Multifamily’s Evolving Market
- Jan 30, 2019
At National Multifamily Housing Council’s 2019 Apartment Strategies Outlook Conference in San Diego, Multi-Housing News sat down with Norman Radow, CEO of RADCO Cos., to discuss how companies should be evolving their investment strategies, the impact of interest rates and the growth of the multifamily market.
How has the influx of purchasing Class B properties changed the dynamics of the multifamily industry?
Radow: The influx of Class B purchases has drastically changed the way we do business in the multifamily industry in several profound and transformational ways. First, until a few years ago, Class B properties were allowed to age into Class C properties. Now, with the urgent need for more affordable housing options, Class B property buyers invest capital to reset the economic clock on these communities. Second, institutional capital is planning to dish out billions of dollars to invest in value-add communities. This capital is chasing yield. Simply put, more capital is being raised than there are Class B deals to invest in, which results in the compression of cap rates despite LIBOR and Treasury rates increasing.
How should companies adjust their business strategies to stay ahead?
Radow: At RADCO, we encourage our teams to stay abreast of market trends, new technologies and seek out innovative revenue streams. While real estate itself is an alternative investment, we are playing differently in our space. In addition to seeking out properties with exceptional value-added potential, RADCO has been partnering with best in class companies in different property classes and markets. We are also now lending capital as preferred equity, which allows us to leverage our experience, platform and brand to help other sponsors. Over the last decade, RADCO has been very successful in the multifamily industry. We are now shifting our focus, radically in some ways, to stay ahead of market trends.
What are some examples you can share from your own company?
Radow: In 2018, we redirected our Acquisitions team to start up RADCO Ventures, a new extension of RADCO that will focus on opportunities that differ from our core business these past seven years, yet leverage all our strengths. These include economic opportunity zone investments, joint ventures in other asset classes, preferred equity, mezzanine financing, and other alternative investments in multifamily deals. With the closing of our first three deals this summer and fall, we are building momentum and expect to close on several more deals this fall. In most cases, we will leverage our experience and infrastructure to manage these assets and ensure their success in the long-run providing an excellent risk adjusted return.
How should the industry be addressing the nation’s affordable housing crisis?
Radow: This requires more than a sound bite. I firmly believe we should, as a nation, bring together the leaders in our industry, finance and government to address this issue with the utmost seriousness. As wealth distribution imbalances grow more noticeable, the need will become even greater, and faster. We keep talking about a crises at the border, but the real crises is affordability, in health care, housing and in most other things, frankly. But housing is a fundamental need, even more so than health care, and we as a nation are spending scant time and resources on this serious issue.
Where do you see the growth of the multifamily market heading?
Radow: We are living through the most extraordinary multifamily cycle. It has become an historically long and robust cycle, in part due to the renting nation phenomenon that I am confident will continue. However, let’s not forget that as unique as this cycle has been, it is still a cycle. Opportunities will always exist. In the coming year, poor execution when values are this high may lead to opportunities for our company. We are also creating our own opportunities by partnering with different types of capital and using our existing capital differently.
Why do real estate investment companies need to build for the middle-class market?
Radow: There is no new supply of affordable housing. Yet, the demand keeps growing, in part due to the unequal distribution of wealth and the myriad of demographic factors we have discussed before. Finite supply plus growing demand equals higher occupancy and revenue. Yet, land and construction costs make it nearly impossible to build for this broader market. Hence, absent new national strategies, supply will barely grow while demand will keep building.
How do you see the volatile interest rate market impacting the economy, and the life of an everyday renter?
Radow: I am not an economist, but rates matter more than ever. We have $22 trillion of debt as a nation. A point rise in Treasuries increases our national debt service 20 percent. The demographic changes leading to the renting nation phenomena, and the fact fewer workers making less are replacing a larger, higher paid generation that is retiring, will stagnate growth. So, debt will eventually act as an elephant on our backs, and with less people to shoulder the weight, I do not see inflationary growth. This is why I believe real rates will stay comparatively low for an extended period of time. At the same time, gyrations in the stock market have spooked a lot of people. Debt yields are low. So, where does capital go to find yield? Real estate. But, within real estate, value-add multifamily is continuing to be the recognized favorite because of the supply-demand imbalance.