'We've Got To Figure Out How To Turn That Around': Multifamily CEOs On The Industry's Image Problem

CBRE's Laurie Lustig-Bower, TruAmerica Multifamily's Bob Hart, BRIDGE Housing's Kenneth Lombard, Langdon Park Capital's Malcolm Johnson and Avanath Capital's Daryl Carter.

Multifamily landlords are feeling the burn of unfavorable perceptions of their industry.

Affordable and market-rate apartment CEOs speaking at the Bisnow Multifamily Annual Conference this week in Los Angeles agreed that their industry had an image problem.

"We have to change the perceptions of the industry," Avanath Capital CEO Daryl Carter said. Avanath owns and operates about 16,000 apartments across 14 states. More than 80% of their units are affordable in the traditional sense, including tax-credit or Section 8 properties.

Carter said the AMI in the markets where his company is increased by around 12%, but he didn't think that he would be increasing rents that much, even though that measure dictates how much rents at his largely subsidized affordable apartments can go up.

"We have to think about the fact that we could do a 15 or 20% increase doesn't mean that it's responsible to do that," Carter said.

The pandemic brought a roughly two-year streak of runaway rent growth that now seems to be coming to a definitive halt. Stories of how well large multifamily owners did financially during the pandemic were a stark contrast to the tales of families with mounting rent debt.

"I think landlords, unfortunately, have become pariahs," TruAmerica Multifamily CEO Bob Hart said. "And now, we've got to figure out how to turn that around."

Langdon Park Capital CEO Malcolm Johnson, however, had a different perspective, saying that, over the last two years, "I've been met with more optimism and interest from great talent in joining a company like ours."

Langdon Park Capital's focus is on naturally occurring affordable housing in higher-cost areas like Los Angeles and Washington D.C., attempting to fill in the so-called missing middle housing for those who make too much to qualify for low-income housing but who are still renters by necessity because of the high cost of housing.

"I think today's worker wants to have some sort of passion about what it is they do and what it is we do presents that opportunity," Johnson said.

The public's negative views on apartment landlords are more than just words. Carter noted that these negative sentiments have undoubtedly fueled legislation in the Los Angeles area, like Measure ULA, and nationally, as rent cap laws have made a strong showing in markets where they were on the ballot, NBC News reported.

Some panelists acknowledged local legislation was a direct response to that anti-landlord sentiment, one that could have an impact on a big part of their business.

"It's going to affect buying and selling patterns in Los Angeles," Hart said of Measure ULA. It would likely, in the near term, be good for brokers, as some sellers push up their timelines to sell buildings before the tax goes into effect, said Hart, whose firm has over $10B in assets under management.

Panelists also discussed changes to the market that have come from rising interest rates, namely the return of negative leverage, or the phenomenon of interest rates on a property's mortgage being higher than the property's return rates.

"The reality is, we've had a universe where we've done lots of business at higher interest rates and at negative leverage," Carter said. "I think, to me, what stands out in the housing business is that we have an undersupply of housing that is chronic, and the fundamental demand drivers are very, very strong."

Hart said that prior to the Great Recession in 2008, doing deals with negative leverage was not uncommon. Hart said it remained to be seen whether that will once again become normalized and people will find a way to do deals again in similar circumstances.

"We're going to be banking on growth," Hart said. "That's what's driving the durability of this business, and you're going to suffer in the short term from less cash flow. Whether the investor wants to take that ride, time will tell."

BRIDGE Housing CEO Ken Lombard said that he fully expects people with well-capitalized projects to continue to wait for conditions to improve, knowing that the cyclical nature of the business means that conditions will, eventually, improve.

"If you've been around the block, you've seen numerous cycles similar to the one we're in now," Lombard said. Lombard is at the helm of one of California's largest affordable housing developers with a $3B portfolio and 14,000 units under management.

 

 

Source: We’ve Got To Figure Out How To Turn That Around: Multifamily CEOs On The Industry’s Image Problem

https://www.creconsult.net/market-trends/weve-got-to-figure-out-how-to-turn-that-around-multifamily-ceos-on-the-industrys-image-problem/

Rising Rents? Blame the Supply Shortage

Much has been made about rising rents in recent months, often with the implication that they are the result of price gouging. In fact, the explanation is much simpler. It’s simple Econ 101—the U.S. does not have enough housing to meet demand.

