Spotlight On: Michael Lynd, CEO, Kairoi Residential

Spotlight On: Michael Lynd, CEO, Kairoi Residential

2022-07-15T06:04:54-04:00February 14th, 2022|Real Estate, San Antonio, Spotlight On|

Kairoi Residential CEO Michael Lynd2 min read February 2022San Antonio is a success story consolidating the required echo among capital markets to continue fueling its residential and industrial growth. Michael Lynd, CEO at Kairoi Residential, shares his insights on what makes San Antonio ripe for more investments into its real estate opportunities.

What are the biggest ways Kairoi Residential continued to grow despite the challenges of the past year? 

Kairoi Residential has experienced amazing growth across all of our business lines over the course of the last couple years. San Antonio is a market where we do some development activity, but it is the market where we focus on owning and managing multifamily properties. Our primary development markets include Austin, Denver, Dallas and Charlotte though San Antonio is increasingly attractive. The last five to six years for multifamily have been amazing. I have been in this business for over 20 years and I have never seen the length and depth of a cycle like we are having today, across all metrics—demand, occupancy and rent. 

Early in the pandemic, we had issues on certain assets with collections and those that had weaker income demographics had some challenges because a lot of the residents had negative impacts from employment due to COVID. That has rebounded really quickly. As work from home has become more available to more individuals working across more industries, people are just less tied to geographic locations and have moved at an accelerated pace into these markets in cities that they want to live in, rather than cities where they are physically located. There still is a question out there that has not been answered, relating to where all of this demand is coming from. I think there are two reasons: 1) accelerated migration due to work from home into better places to live (San Antonio certainly qualifies), and 2) there was a huge component of household formation – aged individuals living with parents.  I believe the pandemic had an impact on how well that was working on both sides and has prompted substantial new demand.  

It has been an exciting four year start for Kairoi. We have three businesses—a development company, an investment company that buys and sells existing apartment projects, and a property management business for our own assets and for third party owners. Our property management business has grown from 7,500 units of property managed assets to just about 20,000 units. When we started, all 7,500 units were self-owned. Over the last four years, we have sold 9,000 units. We bought, developed and sold more than our entire book. Yet, we are sitting at 20,000 units under management for our property management business. 

On the development side, Kairoi has a development pipeline that stands at roughly $4.2 billion. Included in that pipeline are a couple of large projects in Austin that are skewing that number to some degree. $2.5 billion of what I would call typical projects in our development pipeline represents multifamily projects spread across Austin, Denver, Dallas and Charlotte. Over the last six months, our multifamily acquisition business has acquired roughly $500 million of multifamily assets in Austin, San Antonio, Odessa, and Dallas. We have sold a lot of assets as well. It has been a highly active market. 

Despite inflation in asset values, the appetite for multifamily is still very robust, the demand continues to keep pace. Coming out of the pandemic we saw rents really spike, there was some growth in the 15 to 20% range across assets in multiple markets. We have seen that level of growth moderate to some degree, and that is indicated by our weekly traffic numbers and the leasing rent numbers that we see on a daily basis from reports. 

How would you identify the current state of affairs for San Antonio’s residential real estate market?

The story in San Antonio is growth.  There is tremendous in-migration and population growth which is generating new household formation and consumer demand.  At the same time, there is a new economic development focus within the region that is promoting education and skills training in order to attract job opportunities that provide economic mobility.  That is something that in the past has not been the case in San Antonio but is changing with renewed focus on cyber security, finance and insurance, biosciences as well as advanced manufacturing (Toyota, Navistar, Aisin, Caterpillar, etc).  These are fantastic jobs that provide career advancement and higher average wages.

There is no question that the appetite for real estate, specifically multifamily across the US, is strong. Demand in multifamily is tightly correlated with jobs and household formation.  While some businesses continue to grow and are going to consume traditional office space, there are several others reevaluating how they work, what work looks like and how much space they need. The question to be answered is how much space is really being used in the market and how much is really needed going forward, in a virtual world that continues to increase in terms of viability and the number of people required to be in the office. We still think office is a very viable investment sector long-term, but the two sectors that are pretty obvious investment darlings at the moment are industrial and residential. 

