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Executive Summary
Company. Insula Cos. Industry. Commercial real estate, multifamily Key. Insula Cos. has benefited from a thriving apartment market, but new supply and more competition present challenges.

Fred Cochran knows firsthand what it takes to own and operate an apartment building. While still in college 20 years ago, he purchased a 10-unit apartment complex, and he quickly found out just how hands-on he'd need to be.

“With a little 10-unit complex, you can't afford to have a property manager or maintenance guy,” he says. “So for five years, I was the property manager and maintenance guy. I learned the daily ins and outs of property management, which is really not an easy job.”

But that time spent doing repairs and dealing with tenants gave Cochran perspective many of his peers don't have. “There's no substitute for hands-on experience,” he says. “No matter how many books you read or classes you take, if you haven't done it you just don't have an appreciation for how difficult the job is.”

That experience proved useful for Cochran, especially when he decided to start his own firm in 2009. “When the recession came, the values of apartments — and everything else — went down quickly,” he says. “I recognized it was probably a good time to start buying apartments.”

His firm, Sarasota-based Insula Cos., has since become a regional leader in the scorching-hot multifamily market. The market is so hot that Cochran's challenges have shifted, to staving off competitors and managing the level of risk on every purchase.

“It's a nationwide investor base, along with foreign capital,” says Amanda Cooper, director of multifamily investment sales for Tampa Bay at commercial real estate firm Colliers International. “There are very few groups that don't want to be involved in multifamily right now.”

Insula's first acquisition was an 82-unit property in Sarasota. Since then, Cochran and his co-managing partner, Larry Fox, have acquired about 5,000 units with a value of more than $400 million. They've sold some of those complexes, for a profit, over the years when the timing was right, and the firm's current portfolio is about 3,500 units worth more than $300 million. It recently made its 25th and largest acquisition to date, a $42 million purchase of a 396-unit apartment complex in Orlando.

Insula focuses on the Sarasota, Tampa, Lakeland, Kissimmee, Orlando and Tallahassee areas, markets that a hands-on operator like Cochran can easily reach from Sarasota. It looks for apartment properties that need some TLC, fixes them up and rents them out. The firm's goal is to do four acquisitions per year and expand its portfolio to between 5,000 and 10,000 units. But it's seeing a lot more competition for properties than it did in the beginning.

“In 2009, everybody was truly scared,” says Cochran. “When prices are way down, the people who have the confidence are the local people who know and understand the markets and the values. Now people aren't scared; they're very bullish, so there's a lot of competition. It's easier to get access to capital, so you start to see people come from New York, California, all over the place.”

Adds Cochran: “It's more difficult now and we're more cautious, but there are still opportunities.”

Big factors
Cochran, like others in multifamily, has been boosted by a demographics shift, a rebounding economy and an improved unemployment rate. All three factors have strengthened the renter pool. In Florida, for example, the unemployment rate went from a high of 11.2% at the end of 2009 to just about 5% at the end of 2015. “There are a lot more renters who have jobs and can pay rent,” says Cochran.

More people, including baby boomers and millennials, are also opting to rent rather than own for the flexibility that it brings. “For millennials, the days of staying in one job for 15 or 20 years are very numbered if not already expired,” says Cooper. “They want to be able to pick up and go wherever the next job takes them.”

In general, these factors are why demand far exceeded supply in Florida in the last four years, says Barbara Denham, an economist with commercial real estate research firm Reis, Inc. It's also created what Cooper calls “the perfect storm for multifamily.”

But the market has shown signs of shifting.

“Looking ahead, it looks like supply will be exceeding demand in almost every market,” says Denham. “We expect vacancy rates to increase — not dangerously, but more steadily. And that will affect the growth rate in rents going forward. Things will still be positive, but not as robust as it has been.”

Reis estimates that 3,036 new units will come online in 2016 in the Tampa area, which is more than 2015 but less than 2014, when 3,500 new apartment units came onto the market. In Orlando, 3,950 new apartment units are scheduled for completion in 2016, less than the 4,300 new units completed in 2015.

'Underserved market'
A glut of new construction wouldn't be great for Insula. But one element in the firm's favor is much of the new multifamily construction is in the Class A space, high-end buildings that fetch high-end rents.

Insula focuses on Class B and C properties, workforce or affordable housing. It looks to invest in complexes with 100 to 300 units that are 15 to 40 years old in its target geographic areas.

“A lot of times the properties are not maintained or kept in the condition that maximizes the value,” says Cochran. “So we find those and put money into them, and generally the tenants are willing to pay a little bit more to live in a little nicer place. It's an underserved market.”

Cooper, with Colliers International, agrees that Cochran has a solid niche. “The space Insula plays in in the market insulates them from being hit hard by the addition of any new supply,” says Cooper. “They can get that additional rent lift without outpricing their typical tenants.”

While each property's needs are different, Insula tends to invest in increasing complexes' curb appeal and improving the exterior, office and amenities. Interior renovations can include improvements to kitchens and bathrooms.

“A lot of times we let the market determine what it wants,” says Cochran. “So we'll make a couple different levels of upgrades in the interiors and see what people prefer and are willing to pay for. The tenants tell me what they want.”

The renovations Insula makes help boost the complexes' occupancy rates and tenant profiles. “It generally attracts a different type of renter when you have a nicer-looking asset,” says Cochran. “We really don't focus on just increasing rents. Once you have a good resident profile and nice property, you can move the rents a little bit. But we're not looking to maximize rents at the expense of everything else. Because people have to pay the rent. You can charge whatever you want to charge, but if they can't pay it, it doesn't work.”

Cochran has made other shifts at Insula to stay ahead of trends, and competitive forces.

Around three years ago, for example, Insula started its own apartment management firm, which further helps to protect its investments. The management arm now employs 110 people and helps ensure that the complexes remain in their post-renovation condition. “We used to outsource the management,” says Cochran, “but nobody cares about your properties like you do.”

Cochran adds that he believes current market phase has staying power because the fundamental metrics are solid, and in 2006 and 2007 the fundamentals were flimsy, at best. “They were based on speculation and condo conversion and the greater fool theory,” he says. “So this feels a lot better.”

At a glance: Recent deals, Insula Cos.
Here are some recent examples of deals Sarasota-based Insula Cos. has closed on — both acquisitions and sales.

Sold 30 apartments in west Bradenton, in a community formerly known as Braden Lakes, for $25 million to a private investor in May. Insula bought the property out of foreclosure in 2013 for $14.28 million. It spent $1.4 million on renovations.

Firm made its first purchase in Tallahassee in May, when it bought the 120-unit Club at Lake Jackson complex out of foreclosure. Insula plans to spend at least $800,000 on renovations to the complex.

In June, Insula acquired the164-unit Village Green Apartments in Altamonte Springs from a private owner. The firm plans to spend $1.5 million on a makeover there.

In September, Insula acquired Harbour Walk Apartments in Tampa for $29.5 million. The complex, across the street from Tampa Community Hospital, has 400 units. Insula plans to spend $2.5 million on a makeover and rebranding.

By the numbers
Insula Cos.
Year Revenues Percent Growth
2012 $15.3 million
2013 $20.63 million 34.8%
2014 $27.10 million 31.3%
2015 $41.44 million 52.9%
Source: Insula Cos.


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