How do we know? Because the data tell us so. Double-digit rent growth recorded in late 2021/early 2022 coincided with record-low apartment vacancy rates (i.e., the number of empty and available apartments).

As demand continues to outpace supply, the apartment vacancy rate in the U.S. has been on the decline for over a decade.

Recent research from NMHC/NAA found that the U.S. needs to build 4.3 million apartment homes by 2035 to meet both future demand and an existing shortfall of 600,000 units. That shortage means there are too many people competing for not enough apartments, which drives prices up.

More recent data show what can happen when the supply-demand relationship changes.  In the latter part of the year, apartment demand has slowed because of economic uncertainty and as expected, apartment vacancies are increasing.  Households are doubling up, moving back home, or deciding not to create new households at all. We see this in multiple data sources

• RealPage’s national vacancy rate for professionally managed apartments rose from 2.4% in 1Q 2022 to 4.1% in the third quarter.
• CoStar similarly reported a 30-basis point increase in the national apartment vacancy rate in 3Q 2022.

The result? Apartment owners have begun to offer lower rents to fill those vacant units.

• RealPage’s data show annual rent growth during this period moderated from 15.3% to 10.5%, while rents actually decreased for the past two consecutive months.
• Similarly, CoStar’s data show a 0.4% decrease in asking rents over the past quarter.

Long-term, however, apartment demand is expected to rebound with improved economic confidence, which means we need to keep building new housing despite this temporary lull if we want to avoid large rent increases in the future.

To ensure that supply is built, however, we need to avoid the lure of “quick fixes” like eviction moratoriums and rent control. They do nothing to address the underlying supply shortage. More importantly, they eventually harm the very people they are trying to help by discouraging new housing construction and limiting the financial resources owners have to maintain existing housing.

The apartment industry stands ready to help meet the rising need for accessibly priced rental housing, but we cannot do it alone.

Our housing affordability challenges pre-dated COVID, but the market disruptions created by COVID worsened them. Fortunately, economics 101 and the lessons learned from the pandemic provide us with a guide to solving them. First, we need to build more housing to meet housing demand (the economics lesson), and (2) we need to provide rental subsidies and other emergency funding sources to help keep at-risk, lower-income households housed (the COVID emergency rental assistance lesson).

NIMBYism and antiquated, discriminatory land use policies have shut us out of some communities altogether. But even in communities that want and desperately need new apartment development, we face numerous hurdles that can drive up costs or halt development. While the barriers to housing production and preservation are primarily within the purview of local governments, federal policymakers can play a role by creating incentives for local leaders to reduce barriers and adopt policies that encourage private sector investment in housing.

Examples of actions the federal government can take include:

• Expanding and enacting federal tax credit programs that ease development affordability, like the Low-Income Housing Tax Credit and the Middle-Income Housing Tax Credit;
• Reforming and increasing funding for subsidy programs that address housing affordability, including HOME, Section 8, FHA Multifamily, and CDBG; and
• Providing regulatory relief to reduce development and operating costs by tying other federal dollars (like transportation funding) to incentivizing localities to reduce parking and other land use requirements, streamline the development and approval process and restrict the use of rent control and mandatory inclusionary zoning.

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Source: Rising Rents? Blame the Supply Shortage

https://www.creconsult.net/market-trends/rising-rents-blame-the-supply-shortage/

Mortgage Applications Jump as Interest Rates Finally Drop

For months, mortgage rates rose with no end in sight, and potential homebuyers backed off. Now the reverse is happening.

The average rate for 30-year fixed-rate mortgages fell for the second week in a row to 6.67 percent, according to the Mortgage Bankers Association. It is now down almost 50 basis points from a peak of 7.16 percent one month ago.

In turn, mortgage loan application volume increased 2.2 percent on a seasonally adjusted basis from one week earlier. Refinances increased 2 percent from the previous week, although they were still 86 percent lower than the same week one year ago when mortgage rates were much lower.

“The decrease in mortgage rates should improve the purchasing power of prospective homebuyers, who have been largely sidelined as mortgage rates have more than doubled in the past year,” Joel Kan, MBA’s vice president, and deputy chief economist said in a statement.

The average contract interest rate for 30-year fixed-rate mortgages with jumbo loan balances — greater than $647,200 — decreased to 6.30 percent.

