George Michelis, Co-Founder & Managing Principal at RockFarmer Properties, joined us for an interview. We discussed the firm’s foray into Texas, political risk in the New York multi-family market, and the direct correlation between cap rates and interest rates.
Daily Beat: RockFarmer is making a lot of acquisitions in Texas. What excites you most about the market there?
George Michelis: Texas is a really exciting market for us. We are seeing certain patterns – particularly in Austin – that we saw in New York City. Prices have obviously gone up, but we think the runway is very long.
Governance in New York has really hurt the multi-family market. We previously did a lot of rent-stabilized apartment buildings and the rent law changes really hurt us. Based on political trends, we had a hunch that something was going to happen and actually sold many of our buildings in 2015-2016.
We then started repositioning into the other opportunities in New York, we also had the idea of starting to look in Florida and Texas. We really honed in on Texas with a concentration in Dallas, Austin, and San Antonio and now own close to 1,100 units and plan on adding more.
Daily Beat: What type of rent growth are you projecting on these deals?
George Michelis: We’re projecting between three and four percent yearly growth rates. In Austin, you can sometimes be more aggressive with five, but four is standard.
Daily Beat: What’s the average cap rate on a multi-family deal there? I’ve heard of some deals where cap rates are as low as 3%.
George Michelis: Yes. The cap rates are typically between 3% to 4%. What’s most exciting is that rents on properties we are buying are still pretty low. Some units have average rents of $900 / month and in the market you’re getting anywhere between $1,110 to as much as $1,500 if the units are renovated.
When tenants vacate, you’re able to mark it to market immediately and don’t have to wait for any governance, which is a really nice thing. The political environment here is conducive to strong rent growth.
Daily Beat: What are the projected cap rates upon stabilization?
George Michelis: The beauty in this market is that stabilization is even higher than a four cap. We’re stabilizing at 4.25% and at times 5%.
Daily Beat: It’s so ironic because we have reported on some rent regulated buildings in New York City that have traded at five caps. Who would have predicted that five years ago?
George Michelis: When I first started looking outside of New York, I thought we were going to find seven and eight caps, but once you start to look at the market and see what you could do with rents considering the strong demand, deals are priced aggressively.
Daily Beat: Have you done deals in Florida yet?
George Michelis: Florida is another market that we’re going to start concentrating on. Tampa and Jacksonville are where we are looking. Southern Florida is a great market too, but I think you have to be more careful because the prices have skyrocketed there. There needs to be a repositioning or significant value-add opportunity, which we’ve had tremendous success doing in New York.
This is something we’re also looking to do in Dallas and Austin. Everybody in the entire United States is making more money. You can see the minimum wage continues to push higher and this allows rent to move higher. It’s incredible to see in markets where rents were $800 and now closer to $1,200.
Daily Beat: What happens when interest rates go up? How do you protect yourself?
George Michelis: Interest rates will definitely go up, but they will stabilize somewhere. There is definitely a correlation between interest rates and real estate. As rates go up, we should see some shift in cap rates. It’s important to follow the 10-year treasury yield very closely.
In our pro-formas, we project an increase in rates and project at least 50 to 75 basis points higher and in some cases even more, depending on how low the going-in cap rate. I do think that rates will go up and we’re seeing the move on the 10-year already.
The Fed will likely end up making four increases at 25 basis points each, which would mean 100 basis points this year. We account for this with bridge money and put in 100 basis points caps to protect ourselves.
With that being said, on the way out, if rates are up significantly, you’re going to see it on your exit too. I think it will affect prices, but the move in cap rates won’t follow in lock-stop with rates.
The other important point is the amount of dry powder within the real estate industry that will be deployed. We see real estate as something that people need to have in their portfolio and this is starting to manifest itself with crowdsourcing and the minimum threshold to invest going down.
Daily Beat: Treetop Development took a break from playing in the rent-regulated, multi-family market, but recently acquired a large multi-family portfolio. What’s it going to take for you to buy again?
We are looking in Manhattan and will continue to do so. What we’re most worried about is governance and I want to see how Eric Adams and Governor Hochul work together moving forward. The city council doesn’t seem like it’s going to change, but maybe the new Mayor will show leadership and they will follow along a little bit. We want to wait and see how it plays out.
We already had many investments in New York City and had to diversify because the market’s in a different cycle right now, but we will be back buying soon.
Daily Beat: There’s just not as much political risk in Texas.
George Michelis: Agreed; however, it’s worth noting that with many people moving from California to Austin, the political environment might eventually change there too. We are of the belief that the runway is long and rent growth will be strong in the next 10 to 12 years.
Daily Beat: If you had to own one REIT for 10 years, which one would you pick?
George Michelis: One of the most important things in real estate is management. The people I would trust the most – I own the stock already and will continue to own – is Blackstone. I even tell some of my investors to buy and hold long-term.
Daily Beat: What are you watching and reading these days?
George Michelis: I’m watching the show Yellowstone now. As a firm that’s been buying out west, we’ve heard and experienced many of the stories you see on the screen. I’m really enjoying it!
One of my favorite books that I recommend is Outliers. Sometimes people forget how much time you have to put into something for it to be successful. Look at what’s happened with the Daily Beat! How many years has it been already?
Daily Beat: Almost five years.
George Michelis: When you work hard at something and dedicate so much time into it, you become so much better at it. Something changes and shifts within you and your eyes are wide open to the industry. Outliers is a book that allows people to better understand this idea.
*The interview has been edited and condensed for clarity.