Multifamily Strength, Affordability Issues to Persist in 2018: Freddie Mac

By Sanyu Kyeyune

David Brickman

Last month, real estate dealmakers converged in San Diego for the Mortgage Bankers Association’s annual CREF/Multifamily Housing Convention & Expo. At the conference, David Brickman, executive vice president & head of Freddie Mac Multifamily, sat down with Multi-Housing News to offer his perspective on where the industry’s headed in 2018.

Which trends are likely to have the greatest impact on the multifamily industry in 2018?

Brickman: Multifamily fundamentals continue to be very strong, with a great deal of capital flowing into the industry. When you look at multifamily through the lens of housing, you come away feeling very optimistic about the prospects. But first, you need to consider the broader housing shortage in the U.S.: We haven’t been producing enough housing, more so on the single-family than on the multifamily side. House price growth has been rising at an unsustainable rate, while construction and land prices continue to increase. While multifamily supply has gone up, aggregate housing is still nowhere near where it needs to be, just to be able to provide new housing for new households across the country.

Still, there are a number of positive tailwinds for multifamily, such as demographic shifts—delayed childbirth and marriage—and changing preferences, such as greater comfort with renting over owning. There’s also been a renewed focus on living in or near urban areas, and if people are living in denser cities, renting is going to be the more affordable option by virtue of the spatial layout. All of these factors contribute to healthy demand growth, and since supply in most cases is not keeping pace, the bigger issue becomes the diminishing availability of affordable housing, rather than concern of deteriorating multifamily fundamentals.

While there’s been a significant uptick in property values, we still have a lot of capital looking to invest in multifamily and not enough availability of assets for that equity or debt. This dynamic creates a very healthy environment for investment. We’re seeing rapid growth in demand from multifamily investors for the unguaranteed securities that Freddie Mac sells. Overall, the outlook is positive, but of course, we need to keep an eye on certain things. If interest rates or inflation rises drastically, that could create some disruption.

Amid a lengthy economic recovery, what risks does the multifamily industry face in 2018?

Brickman: When you consider the nature of this recovery and the economic fundamentals I described earlier, there is not necessarily a compelling reason to believe we’re headed toward a correction. We continue to be in a low-rate, low-return environment, even though the issue is the potential increase in rates, as represented by the volatility we see in the stock market. The regular course of inflation moving up slightly is not what I’d be most concerned about, rather a rapid shock to the economy.

The biggest policy threat is related to a lack of certainty on a variety of issues. For example, potential policies that limit rent growth might make real estate less of an effective inflation hedge. Market players like certainty, so, as with economics, drastic shifts in policy could have a negative impact on capital flows.

As another example, tax reform is generally positive for the industry, especially the way the reduction in rates affects pass-through entities and encourages investment in real estate, but the bill passed in a very partisan fashion. After the market has adjusted, if this regime were to swing in the opposite direction—which is not unlike what we saw in the early 1980s, when the 1981 tax act was partially reversed by the 1986 bill—then that rapid shift could counter the benefits of tax reform.

Additionally, the multifamily market has benefited from significant capital inflows from abroad, which have been a big part of the sector’s growth story. If there were to be shifts in the relative value of the U.S. dollar, for example, it could have an effect on the attractiveness of U.S. investments overall, not just multifamily real estate. If we saw some significant reduction in the foreign capital being invested in U.S. multifamily assets, then that would impact property values.

Which markets are feeling the greatest impacts of multifamily supply growth?

Brickman: I’m not too concerned about supply in the medium to long run, but there are some markets where there has been excess supply left over from the run-up in new deliveries over the past few years. Rent growth slowed while that supply was being absorbed, and then it began to pick up again when deliveries plateaued. When you broadly look at multifamily as a whole, the new supply is not as significant of an amount and tends to be concentrated at the highest price point in the market. It does take some time to absorb those units, which is more of a leasing issue with regards to providing concessions.

The biggest problem in terms of housing and housing affordability is that it costs too much to build housing. In real dollars, incomes have largely been flat, while housing costs have definitely gone up.

This means that developers have to consider not only land costs but also how long it takes to build a single-family home as compared to a multifamily property. This is why most of the new multifamily construction is Class A, high-end properties. The same goes for the single-family market, where you rarely see starter homes being built. Instead, you see more home built for buyers who are trading up.

The U.S. is not producing enough affordable housing to keep up with demand, and demand is likely to tick up with economic growth. It’s an urgent problem, and that’s why Freddie Mac’s financing aims to preserve the supply of affordable rental housing by driving capital into the affordable and workforce housing space.

How is Freddie Mac leveraging technology in its operations?

Brickman: When you look at our business and how we process it, it looks a lot like the residential market did 30 years ago. It is a still a very high-touch, labor- and paper-intensive business. Freddie Mac is committed to bringing new products to the market, and we see huge potential for technology to change the way we do business.

There certainly is an opportunity to use some of the advances we’ve seen in the rest of the financial services industry for multifamily and commercial mortgage underwriting. These could help reduce costs, expedite processing and provide better service. We intend to make significant investments to move in that direction. The environment is ripe for disruption, for someone to come along and rethink the way commercial mortgage processing is done, and we want to be a disruptor.