a little bit more of a move into some Midwest cities. So we just launched a program multifamily in Louisville.

Scott: Oh, nice.

James: Yeah. Which is great. We’re really excited to have that. Great attributes to that market, same type of focus, better value set, really big population growth. And thus, we’re seeing some great rent growth, and 7%, 8% average going forward so.

Scott: I love it. I love it. Yeah. So a lot of different markets there, and the thesis for all of them does seem to be, you know, similar. We’re talking job growth, we’re talking, you know, high demand, you know, attractive opportunities there. Could you speak to any current or recent projects that you’re particularly excited about?

James: Sure.

Scott: Anything about, you know, unit mix and sort of what you guys have been doing there.

James: So really in the last year or so, we’ve always had a Class B and a Class A kind of strategy. And in the last year, we’ve really focused more on the Class A side of it. Part of the reason why is it’s been such a great real estate market and specifically multifamily market, when we look forward, if there are any challenges that come up, we want to make sure that we’re in the highest quality possible.

And so, in Jacksonville, Florida, we recently bought a brand-new Class A from a developer that we’d worked with in the past. They come to us because we’re good and conscientious buyers. And we bought three properties from them. We’ve got a couple more lined up to buy from them, but this is…it’s called Vista Brooklyn. The Brooklyn neighborhood of Jacksonville is the best neighborhood.

And this is the best property in all of Jacksonville, the highest quality, highest in amenities, highest interior amenities. That kind of, you know, focus gives us that stability you were mentioning about multifamily as a whole. We really like the highest quality because we know when and if things kind of churn, the higher quality you’re in, the lower your standard deviation range of returns over time.

Jacksonville is exciting. This is another kind of key attribute. Sixty people a day are moving to Jacksonville. Jacksonville is not that big of a city.

Scott: Right, right.

James: That is a lot of population absorb. As we see that trend line continuing, really, you know, obviously, that’s the baseline for future growth. And why not own the absolute best in the market that is doing exceptionally well? That’s something, I think, we’re all really excited about. Great market. Another project, obviously in Chattanooga, where we have been the number one buyer, we had a really great one Riverside Class A right about a mile from the heart of downtown, but right along the river.

Scott: Oh.

James: Good amenities, good lifestyle, kayak storage, which is kind of cool. I think it’s one of our only properties that has that.

Scott: That’s super neat. I like that.

James: But yeah, same type of thing, just a great growth market with the best property that you can buy from a developer that we know really well. So those are two projects in particular that I really like.

Scott: That’s very cool. Very cool. I’m curious, what’s Capital Square’s, I guess, DST strategy when you kind of consider that?

James: So we always have between three and five offerings at any given time. Those people who are in the market, thank you to everybody who knows us and invest with us on the DST side. But, for us, it’s product supply. Every property is unique and different, but we like to have some of the same market conditions, same attributes.

We like the science to line up, right?

Scott: Sure. Yes.

James: Have all the growth projections, everything kind of be in line with where we see just in general, but have different markets. But then, you know, the art of it is actually the physical property itself. What’s the community like? What’s the actual property management like? What’s the leasing like? What’s the overall community feel for that city or that location, and how does that property fit into it? So on the DST side, we’ll always have a Class A, we like to have a B, but, again, we’re focusing a little bit more on continuing that Class A high-quality strategy this late in the cycle.

And so right now, we have probably three Class As, one Class B. We do occasionally have either medical or industrial property. We have experience across all asset classes. We’re not very focused on making sure we’re diversified by asset class right now in our DST side of it.

Scott: Sure.

James: Just some of the market conditions, some of the challenges in finding what we really like inside of industrial, medical, we just haven’t seen a lot of great deals. So our overall DST strategy is just going to continue with our core focus of that, little bit more A-weighted than B right now. And 3 to 5 offerings, call it $200 to $300 million of equity available at any given time, so.

Scott: I love that. And I think that there’s just this great philosophy of know what you do well and do it well. Right?

James: Well, it’s also to execute well, I think a lot of people understand this, but they might not have a full grasp for it, it is relationships. It’s relationships with the developers, it’s relationships with the brokers, it’s relationships with all things that go into a market that are developed over a long period of time. So not only does it make sense from kind of an investment philosophy, from an execution philosophy. Keep going back to the markets you know well, where you have great relationships, and you’re going to get the best opportunities in those markets.

