With the longest U.S. economic expansion in history now officially confirmed by the National Bureau of Economic Research, it’s time to take a closer look at the potential scenarios that might play out going forward. Although the multifamily property segment is strong, displaying healthy fundamentals, it is now more important than ever to plan and invest for the long term.
Al Brooks, head of commercial real estate for JPMorgan Chase, talks about the looming risks for investors and developers and how they should be prepared for a correction in 2020.
What are the biggest challenges in the multifamily landscape?
Brooks: One of the biggest challenges facing the industry is an increasing need for low- and moderate-income housing. Rent costs have continued to rise in major markets across the U.S. and there aren’t enough units being built to meet the demand for more affordable living options.
How did the price of capital change for multifamily investment?
Brooks: We haven’t seen a shortage of capital and there’s still a good amount currently available to industry investors and developers. Pricing is getting more aggressive and we anticipate this trend to continue throughout the year.
How have the needs of borrowers changed in the last few years? What do you expect going forward?
Brooks: Our multifamily clients have outperformed, particularly in urban markets, as demand for rentals closer to city centers has continued to grow. Younger generations are trading in living space for a better location within close proximity to vibrant metro areas. As a result, real estate borrowers have continued to look at refinancing and development opportunities in core urban markets, and we expect that to continue.
We’re also seeing more real estate investors and developers looking to innovate and streamline their businesses for better and faster results. Technology is increasingly impacting the real estate sector, bringing opportunities to help improve the way all industry players have been doing business for decades, and this will only continue. For instance, we’ve digitized our loan process and brought down controllable cycle times—now 50 percent of our Commercial Term Lending business is done in under 30 days.
Competition is growing in the financing sector, due to the significant influx of capital. How is this manifesting in the multifamily segment?
Brooks: The multifamily space is seeing a lot of activity, with low vacancy rates across core markets, and it’s attracting more capital. As a result, our clients are continuing to find opportunities to make strategic investments in key markets across the U.S.
What do lenders need to know about risks in today’s market?
Brooks: The multifamily segment continues to see activity in major markets. However, commercial real estate developers and investors should be prepared for a future correction. Although the multifamily segment is benefiting from lower rates and a strong economy, it’s important to maintain a fortress balance sheet for the long term and be ready for anything in a changing and uncertain marketplace.
What will the main trends and challenges be in multifamily lending as we head into 2020?
Brooks: Heading into 2020, we’ll see a few trends carry over from this year. We expect continued demand for affordable and workforce housing, which drives a greater need for rent controlled units in core urban areas.
The industry has been enjoying a long uptick and as we get closer toward the end of the cycle, we also expect to see more real estate players planning for a correction in 2020. Investors and developers can plan ahead and should be frequently testing, building the liquidity they need and ensuring they aren’t overleveraged to help withstand a future downturn and beyond. The winners over time are the ones who have the liquidity to act on opportunity or, in other words, the ones who can buy when others need to sell.