The residential market has been a beneficiary reallocation of investment away from retail and hospitality, and to some degree office until there is more data as to how space is consumed. While hospitality’s attraction has improved, there are very few groups allocating more capital to that space, unless they are a more opportunistic pocket of capital, which does not represent any meaningful depth of capital. Where the money is moving today is in industrial and residential assets. For rent single family, for rent in development, for rent multifamily acquisitions, capital markets are super healthy today. Equity is readily available and highly flush with capital. Because the product type is so favored and interest rates have continued to migrate downward, cap rates have compressed to the lowest point that I have seen in my career. Certainly, it is an all-time low in terms of apartment cap rates. What we have also seen in cap rates in our business has been compression between asset quality. Traditionally, you had this very well stratified distinction for expected returns between core, core plus assets, value add and opportunistic. The spreads between those assets are really compressed. In some cases, they are right on top of each other. In other words, a 50-year-old asset is trading at a very similar cap rate to something that is a brand new high-rise, which is unique. It is a situation that I have not seen in my career. There is also a significant amount of capital that has migrated to suburban assets. In terms of the focus for a lot of groups, pre-COVID, it has been more urban, as people want to live urban, be closer to amenities, restaurants, bars, sports and entertainment and those sorts of things. There has been somewhat of a migration, an overreaction to suburban lifestyle. Investors have gone on a big suburban acquisition push, which has pushed up pricing in the suburban areas well beyond replacement cost. 

What is your take on finding a balance between the area’s demographic influx and affordable housing? 

San Antonio has some of the cheapest housing in the country, relative to other markets.  There are those that claim that San Antonio has an affordability crisis, but that issue is only relevant when compared with their incomes.  We have an income issue not a cost issue.  When you compare all of the metrics- average rent, average home price, home price appreciation, first time home cost, average value of a multifamily property, they are all very affordable relative to other large metropolitan areas across the country.

Replacement cost is relative, it does not vary that much market to market. Materials cost what they cost. Labor and land values are the variables that change. What we have here in San Antonio is that our pre-COVID in-migration was very strong. The majority of population in-migrations are from the Rio Grande Valley of Texas. The majority of those individuals are migrating to San Antonio for opportunity; they are less educated with minimal skills training. That has created a big workforce, but one with issues regarding their employability. The education and workforce development piece is really critical. San Antonio has done a great job of accelerating skills training in an effort to upskill those folks and educate them to a point where they can get a job that creates economic mobility, which is really the backbone of a great economy: economic mobility. That skills training coupled with a huge move in education is positioning San Antonio to have a powerful workforce of the future.  Between 2012 and 2017, the city increased its two- and four-year output—associate’s degree and four-year degree by 49%. 

In the past, San Antonio has lacked jobs with economic mobility which has trapped generations in a cycle of poverty and low wages. San Antonio is now creating better jobs that are more sustainable that also create more economic mobility.

San Antonio is an attractive place for families and talent living in more expensive markets, no question. Its culture, diversity and affordability make San Antonio a place where the American Dream is more accessible. Until now, San Antonio has not been effective in telling its story to those outside the region. People do not know a lot about it. It has done a poor job of marketing and branding around why you would want to work and live here. The San Antonio magic has yet to be discovered by the rest of the country, but that is happening now. 

What is your general outlook for the residential real estate sector in San Antonio over the next two to three years? 

There is tremendous opportunity in San Antonio because it has not been discovered but that is changing rapidly.  San Antonio’s economic development organization rebranded to greater:SATX and spent over a year developing a robust plan and tactics to change the economic trajectory of the city. Greater:SATX has the attention and focus of business community leadership for the first time in 20 years. When you look at the cities across the country that are achieving accelerated growth trajectories, they are cities that are cool, unique, generally southern, that also have a heavily involved business community driving a strategy for economic growth. San Antonio has not had a strategy for growth in a coordinated fashion for decades until now. When you look at the office rents here relative to the rest of the country, when you look at residential rents relative to other markets in Texas, not just to the rest of the country, but relative to everywhere else, San Antonio is extremely inexpensive. 

We will start to have accelerated business growth here through new economic development initiatives. We are developing more talent than we have ever developed. We have strong transportation and highway infrastructure with IH-35, IH-10, US 281, and our double loop system.  We have unparalleled history and culture.  We have the diverse workforce that companies are looking to hire.  Soon, San Antonio will begin to hit the radar of more companies  that see San Antonio as a real, viable option in terms of relocation, investment or expansion.  I think the economic development effort alone makes San Antonio a real target for investment. 

For more information, visit: https://www.kairoi.com/

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