If you stretch outside of that, your execution might run a little bit more challenged. So, yeah, it’s kind of a dual thing for us where both investment philosophy, but then obviously on execution.

Scott: Sure. And I’m curious, kind of, and this is connected to, you know, relationships and all of this, can you speak a bit to your capital base and, you know, who are your investors?

James: Sure.

Scott: And if you could just speak more to that.

James: Yeah. So 2012, we’re going to celebrate our 10th anniversary this year, which is great. So we were founded in 2012, and really since about 2018, we’ve had exceptional and phenomenal growth. Anybody listening, thank you. Really appreciate the confidence and your trust in us. And on that capital base, you know, most of our investors, probably about 80% of our total capital flow is 1031 investors.

We’re well known in the DST space. What we’ve seen is the vast majority of those people really are coming to a point of “aging out” and wanting to run their real estate. And so where it was purely almost a function of getting a good 1031 strategy, really what it’s now become is getting a good lifestyle strategy.

So our average age has come down a little bit, and our average investment per has gone up a little bit. So our average investment into a 1031 program’s about $380,000 now. Four years ago was about $300,000. So obviously, the market’s gone up, but we’re also getting larger opportunities where people are more focused on being able to choose their lifestyle and use the DST as kind of that passive 1031 vehicle.

So that’s really where the big spot is. On the opportunity zone and development side, we’ve seen a much younger skew, and the reason why is because just the nature of the opportunity zone as well as development real estate, a little more risk acceptance, which is good. And everybody needs to be aware. Development carries more risk. And a little bit of a longer hold with some really good benefits at that 10-year mark, it seems that, you know, the population is really in that late 40s to 50s, just on age, and generally entrepreneurial.

So some of those investors are larger net worth and larger ticket size as well. So really, on the DST side specifically, it’s been amazing to see kind of the growth, but really, it’s also lifestyle choice over economic choice. And I get it.

You know, we went through a global pandemic. People are making decisions about what to do with their life. And I think a lot of those investors are, you know, finally getting in tune with what DSTs can do for them on their exchanges.

Scott: Sure. And, you know, you mentioned the pandemic, and I want to kind of just take, I guess, a bird’s-eye view of everything. I’m curious, what trends are you seeing in multifamily, I guess, in general, that are pretty compelling right now, and I guess, some of the changes, where things might be headed?

James: Yeah. So really amazing to us. We have this 10-year philosophy that was secondary, tertiary markets in the Southeast, higher growth, long-term growth. Just on the flip side, pay very close attention to this, the state of Connecticut has been negative outmigration for about 20 years.

Not by massive changes, but obviously, for us, just in a kind of a macro-regional, we’d rather be playing where there’s people moving to, not…

Scott: Right, where you have the population coming in. Yes.

James: So that was something that’s just our general thesis. What happened as a result of the pandemic is a lot of that got accelerated. People were making lifestyle choices faster, and they continue to this day, with the work-from-home environment and the ability to be flexible. So you have a lot of people who are moving to markets like Jacksonville, or Atlanta, or Raleigh, they maybe were located in the Northeast.

They still likely work for companies where they’re based in the Northeast, or in California, or…but they’re really able to make these great lifestyle choices because of the work from home or concentration in the ability to choose. We’ve found that most of our secondary and tertiary marketplace, it used to be locals kind of upgrading their lifestyle and choosing a brand-new class A, or got a job new, a new opportunity.

Scott: Right. Saying, “Okay, I’m ready to get the new spot.” Yeah.

James: What we see now is a lot of people coming from these higher-cost markets, they have a more flexible budget. They might be getting their wages associated with their job in New York or where their job was, and they’re willing to spend and have a budget that’s about 19% higher than we get out of general local population.

Scott: Wow.

James: So one of the bigger trends has been that continuation of what we were seeing on some of the growth and, frankly, an acceleration. The other good side about multifamily is that collections have done nothing but go up, occupancy has done nothing but go up. So I think the pandemic, you know, accelerated a lot of trend lines. Surprising to us was the ability to collect rent, to push rent, and to have continued demand.

That doesn’t seem like it’s slowing down in any way, shape, or form, at least in the markets that we’re investing in.

Scott: Sure. And actually, to that point, it kind of segues well to my next question because, you know, there are folks out there that maybe they’re sitting on the sidelines, there’s maybe concern, like, “Oh, is multifamily going to continue?” You know, “Interest rates are going up, what’s going to happen here? Are some markets being overbuilt?” These kinds of questions.

