Presented By: NewPoint Real Estate Capital
NewPoint CEO Talks Multifamily Resiliency and What It Means from Here
Future Of Multifamily, brought to you by NewPoint Real Estate Capital
In good times and bad, through pandemics and wars and political uncertainty, one of the most reliable truisms in commercial real estate is that everyone needs a place to live. This is one reason why multifamily has shown resilience for investors amid the global and domestic turmoil of the past few years. Partner Insights spoke to David Brickman, CEO of NewPoint Real Estate Capital, about why multifamily is standing strong and whether we can expect that to continue in the near future.
Commercial Observer: Why do you think multifamily has remained a favorite CRE investment for the past decade and a half?
David Brickman: Multifamily is increasingly viewed not as part of commercial real estate but as its own distinct asset class. The prospects of other CRE asset classes depend on shifts in technology, preferences, how people work and how people shop. But multifamily has been incredibly stable because it’s housing. It’s tied closely to demographics, population growth and, ultimately, supply and demand. That is why it’s been insulated from some of the more macro-driven cycles we’ve seen over the last 20 years.
CO: We saw tremendous rent growth in 2021 that even surpassed inflation. How much of this is reflected in the departure from 2020’s COVID-19 concessions, and how much is a factor of sheer demand and increased operating costs?
DB: The trend of COVID concessions, which rose for a period in 2020, and largely burned off in 2021, contributed to a portion of the rent growth we have seen. But the primary driver in rent growth was the expansion of demand coupled with insufficient supply. Renters who negotiated a concession or moved during the height of the pandemic are seeing renewal letters with new — and sometimes surprising — market-rate rents. The bulk of the rent increases we are seeing now are driven by market forces and not the expiration of concessions.
CO: How is the current state of the single-family market impacting the rental market?
DB: Looking at the broader housing market, we’ve seen a rapid increase in house prices — due in major part to a lack of inventory, particularly for moderately priced homes. In addition, rising interest rates have made homeownership even more expensive. These factors clog one end of the pipe in terms of how households typically transition from renting to owning — many millennials are not able to, and will not be able to, exit the rental market. Then on the other end, you have Generation Z graduating college, getting jobs and entering the rental market, driving rental demand. Pair this demand with a general return to the office, and it is apparent why rental inventory is extremely tight and why we are seeing rent growth accelerate in a way we haven’t seen in recent history.
CO: Do you expect to see the U.S.-style multifamily model become more popular overseas?
DB: The types of housing problems we have in our major metropolitan areas are identical to what you see in London, Sydney, Tokyo or Mexico City. Every major city across the globe is confronting issues of affordability and inadequate supply, particularly for affordable and moderate-cost housing. A maturing multifamily sector presents an opportunity to create more affordable housing in these cities, which tend to have limited purpose-built rental housing, especially outside of the urban core.
One can make the analogy that the rental market abroad is akin to the U.S. apartment market 30 to 40 years ago — fractured, regional and comprised of smaller mom-and-pop owners. Greater capital flows to global multifamily will hopefully improve the quantity and quality of housing with operational discipline and institutional management. We are seeing a similar thing happening right now in the U.S. with single-family rentals and build-to-rent communities.
CO: Can you tell us about some of the trends you see in terms of capital flows into the U.S. residential rental sector?
DB: Multifamily’s capital flows are very much driven by how insulated the asset class is from some of the shocks other CRE sectors are exposed to — simply put, multifamily can be consistently relied upon in terms of steady growth. Multifamily also provides a good hedge against inflation, as housing is the largest component of inflation. In addition, increased uncertainty about where returns will be in a changing economy has made it more attractive for global capital investors given its greater inherent stability.
CO: And is the investor interest in multifamily changing the way loans are being underwritten or structured?
DB: It’s putting a lot of pressure on how loans are underwritten. Low cap rates pushing against the tension of rising rates have led more borrowers into bridge loans where they can get the leverage they want. It is a funny thing today when you talk about someone acquiring a property and, at best, being able to finance 60 to 65 percent of their purchase price. It wasn’t so long ago that we took for granted that you could borrow 75 or 80 percent from a main street bank. So, we see a pivot in terms of from where people are borrowing money.
Also, as the yield curve grows more steeply sloped, we’ve seen a shift towards floating rates over fixed — though concerns about rising rates may change that yet again. We are also seeing slightly shorter terms, with a greater preponderance of three- to five-year terms in the bridge world. Even the permanent arena has shown increased interest in five- and seven-year terms compared to the traditional 10-year loan.
CO: There are projections that multifamily loan originations could hit upwards of $500 billion in volume this year. Where is this support coming from?
DB: Growth in multifamily debt tracks the overall growth in the multifamily capital stock value. It’s a pretty simple formula in the long run: You have more units being created, each unit is worth more and there’s a certain amount of debt that will track with that total value. As we’ve continued to see double-digit growth rates in values and healthy levels of construction for multifamily, we see multifamily debt tracking alongside it. Right now, I believe we are at approximately $6 trillion or $7 trillion and growing in terms of total multifamily capital stock, which is almost double what it was a few years ago. By contrast, total mortgage debt outstanding is likely a little less than $2 trillion — with ample room for growth. It shouldn’t be surprising then that we’d see debt growing at a similar rate to what we observed in the aggregate capital stock.
As mentioned earlier, we see that the overall duration of multifamily debt is shortening. Borrowers are taking slightly shorter loans and refinancing more quickly, so the turnover in debt is also increasing. While the aggregate amount of debt we have outstanding continues to grow due to higher valuations and increasing stock, we also expect to see a higher volume of originations in a given year due to shortening term. Both factors should help push us to $500 billion this year, barring any disruption from events in Ukraine or elsewhere.
CO: What are your thoughts on the prospects for multifamily over the coming year?
DB: There are a few possible concerns. The first is the potential for rent control. No, it is not healthy for markets to experience 20 or 30 percent rent growth. It’s disruptive, and it creates real tension and stress for many households. Unfortunately, this may prompt state and local governments to look to rent control, but this is not the right answer. The right answer is to build more housing, but that’s a complicated, long-term challenge to address a near-term problem. Second, the world tends to change radically. We’re recovering from COVID, and things certainly look optimistic on that front. But now we’re watching the largest armed conflict in Europe since World War II unfold in real time. It’s hard to predict what reverberations the invasion of Ukraine will have on the global economy, but I imagine they won’t be insignificant.
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