Multifamily: A Promising Start to 2018, Plenty to Keep an Eye on
The commercial real estate industry faced a fair amount of uncertainty at the start of the year, especially on the multifamily side. Between rising interest rates impacting investment sales and lending activity, and tax reform potentially influencing renter demographics in various areas of the country, there were several question marks for lenders, borrowers and investors alike.
Despite this, the market has remained steady—across all sectors, including multifamily—and there are strong expectations for the remainder of the year ahead. While the outlook is largely positive, there are some potential hurdles that can’t be overlooked.
Multifamily Land of Opportunity
At the beginning of the year, we asked both investment sales and mortgage banking professionals at Berkadia about what they expected from the multifamily market in 2018, as part of our inaugural Powerhouse Poll. What did we find? Most mortgage bankers did not expect to see a downturn in the multifamily lending space year-over-year, nor did they expect to see a decline in overall deal value. In fact, a majority anticipated a big year for the government-sponsored enterprises.
Three months into the year, many of these expectations have held true. There’s been a steady amount of deal flow and inquiries on both the mortgage banking and investment sales side of multifamily commercial real estate. We’ve seen a flurry of activity in the Southeast, which was widely expected due to the anticipated strong economic factors in that region, like job growth and development stabilization. The Southwest and West Coast markets are other regions expected to remain healthy—when Berkadia polled professionals late last year, they also chose these core regions as being hotbeds for deal activity. In terms of capital sources, there is plenty of money moving about the market. GSEs have been a critical source of financing, but both debt funds and private lenders have also had seats at the table.
One of the challenges the market is facing on both the sales and lending side is rising interest rates. Although the expectation was that investors would be able to forecast the upticks and thus the market would be largely unaffected, the reality may be that buyers could become a little more cautious. This hasn’t happened yet, but rising interest rates could cause loan activity to begin to slow down—particularly when it comes to refinancing. This may lead to the market size not being as robust through the rest of 2018—and even into 2019—as it has been.
Along with rising interest rates, buyers and borrowers would be prudent to keep their eye on news from Washington, as the regulatory environment is poised to shift in the next couple of months. Regardless of the strong fundamentals and economic factors that we expect to see at play throughout the year, a regulatory change would certainly impact the course of the multifamily market. Additionally, the market needs to keep its eye on factors outside of the United States—geopolitical risk and global market volatility may impact the sector in terms of how foreign capital reacts to either of these potential bumps in the road.
While smooth sailing is no guarantee, multifamily market conditions remain as healthy as expected at this point in the year. And while the sector certainly holds a lot of upside potential for the remainder of 2018, there are a number of factors that will be interesting to see unfold over the next several months.
Hilary Provinse is the head of mortgage banking at Berkadia.