The Delaware Statutory Trust Universe is fairly small. As this is being written, there are only 31 active DST sponsors in the space. As mentioned in a previous article (DST Properties, All Sponsors Are Not Created Equal) only three of these: Inland, Passco and AEI predate 2008 and the great housing market crash. All others are recent, post-recession creations.
When the single-family home market collapsed in 2008, it didn’t take a rocket scientist to figure out the primary beneficiary would be multi-family. This is because you had a whole generation of never-should-have-been-owners going back to being renters, and 90% of building was single family home construction. Very little in the way of new multifamily product came to market. Therefore, when the single-family home market went tits-up, demand for multifamily housing far exceeded supply.
This supply-demand imbalance was exacerbated (made worse) by a whole generation of young renters deeply traumatized by their parents’ losses in housing. They were very disinclined to buy and would remain renters for many years to come.
As such, it took nearly 10 years for the supply of multifamily housing to catch up with demand. Therefore, rents went up as did values. This is why 90%+ of Delaware statutory trust properties for sale have been and continue to be multifamily.
So far, so good. However, with average acquisition cap rates (the expected unleveraged return on an investment property) on multifamily below 5%, the Risk Adjusted Return (RAR) is clearly shifting away from them. But to what you ask.
Based on the current cap rate environment we believe the RAR is shifting to the hospitality (hotel) sector. Even though there is only one such offering currently on market (Inland’s Denver Hospitality Portfolio DST) we expect to see more investment activity here as other DST sponsors begin to seek better RAR’s and shift their focus to hotels.
With the economy now growing at nearly twice the annual rate as under the previous administration, business travel is way up. As such, major hotels in hub cities such as Denver and Atlanta are booked 24-7. Obviously, this puts them in a very advantageous position regarding future rate increases. Increased rates equal increased valuation.
The fact that Inland can bring a Marriott Hotel portfolio like this to market with a lower LTV (43.9%) than the average apartment DST (53%) and provide a demonstrably higher starting cash-on-cash return at 6% vs. 5% for apartments is proof positive the Risk Adjusted Return is shifting to the hospitality sector.
The only question is do you as a Delaware statutory trust investor want to be a trend follower or a trend leader?
DST Sponsor :
Peregrine Private Capital | Lake Oswego
5000 Meadows Road, Suite 230
Lake Oswego, Oregon 97035
Delaware Statutory Trust
This material and views are prepared solely by the author and does not necessarily represent the views of the its affiliates. Statements concerning financial market trends are based on current market trend, which will fluctuate. Projections are inherently limited and should not be relied upon as an indicator of future results. Historical figures and performance are not indicative of future results. This is for informational purposes only and does not constitute an offer to buy or sell any investment.
DST 1031 properties are only available to accredited investors (typically have a $1 million net worth excluding primary residence or $200,000 income individually/$300,000 jointly of the last three years) and accredited entities only. There are risks associated with investing in Delaware Statutory Trust (DST) and real estate investment properties including, but not limited to, loss of entire principal, declining market value, tenant vacancies and illiquidity. Diversification does not guarantee profits or guarantee protection against losses. Potential cash flows/returns/appreciation are not guaranteed and could be lower than anticipated.
Because investors situations and objectives vary this information is not intended to indicate suitability for any particular investor. This information is not meant to be interpreted as tax or legal advice.
Securities offered through Concorde Investment Services, LLC (CIS), member FINRA/SIPC. Peregrine Private Capital Corporation is independent of CIS.