So I’m curious what you might say to an investor who’s still kind of sitting on the sidelines now and saying, “Well, I’m not sure about multifamily.”

James: Sure. Well, some great ideas here at ADISA. So first and foremost, it’s great to be here and share some of these ideas with other industry experts. It is more challenged than it was to buy properties well. However, the focus on highest quality for us in great growth market. So, you know, there’s a difference in…and this, especially, I’m not going to…just to use market conditions on an example.

So please, don’t nobody take offense. You know, you can buy a multifamily in a great growth market like Jacksonville and pay, call it a 3.9 cap. We’re fortunate that our loan partners extend beyond just Fannie and Freddy. So besides agency, we have some of the largest insurance companies that give us debt, but rates are still up.

And if we’re buying into a 3.9 cap, we’re getting paper at about a 4, there’s still some good accretive use of leverage, but you have to watch that risk-return. So you’re going to see lower leverage for us. Starting leverages, you know, are going to be at that 50% or slightly below where we might have been closer to 60%. It’s just that increment of risk-return based on the additional amount of leverage. It gets a little bit thinner when you have kind of that par on your debt financing rate.

But let’s say you buy a Jacksonville at a 3.9, 3.8 cap where you can buy, you know, Illinois market that, you know, you might be at a 4 cap or 4.1. Well, you look at the long-term growth rates, population trends, some of what we’re talking about, and you can see that, although you’re paying up for Jacksonville, if you will, by, you know, 300 basis points or 30 basis points or whatever it may be, the reality is you’re paying for the opportunity to capture some of that growth [crosstalk 00:18:02].

Scott: You’re paying for the trend itself.

James: And so you’re paying for the trend itself. Same with the leverage. You’re going to take that leverage, even if it’s not as accretive as it used to be, there’s still a lot of benefits to taking that incremental leverage. It is going to be accretive, especially when you look at total return. So it really is kind of this longer view, total return will pay up in certain growth markets. I think that trend’s going to continue for a couple of reasons.

The flight to high-quality U.S. real estate including from foreign investment capital, in the way the world is today, that will keep going for the rest of this year. It just means, sorry, acquisitions team, they have to turn over a lot more deals to find the diamonds. Which they’re equipped and can do.

Scott: They can do. Absolutely. Sure.

James: But they’re absolutely working a lot harder than they were a couple of years ago.

Scott: Yeah. And I think I’ve heard that several times that I think everybody is just…you’re just having to dig a little bit more so to speak, right?

James: And use your relationships like we do with our development partners, the partners that we buy from, and just look at the world a little bit differently. On the leverage side, we’ve been able to assume some loans, which, I mean, it sounds crazy, but 3.6 is a really good rate today, if you can assume that. So you have to be a little bit more open to kind of what some of the attributes are that can get you the long-term return profile that you’re looking.

Still a great market. If you see across last year and 2011 are 11,000-ish units, 10,000-ish units, we saw 11% rank growth across the entire market.

Scott: I mean, yeah.

James: Exceptional. Will it grow? Obviously, that’s almost unsustainable, but the market is still there for good rank growth. The demand is still there. Housing shortage has not changed. If anything, it’s getting exacerbated by supply chain issues and some of the single-family home development problems. And really that’s, you know, the general thesis is still there.

It’s just a little bit more selective of the market on the buy-side.

Scott: Sure. James, thank you so much for joining me today, sharing so many great insights. And if our viewers, our listeners want to find out more, maybe connect with Capital Square, where can they do that? Where can they go?

James: Sure. So we have changed our branding a little bit since we’re not just focused on 1031, but you can also get there. has all of our information about our latest offerings, all of our development side as well, especially on the opportunity zone. And really, you know, on the DST, if you do go to or go often.

We do have about a program a week that we’re launching.

Scott: I love it.

James: This week we got two. So, you know, the website’s getting updated every day with a variety of different things. A lot of it obviously going to be multifamily focused. But, Scott, I really appreciate the opportunity to speak to the crowd, and great to see you here at ADISA. I would say one good trend line is, in fact, we don’t have to wear masks anymore.

Scott: Yeah. That’s a good trend line.

James: And so I…

Scott: I’ll take that.

James: …I feel great about being back in the world and getting to see everybody’s faces.

Scott: Exactly. Here we go.

James: Thanks a lot.

Scott: Handshake, right?

James: Yeah. Yeah. Really appreciate it.

Scott: Thanks.