Jeff Rosenfeld of North River Partners: 5 Questions

The 21st Century ROAD to Housing Act, which was enacted earlier this month, promises to greatly impact U.S. real estate when it goes into effect in January.

The U.S. House of Representatives and the U.S. Senate passed the legislation — without President Donald Trump’s signature — with the intention of boosting housing supply and cutting construction red tape.

The heavily bipartisan legislation also promises to greatly restrict large institutional investors by banning them from competing with traditional buyers for existing single-family homes. But there’s some loopholes that companies can exploit to get around the ban, according to Jeff Rosenfeld, managing partner and co-founder of New York City-based real estate credit platform North River Partners.

As a lender focused on residential construction across the U.S., North River is experiencing the effects of the bill on developers and owners firsthand, Rosenfeld said.

North River has also been doing some deals of its own lately. In April, the firm, along with Amzak Capital Partners, provided $68.5 million of total financing to CedarSt Companies for Flagler Gateway, a 215-unit multifamily development in Fort Lauderdale, Fla., where Rosenfeld said the firm sees a “really exciting housing market for decades to come.”

Commercial Observer sat down with Rosenfeld last week to discuss the ROAD to Housing Act and how it might impact housing investment trends, as well as how the Federal Reserve’s vote on benchmark interest rates might go on Wednesday.

This interview has been edited for length and clarity.

Commercial Observer: The 21st Century ROAD to Housing Act was enacted earlier this month, with a clause banning institutional investors from competing with traditional buyers for existing single-family homes in the U.S. How big of a deal is this?

Jeff Rosenfeld: First off, there’s probably a bit of a misunderstanding in how operators like Blackstone buy these things today. Unfortunately, I think what a lot of people think about is really Blackstone’s playbook from around 2010 to 2011, when they were actually sending people to auction houses to buy up individual houses. They were doing so for several years, really prior to putting together a portfolio and eventually taking that public.

How a lot of these very large institutions behave today is by way of bulk purchases, which are still going to be allowed, so I do think it will make an impact. 

Frankly, just the headlines in and of themselves are going to scare away institutions from going out and attempting to acquire single-family rentals. This introduces a new element of regulatory risk that, frankly, just did not exist five years ago, and you have groups like Blackstone and Pretium, for instance, which is probably the largest single-family rental owner in the country. Their DNA is going out and buying a house, house by house. 

But they don’t really operate that way anymore, so it’s to be determined whether or not it actually slows them down or is a true silver bullet to their business.

Following approval of the bill, what trends are you seeing when it comes to investments in build-to-rent versus single-family homes?

Just prior to the legislation being passed, there really was a huge pause with respect to construction lenders, in particular, wanting to finance build-to-rent projects. The single-family rental space, and single-family housing in general, has probably held up from a rent occupancy value standpoint a little bit better than multifamily and even build-to-rent. But we think the tailwinds right now are within the BTR space. 

There are some loopholes within the Housing Act that will allow institutions to continue to buy single-family rentals — there’s some loopholes if they buy bulk transactions, if they buy single-family rentals that meet required heavy rehab, single-family rentals that are age restricted. But, by and large, we’re seeing evidence that there’s a lot of capital that, frankly, is just going to be funneled or channeled from the single-family rental space into the BTR space.

There’s a company called PPR Capital Management that just launched a $100 million fund focused on build-to-rent properties with the specific investment thesis that a lot of people aren’t going to be able to buy single-family rentals, or they’re going to be afraid of the space, and this is the opportunity for BTR to really capitalize on providing rental product to the market.

The good thing here is that the BTR is effectively carved out of this because it’s purpose-built for rental. It was never built with the intent of providing a home to a family for sale. So a lot of the groups that we’re dealing with, who in the past were considering branching their business out to also include single-family rental, are now saying, “Hey, let’s slow down and just continue to focus on what we know, and that’s BTR.”

What do you think lenders, specifically, are watching as developers begin new projects under the framework?

The days of government not being as involved in housing creation are just over. When you read through this act, you realize that the government, especially the federal government, has tentacles across the entire market.

What we’re seeing and experiencing in real estate investment right now is that it has become increasingly difficult to turn a profit. The Sun Belt is oversupplied, rents are down, vacancies are up. The few segments of the market, or at least one of the few segments of the market that has been incredibly performant, is really anyone who can navigate government housing programs and, in many ways, provide affordable housing. That could be by way of Low-Income Housing Tax Credits or any sort of other government subsidies that encourage housing development. This is going to add jet fuel to that business.

One of the clauses here that I think is probably not as heavily reported is that the act adjusts banking limits for Low-Income Housing Tax Credits or other sorts of subsidies from 15 percent of a bank’s reserve capital to 20 percent. That, in and of itself, is tens of billions of dollars within the banking system that is going to be available for affordable housing developers to really make deals pencil that, frankly, would otherwise not have come out of the ground.

Would you say this bill is going to help solve the country’s housing crisis, or do you think there’s still too much red tape?

It’s a step in the right direction to encourage a lot of the housing development that people need. 

Especially on the lower end of the pyramid or the distribution scale, there’s a lot that needs to be done, just in terms of both red tape and easing construction costs. We’re still in the midst, especially when you think about single-family for sale, of a six-year housing cycle that has been up and to the right, so it still is increasingly difficult to both get projects that pencil because of construction costs and also acquire existing housing. Without a correction, that’s probably not going to change too much.

But I do think this is a step in the right direction. There are some regulatory burdens that it’s attempting to ease, and I do think what this does at the federal level is it allows a bit more autonomy in some cases at the state and local level to make quicker decisions. So, by disaggregating that decision-making process, you’re hopefully able to get more supply built.

The big thing is the devil’s in the details, and investors will find ways to benefit from this bill. That’s how capitalism works, and some of that is going to be institutions who can no longer buy single-family rentals on the open market, which really means auctions and multiple listing service listings. They’re going to have to be more opportunistic in buying housing that needs heavy rehab, and I think that’s a good thing. It’s a good thing that some of the housing stock that probably is well overdue for some investment now has another channel and an incentive for it to get that money.

Any thoughts on the Federal Reserve vote on interest rates this week?

No immediate thoughts right now. There’s probably a 75 to 80 percent chance that rates remain unchanged. So long as that’s the case, outside of the Fed, what’s impacting real estate right now, especially on the multifamily side, is the fact that the 10-Year — and just general Treasurys — are up. That’s really what cap rates are driven by, more so than Fed funds rates. 

So irrespective of what the Fed does, I do think there’s already been an adverse effect on market sentiment for real estate, just because you do have Treasurys and yields that have risen.

Isabelle Durso can be reached at idurso@commercialobserver.com.