Apartment Investors Share Tactics for Shifting Market

From capital flows to development and investment trends, industry leaders addressed the big picture at NMHC's Apartment Strategies Conference in Orlando.

Talk of multifamily filled the air in Orlando on Tuesday as industry leaders gathered to share insights at the National Multifamily Housing Council’s Apartment Strategies Conference.

Michael McRoberts, PGIM; Hilary Provinse, Berkadia; Ralph Pace, U.S. Bank; Jeffery Black, Colliers International

Speakers in the debt trends panel painted a picture of a market with abundant capital for investment, development and refinancing, pointing to projections by the Mortgage Bankers Association that multifamily lending volume will reach $390 billion this year. That abundance will affect most lending categories, panelists said.

“There’s no shortage of loans to take out construction loans,” said Ralph Pace, executive vice president & Northeast region manager at US Bank. “I don’t see a problem for anyone in  the audience to find permanent financing.” Demand for construction loans continues to be driven by broad-based growth in employment and population.

For their part, debt funds are providing 80 percent financing on three-year to five-year loans at 275 basis points over LIBOR, reported Hilary Provinse, executive vice president & head of mortgage banking at Berkadia. Discussing the availability of permanent financing. 

Fannie and Freddie’s Big Clout

New debt caps established by Fannie Mae and Freddie Mac have also enhanced the GSEs’ participation in the market by supplying consistency and avoiding a wide variety of spreads. As a result, “Fannie and Freddie are going to be in the market in 2020 in a very big way,” predicted Michael McRoberts, managing director at PGIM Real Estate Finance. As the GSEs move toward exiting their years-long conservatorship, another issue to watch will be the implementation of capital requirements.

NMHC attendees race to sessions at the annual Apartment Strategies Conference in Orlando.

McRoberts emphasized the importance of ensuring that the requirements do not give either GSE an advantage over the other. Provinse pointed to a major financing policy shift at the Federal Housing Administration, which is expected to modify the rule that restricts construction loans from being refinanced for three years after a property had been stabilized. That will enable construction loans to be swapped into FHA loans much more quickly.

At the same time, the capital markets face a series of challenges and changes on the regulatory front. The switch from LIBOR to the new SOFR interest rate platform has wide implications. “The industry has a lot of work to do,” said Provinse. “The end of 2021 is going to be here before know it.” Among other issues, the transition will affect loan documents, will eliminate the derivatives associated with LIBOR and elimination of derivatives. Because the transition from LIBOR to SOFR does not represent an exact one-to-one match, plenty of litigation is likely to result. “The lawyers are going to focus on these winners and  losers,” Provinse predicted.

Changing Tide

Development strategies are likewise undergoing their share of changes. Citing a lower rate of return than was generally available earlier in the current cycle, several sponsors reported a shift in approach. 

Kevin Keane, The Bainbridge Cos.; Sean Caldwell, Mill Creek Residential Trust; Tom Bakewell, StreetLights Residential; John Gray, LMC Investments

The Bainbridge Cos. has shifted from being a merchant builder to a strategy of about 50 build-to-sell and 50 percent build-to-hold, noted Kevin Keane, the firm’s executive vice president & COO and the panel’s moderator. Mill Creek Residential Trust is reducing its development map to reflect varying have and have-not dynamics in its markets, reported Sean Caldwell, the firm’s executive managing director.

Economic forces are influencing builders, as well. Labor shortages continue to be a hurdle to development, but developers find some consolation in the stabilization of those shortages. “It’s not great, but at least it’s predictably bad,” joked John Gray, presidents of LMC Investments, an affiliate of Lennar Co. Rent control and affordable housing mandates present an enormous concern.

Rent control regulations in New York, California and Oregon are worrisome, with panelists singling out New York’s as particularly burdensome. The mishandling of affordable housing threatens to backfire, as well. Gray mentioned Chicago’s move to require a 20 percent affordable component without offering developers any offsets in return.  “Not only have they stalled development, but they’ve made the crisis even worse, because there’s less supply,” he argued.

 CEOs Weigh In

Doug Bibby, NMHC; Susan Ansel, Gables Residential; Craig Leupold, Green Street; Hessam Nadji, Marcus Millichap

Capping the day’s discussions, a trio of CEOs took stock of the industry’s prospects and offered optimism combined with realism. “The cycle will turn, but right now it feels to us that we’re in a pretty good place,” said Sue Ansel, CEO of Gables Residential, who is concluding a two-year term as NMHC’s chair this week. Multifamily assets maintain high status among investors, second perhaps only to industrial assets. A new investor class taking greater interest in the sector is foreign capital, a trend that is still in its early stages, predicted Marcus & Millichap CEO Hessam Nadji.

Asked by NMHC President Doug Bibby to name major disruptors affecting the multifamily sector, Ansel said, “We have to reconcile ourselves (to the fact that) the industry is more about cash flow than about cap rates continuing to decline.” That reality, she added, raises the challenges of enhancing revenue and reducing expenses. A longtime advocate of implementing technology, Ansel mentioned the potential of machine learning and artificial intelligence to reduce the expenses of leasing and maintenance.

One macroeconomic need that calls for large-scale action is the mismatch of job skills to job openings, said Bibby. “I truly think we need a Marshall Plan for housing and for the job side of our economy,” he said. Education is an area that demands particular attention, he added. Ansel suggested that immigration policy is making it difficult to address the worker shortage.

Few speakers expressed concern that an economic downturn is imminent, but Nadji offered perspective on strategies that mitigate the impact. In the wake of the Great Recession, he noticed a pattern among company clients that may have been impacted but nevertheless navigated the crisis successfully: They didn’t over-leverage themselves.