September 22, 2022
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Inflation has become the dominant economic theme that both renters and developers must work to overcome.
Inflation has become the dominant economic theme that both renters and developers must work to overcome. Fort Lauderdale-based Southern Waters Capital (SWC) is one real estate development firm that has found a solution in its platform developing market rate attainable rental housing.
Founded in 2020, SWC has built a strong development pipeline that includes more than 1,600 units all located within the state of Florida. SWC’s goal is to add 1,000 new units per year going forward. The product is “market rate attainable,” meaning that it offers quality housing to America’s workforce and the projects don’t require government subsidies to be successful.
A key part of SWC’s success is tackling entitlement risk head-on to create value and opportunities to develop build-to-rent (BTR) and multifamily communities of scale. SWC focuses on two simple tenets to remain successful: location and basis.
“First, if you have an irrefutably good location, your asset will be resilient over the long run. Second, your money is always made on the buy,” says Ray Mazzie, co-founder and managing director at SWC. “At the end of the day, you can never change your location and you can’t change your purchase price,” he says.
SWC is keenly focused on identifying supply and demand imbalances. “It’s a simple strategy, but that doesn’t mean it’s easy to achieve,” says Dean Myerow, SWC co-founder and managing director. “Successful execution requires discipline, a deep understanding of market drivers and a relentless effort to find a good site in a fundamentally sound market.” According to Mazzie and Myerow, the firm’s methodology starts by answering simple questions paired with empirical data. This in turn proves SWC’s thesis on the underserved market it’s targeting.
How many units have been delivered in a particular area for the past 5-10 years? What type of growth is happening? Is there diversity in the economic growth? Who is moving to the area, how many people are moving there per week, and how likely are those people to rent? It’s not really a complex process but finding great sites that are priced right is akin to finding a needle in a haystack, notes Mazzie.
Mazzie and Myerow also believe the true “x factor” to SWC’s success is its team. Myerow spent 30 years on Wall Street focusing on asset management, credit workouts, project finance. He sold his investment bank and broker-dealer to BB&T, now Truist, in 2005. BB&T then tapped Myerow to head its capital markets strategy until 2015.
Mazzie served as a real estate attorney and has extensive experience in government operations from his time spent serving Governor Scott and at state agencies, including the Florida Housing Finance Corporation. SWC secured additional development experience by adding Andrew Sinclair, a construction finance manager at Turner Construction for six years where he gained experience working on projects as large as Amazon’s Blue Origin launch complex on Florida’s Space Coast.
Surging demand for BTR
SWC has wholly embraced the newly recognized BTR asset class and is doubling down on its efforts to become a major player in the space, especially in the state of Florida. “Coming out of the pandemic, people were clamoring for more space and millennials, in particular, are continuing to move into these communities due to affordability challenges in the housing market,” says Myerow. Millions of potential homebuyers have been priced out of the market because of higher mortgage costs. “Affordability, desire for more space, and freedom really seem to be driving factors that lead renters to master planned BTR communities,” he says.
Rental rates across the country have skyrocketed over the past two years compliments of migration and a shortage of supply. According to CBRE, the average national vacancy rate for apartments as of mid-year was hovering at 3.1% with annual effective rent growth at 14.6% percent. Although recent double-digit rent growth has provided a strong tailwind for the BTR space, SWC remains very conservative stance on its underwriting.
“Those who are banking on 5%-10% rent growth for years to come are disconnected from reality. One only has to look at wage growth to see that assumption is untenable for the average American,” says Mazzie.
Yet even with conservative underwriting, BTR is a compelling story for investors. “When you look at a project’s total value based on a cap rate you would think almost all projects are worth building, but when you justify the projections on a dollar value per unit the story changes,” said Mazzie. Initially, it was difficult to convince investors of the rent premiums BTR will fetch over traditional apartments in the same market. However, the projected premiums in the BTR strategy have been born out in the data.
For example, SVN | SFR Capital Management is projecting that BTR can achieve between 10-30% higher psf rents as compared to traditional apartments. Tenants are speaking with their dollars when they lease at a highly amenitized BTR community that has all the perks a class-A apartment would have plus a backyard, more common open space, and larger floorplans for their families, notes Myerow.
Right place, right price
SWC focuses on the fundamentals. The development team is working to identify imbalances in supply and demand for rental housing, which is a strategy that naturally leads the firm to underserved markets. For example, instead of focusing on Orlando where property values have soared, the firm is active in Ocala, Wildwood and Cocoa. SWC is currently developing a project in Ocala that has the potential for entitlements that allow for up to 360 units. “SWC is excited to partner with Merrimac Ventures, led by Dev and Nitin Motwani, the iconic development family behind Miami World Center, the Four Seasons Hotel & Residences on Fort Lauderdale Beach, and over $3BN in additional developments,” says Mazzie.
“The strongest testament to the team’s hard work and discipline at SWC is the simple fact that every single unit we’ve put under contract over the past two years is still under contract and still penciling out today because we found the right site at the right price,” says Mazzie. “We’re taking that extra effort to identify and underwrite markets that are just as strong from a fundamentals standpoint but go unnoticed because they’re not broadcast ad nauseam by the media,” he says. Every market SWC is looking at has occupancy rates over 95% and annual rent growth well over 5%, if not 10%, and a dearth of supply.
True Friends of The Friendship Circle
It’s not all about generating alpha at SWC. The firm is a sponsor and staunch advocate of the Friendship Circle of Greater Fort Lauderdale, a non-profit organization that delivers vocational training and social programs to individuals with special needs through various life-skill programs. Myerow serves as chairman of the advisory board for the non-profit. He also founded the Friendship Café where Mazzie serves on its board of directors. This new training program is a fully functioning restaurant and catering business that sits on the bustling Las Olas Blvd. in Fort Lauderdale. The Friendship Café has been a huge success that has too many garnered national publicity, garnered support from the United Way, and most importantly the Café has served hundreds of Friends in its two plus years of operation.
“This cause is personal. My nephew Damon has special needs and I fully understand how imperative it is that we support creating independence in the lives of those with developmental disabilities,” says Mazzie.
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