Back in 2018, I made a simple observation: we have to be prepared for an economic Melt-Up, not a Meltdown. A year later, as I shared in a 2019 article, our country was headed towards a “melt-up” or a sharp and unexpected rise in prices, even before the COVID-19 pandemic began. Anyone watching the dial on the gas pump lately will probably agree that we are there.
How, then, do you survive an economic landscape that is such a departure from the norm? The following is an overview of our approach and how a look into the untapped market of the Upper Midwest, especially South Dakota, provided us with the fertile ground for growth even during a changing marketplace.
Finding Those Quarternary Markets
Knowing that our next recession will look a lot different than expected, my team and I got to work on a plan to survive it. We started looking at all 50 states for cities that weathered the 2008-2010 downturn and came up with dream criteria:
- population growth
- lack of supply
- no overbuilding
- low crime rate
- 6% plus cap rates
- low vacancy
- 20% plus IRRs
- market liquidity
- state taxes
- governor stewardship
Our findings revealed that these markets were often in flyover states and overlooked yet exhibited accelerated and steady growth despite their smaller size in populations. While everyone else focused on primary and secondary markets, we focused on these quaternary markets.
South Dakota Hit the Mark
South Dakota was one of the best performers during the Great Recession from an economic, multi-family perspective. Both Sioux Falls and Rapid City presented double-digit growth and remained stable throughout the 2008 crash. Throughout the pandemic, it has been relatively non-correlated to the rest of the U.S. It was the only state that did not have mask mandates, curfews, shelters, social distancing requirements, and no business was deemed non-essential by the estate and forced to close.
South Dakota attracts residents for its abundance of jobs (the unemployment rate is approximately 3% – the lowest in the U.S), access to land, and leisure activities each season, such as snow skiing, hunting, rafting, hiking, and biking. The State offers a completely different lifestyle than urban areas. Housing is reasonable and offers large backyards.
In a state where the government is very non-intrusive, property taxes are low, and there are no state income taxes, businesses and individuals continue to move to South Dakota. Plus, the state’s economy has proven to be one of the most COVID-19-resistant in the U.S.
A Collaborative Relationship
South Dakota provided the opportunity for me to bring my unique approach from other markets to the area while also adapting to local needs and trends. We quickly incorporated our approach of prioritizing advantages that go beyond an income statement.
We were able to buy apartments and bring in Tzadik Properties’ daily reporting, company core values, themes and mission. We connected onsite employees with all our properties across the country and provided them with even more employment opportunities.
Our first acquisition in 2018 in Sioux Falls included just over 700 units. Today, we own and operate 2,206 properties in South Dakota. At these properties, vacancy has been as close to zero as I have ever seen. We also have a corporate office in Sioux Falls, with 35 employees. Throughout the pandemic, we remained actively investing and finding new growth opportunities in the State. In 2020, we acquired income-producing properties with substantially higher yields than primary and secondary markets anywhere in the U.S., including our 22,000-acre and 200-acre ranches in the Black Hills, Cheyenne River Ranch and Raz Hideaway.
I will be hosting a breakout session, “Surviving a ‘Melt-up’: A Vision for South Dakota,” at FreedomFest 2021. I will share more on why I had the vision to invest in South Dakota, my thoughts on why South Dakota is a great market to enter and why now is the best time to invest there. Please be on the lookout for more details.
Adam M. Hendry, an accomplished entrepreneur and executive, is the founder and CEO of Tzadik Properties, LLC, an industry-leading real estate company based in Miami, Florida. Since Hendry founded the company in 2007, Tzadik has managed more than $1 billion in apartment complexes, over 15 million square feet of commercial real estate and more than 20,000 units in over 20 states, in the last 14 years.