With real estate market dynamics constantly shifting, how do you avoid chasing momentum? In our latest In Conversation video, ARA’s Kirk Helgeson and Sabrina Unger discuss how we differentiate between long-term structural market drivers and cyclical upshifts that may provide only short-lived performance.

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Kirk Helgeson: Hello, and welcome to another installment of a ARA In Conversation. I'm Kirk Helgeson, President and Chief Investment Officer, and I'm joined here today by Sabrina Unger, who heads up our Research and Strategy efforts. Sabrina, we've spoken about our market and sub-market selection process before, but I want to talk about what happens when a market's attractiveness seems to change overnight. How do you think about rapid shifts in market performance in a long-term asset class like real estate?

Sabrina Unger: It's a good question and one that's particularly timely, just given some of the wide swings in relative rankings that we've seen over the last couple of years. When we see a market make a big move in relative ranking – so how a market's performing compared to its peer set around the country – we really want to dig into what's driving that. So, if we see a demand surge that is resulting in a rent growth pop, that might mean something different than if a market rises in the ranks simply because some of the normal top-performing markets are taking a bit of a breather, perhaps because of oversupply.

A good example of this would be an apartment market like Kansas City, where it's been relatively benign over the long term in terms of rent growth potential, a relative underperformer compared to other markets, but over the last couple of years, it's popped back up. Now, I'm not saying that there aren't opportunities to be had in Kansas City apartments, but a market jumping up 10 or 20 places in a ranking in one year feels a bit like a moment in time.

KH: How do you tell whether a market is having a cyclical updraft or whether there's something more structural going on?

SU: Yeah, I think we look at the resiliency of a market's profile. So, in effect, how frequently is it outperforming? And then we will also consider its trend, because neither do we want to make an investment decision based on one year's worth of data, we also don't want be making investment decisions today based on how a market performed 10 or 15 years ago, if the most recent 10 or 15 years is significantly different. I think a good example of this again, is a market like Kansas City, where throughout much of the 2010s and really up through 2022, it was a chronic relative underperformer on the national scale. When we look across apartment markets, you know, it takes time for the desirability of a market to change when it comes to making a real estate investment because obviously we're holding it for more than one year. So, if we look at 2010 through 2022, Kansas City was sort of always in the bottom bucket of markets for rent growth, and then we have two years where it's doing relatively better than other markets. That intuitively feels cyclical to me. But if we were looking at that same time period and maybe 2010 through 2015, it was in the bottom, and then it was maybe in the third quartile for a few years and started to gradually improve, that might signal something more structural is changing in the desirability of the market, and that's certainly not something we want to ignore,

KH: So what are some of the things that you're looking for when deciding to add a new market to one of our strategies, and can you give us an example of a market that you have added in this last cycle?

SU: I think when we're considering making an investment in a market that's new to us, we want to have the answer to several questions: number one is, what's driving our interest in the market? Are we responding reactively to an opportunity, or is the market being flagged either by a research methodology or our investment teams with boots on the ground? We want to have an answer to that question, certainly.

We also want to understand where are our advantages in the market. So if we have existing relationships from other markets that may translate there, that's an opportunity for us to have an advantage. We don't inherently want to go into any new market at a severe disadvantage. We also want be able to answer: who is our competition? If there's a market that is dominated by local players, we say we don't want be paying the “dumb tax” in a new market, nor do you want to constantly be viewed as the outsider. It's very difficult to achieve outperformance when you're just not on the inside track there.

And ultimately, we want to understand: who is our next buyer? If we're going into a market that is comprised of our peer set, that's different than if we are being pioneering with our investors’ capital, which is certainly not what we want to do.

You know, one of the markets that we recently invested in the most recent cycle, that was new to us was San Antonio residential, and the rationale behind that decision was really twofold. Number one is we had a lot of existing relationships in neighboring Austin that we were then able to leverage and give us a fair playing field in a place like San Antonio. And the second part of that was that we understood the exit liquidity,  we're able to sort of anticipate we would be able to complete a business plan at a time that felt appropriate to us.

KH: Interesting. I like that example. But you know, my parents used to warn me: just because you're lucky doesn't mean you're right. So tell me, is it resiliency, or is it momentum?

SU: I think you can't ignore momentum, but momentum when it comes to investing, and particularly real estate investing, ultimately, to me that translates as timing.

So you can get lucky and get the timing right, or you can be unlucky and get the timing really, really wrong. Ultimately, I think that's why we as a firm have decided to anchor all of our strategies in research that is focused on identifying thematic structural tailwinds that aren't going to disappear overnight.

I think it also comes down to the type of capital we're talking about. For core capital specifically that has a longer hold period, resiliency, or the likelihood and propensity to outperform, likely wins out. You want to make an investment in a market where the odds of outperforming are higher, and that needs to happen not just in one year, but over 3, 5, 7, 10 years and beyond, and so ultimately, I think resiliency overtakes momentum in that case.

For value-add capital that has the ability to move a little more nimbly, timing and momentum certainly play arguably a larger role. But even then, I don't think you would take a singular year's data point and make an investment even for value-add capital.

KH: OK, so momentum is tempting, but it can be short-lived, and then balance that with long-term performance.

SU: I think that's right.

KH: Those are valuable insights. Sabrina, thank you for the discussion. I'm sure that our investors will find this helpful as they consider investments in this new cycle.

This transcript of the ARA In Conversation discussion has been edited for clarity.

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Disclaimer

The information in this video is as of March 1, 2025, unless specified otherwise and is for your informational and educational purposes only, is not intended to be relied in to make any investment decisions, and is neither an offer to sell nor a solicitation of an offer to buy any securities or financial instruments in any jurisdiction. This presentation expresses the views of American Realty Advisors, LLC (ARA) as of the date indicated and such views are subject to change without notice. The information in this video has been obtained or derived from sources believed by ARA to be reliable but ARA does not represent that this information is accurate or complete and has not independently verified the accuracy or completeness of such information or assumptions on which such information is based. Models used in any analysis may be proprietary, making the results difficult for any third party to reproduce. Past performance of any kind referenced in the information above in connection with any particular strategy should not be taken as an indicator of future results of such strategies. It is important to understand that investments of the type referenced in the information pose the potential for loss of capital over any time period. This video is proprietary to ARA and may not be copied, reproduced, republished, or posted in whole or in part, in any form and may not be circulated or redelivered to any person without the prior written consent of ARA.

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