Cautious Optimism at NMHC Apartment Strategies

In this environment, success calls for being both creative and realistic, panelists said.

Panelists at the National Multifamily Housing Council’s 2024 Apartment Strategies Conference are taking the threat of short-term operational headwinds seriously despite striking a generally optimistic note about the industry’s future.

Economic calamity is expected to be avoided on a macro level, with even a worst-case recession expected to be mild. That expectation, alongside the multifamily sector’s strong fundamentals, is cause for optimism.

However, difficulties around financing and property operations, not to mention burdensome public policy, can make the sector tough enough to navigate.

Relatively rosy economic outlook

Orphe Divounguy, senior economist at Zillow, said a slowdown in rent growth, which accounts for 40 percent of the Consumer Price Index, is part of a larger “normalization in the housing market.”

“If rent is following market rents, there isn’t much inflation to speak of,” said Divounguy, adding that he expects a series of interest rate cuts to occur in the second half of the year. “I don’t have a crystal ball, but looking at the indicators tells me rate cuts will happen in 2024.”

Cristian DeRitis, senior economist at Moody’s Analytics, agreed, noting that other shocks to the economy have had a limited impact on Core PCE. “(It) didn’t budge when we had the debt ceiling crises or the Russian invasion of Ukraine,” he said. “By the end of the year, I predict that we will be close to the Fed’s 2 percent.” The current rate of 2.9 percent is within “spitting distance” of the Federal Reserve’s target, DeRitis observed, making rate cuts all but inevitable.

Despite their tempered optimism, the panelists were sober in their assessments of the state of multifamily deal-making, especially considering the stubbornly high cost of capital. “Lower rates would be helpful, but that is not the only reason why transaction volumes are so low,” DeRitis explained. “I don’t see a rush of capital coming into the market to support a large volume of transactions,” he added.

While geopolitical headwinds, insurance rate hikes and struggles with affordability all present potential challenges, Divounguy does not anticipate any adverse effects on the economy and the sector’s general trajectory. His only qualms are in comparison to multifamily’s success in 2021 and 2022. “I am positive about the foundation, but how quickly do we grow? I don’t see a return to the heyday of a year or two ago.”

Reflecting on the economic outlook, Jimmy Hinton, chief revenue officer at Newmark, sees a more moderate Fed policy not just motivating more transactions but also the type taking place. “Departing NMHC, buyers are not only more eager to deploy capital in 2024 than we anticipated, but they are also increasingly interested in investing in common equity which is in contrast to the structured equity they sought last year,” Hinton told Multi-Housing News. “All of these nuances combine to upgrade our outlook for 2024,” Hinton added.

Pockets of opportunity

Demand remains historically high, while supply has been inconsistent in meeting the needs of renters. “It’s not an issue of demand—it’s an issue of localized supply,” observed Jeff Adler, Vice President at Yardi Matrix. The Sun Belt and Mountain regions, home to some of the nation’s largest development pipelines, have fared far better than the Northeast and West Coasts. Still, Adler noted that some Midwestern markets stand to do well despite “not having a lot of supply coming”.

At the same time, shortages in some regions may not necessarily be a bad thing. Some Midwestern states actually stand to benefit due to a growth of manufacturing and tech jobs in places like Columbus and Cincinnati, and lower development risks in comparison to Florida, Texas and elsewhere on the East and West Coasts. “Some of the biggest opportunities are when a city changes its fundamental character,” Adler explained. “Some of these Midwestern cities are in a position to do that in five or 10 years,” he added.

For the panelists, the biggest obstacles to mitigating these shortages are capital costs and regulations that make multifamily housing more difficult to build. Sun Belt markets, which tend to have more relaxed regulatory environments, remain the most favorable for developers, with some experiencing oversupply.

One side effect of these trends has been Class B and C product widely outperforming Class A due in part to their more stable rents and a larger pool of renters looking to live in the spaces.

The players get creative

Those experiencing these struggles in real time are developers, owners and operators, who have had to get creative both in consistently building new communities and in keeping them affordable for their targeted renters.

Developers’ struggles to acquire construction financing is not helping, either. (It’s) going to remain very challenging, regardless of geography,” Hinton said. “We do not anticipate a meaningful increase in the willingness of construction financiers or joint venture equity to provide capital for development in 2024.”

Marc Norman, Associate Dean at the NYU Schack Institute of Real Estate, picks the brains of development experts from Grosvenor, The Michaels Organization, AOG and Hines about how they are adapting to the industry’s acute headwinds. *Photo by Gabriel Frank*

Still, many high-profile developers have enjoyed some more localized success. For Mick Flanagan, president of development at The Michaels Organization, joint ventures with smaller developers make a big difference. These partnerships help build relationships with otherwise hesitant lenders. The reputation of Flanagan’s company, coupled with local market expertise, has proven to be a winning combination. “We joint venture with other small developers and we find a natural pipeline in terms of folks looking to us for capital sources,” Flanagan said.

In addition to working with local multifamily players, developers are also building relationships with local governments and employers. One example is The Michael’s Organization’s partnership with Disney to build 1,500 units of attainable housing. Others have partnered directly with local governments, seeking to maximize tax abatements while minimizing infrastructure costs.

To some panelists, advocacy is important for positively affecting local housing rents and affordability. Angela Biggs, managing director of investment at Grosvenor, encourages involvement in local municipal meetings. For Biggs, simply voting for favorable candidates and policies in local elections is one of the most effective tools in the arsenal of building more housing.

Similarly proactive is a desire to innovate, said Biggs. This can include utilizing AI in building operations and using more sustainable construction materials. Both make projects more palatable for local residents and their governments while reducing embodied carbon in construction and operational costs. “We hope to be at the beginning of the curve as these costs go down (and) the technologies get adopted,” Biggs noted.

Such initiatives are just as much a public good as they are a business strategy. Reflecting on the panel discussion that he moderated, Marc Norman, Associate Dean at the NYU Schack Institute of Real Estate believes that both developers “can’t do it alone,” even with the added crutches of agency lending. According to Norman, developers should recognize the limitations of attempting to vault over every regulatory hurdle, but at the same time should try to keep their developments both interesting and affordable. “You build in the places where you can,” Norman told Multi-Housing News.

Consequently, some more affordable duplexes, garden-style properties or even single-family rentals could add to the mix, according to Norman.

Willy Walker, Chairman & CEO of Walker & Dunlop, talks the present state of housing policy with Barbara Frommell, Senior Director of Government and Community Relations at AIR Communities, Mike Kingsella, CEO of Up For Growth, and Ben Metcalf, Managing Director of the Terner Center for Housing Innovation at UC Berkeley. *Photo by Gabriel Frank*

Developers are not the only ones who have had to get creative. Owners and operators have as well, with particular challenges arising in the realm of heightened insurance costs, competition for renters, sustainable operations and government interference.

Solutions are often local, however. Developing in markets where zoning is less restrictive or nonexistent and advocating for more lenient regulations remains a priority. For sustainability, installing onsite solar panels for power generation and electric vehicle chargers is key.

However, all the amenities and aesthetics in the world are no substitute for reliable, consistent and speedy communication with prospective renters, said Chris Lahna, chief property management officer at Dominium. “Even if they know your brand, if someone else responds to (an inquiry) faster, (they) are going to get their attention.”