The turnaround may be fledgling and fragile but is nonetheless welcome in an industry that has suffered losses and layoffs this year.

Some signs of trouble in the nation’s housing market did emerge last month. The delinquency rate rose 12 basis points from September to 2.91 percent, driven by a 9.4 percent rise in 30-day delinquencies, according to Black Knight.

The firm noted that Florida led the jump in new early delinquencies, with the state’s delinquency rate rising 53 basis points to 3.42 percent. The rate’s 18 percent increase is likely attributable in part to Hurricane Ian.

The foreclosure process was initiated on 7 percent more properties than in September. But foreclosure starts are still 55 percent below pre-pandemic levels, according to Black Knight.

That is because lenders are going easier on troubled borrowers than they did before the pandemic. They began the process on just 4 percent of seriously delinquent mortgages in October, less than half the rate of the years leading up to the pandemic.

 

Source: Mortgage Applications Jump as Interest Rates Finally Drop

https://www.creconsult.net/market-trends/mortgage-applications-jump-as-interest-rates-finally-drop/

COMMERCIAL RATE SNAPSHOT 12-5-2022 These are the average available rates from eXp Commercial's Capital Partner CommLoan database of 700+ commercial lenders as of 12/05/22 and are provided for comparison purposes only. Actual rates are dependent on property and sponsor. https://www.creconsult.net/market-trends/commercial-rate-snapshot-12-5-2022/

Aurora Starts Process Of Creating TIF District For Hollywood Casino

Aurora is forming a tax increment financing district to help pay for $50 million in benefits for the development of a new complex for the Hollywood Casino.

Aldermen in the state’s second most populous city voted to begin the process of creating a TIF district on a property along Farnsworth Avenue and Bilter Road where Penn Entertainment will build a new $360 million casino resort, the Aurora Beacon-News reported.

Last month, city officials approved $50 million in financial assistance for Jay Snowden’s Penn to move the Hollywood Casino out of downtown to a location closer to Interstate 88. The new facility is set to include 900 slot machines, 50 live table games, and a sportsbook.

Aurora will borrow the $50 million by selling bonds, and the principal and interest will be repaid by the casino’s property taxes. Part of the site is located within an existing tax increment finance district, but the agreement also called for a new micro-TIF for the casino that would last about 23 years and prevent the additional value the new development brings to the property from being taxed for that period.

Under the new TIF district, which the property still needs to qualify for, part of the casino’s property taxes will go into a fund that will be used to retire the bonds each year.

The City Council approved paying $42,000 to Kane McKenna and Associates to do the necessary feasibility study for the TIF district.

Residents against the agreement said they don’t mind the casino moving, but they didn’t want the taxpayers to be on the hook for the bill. Opponents say that Penn Entertainment, which had $2.75 billion in gross profits in 2021, can afford to finance the move and redevelopment without money that would otherwise go to the city for public expenses.

Aside from gambling, Penn wants to build a 200-room hotel, a spa, and several restaurants on its new casino site across Farnsworth Avenue from the Chicago Premium Outlets Mall.

 

Source: Aurora Starts Process Of Creating TIF District For Hollywood Casino

https://www.creconsult.net/market-trends/aurora-starts-process-of-creating-tif-district-for-hollywood-casino/

People need more space fortunately for self-storage

City living comes with cons—and for many, it’s sacrificing square feet. Fortunately for the self-storage sector, less space in the home means more is needed outside of it, causing an increase in storage units near multifamily hotspots.

The decade marked high construction volumes across the U.S., with almost 350 million square feet of storage space delivered from 2012 to 2021, 22% of overall existing inventory. Over the same time, 3.1 million new apartments in 50+ unit buildings were added, and 427,000 new rentals were added to the national market last year alone. But not all metros were created equal—RentCafe and YardiMatrix recently analyzed the country’s largest metros to identify the places self-storage is doing the best, in correlation with a growing apartment market. Chicago was No. 4.

From 2012 to 2021, Chicago added 11.5 million square feet of storage space and almost 72,000 multifamily units, reaching a peak for self-storage construction in 2016 with 2.1 million square feet of space delivered. Yet it’s just the start of what’s to come.

Developers are currently amping up their construction efforts to keep up with demand, despite economic challenges, with 2.6 million square feet of storage space currently planned and under construction.

Still, Chicago’s numbers are low in comparison with metros like Dallas and Houston. People continue to relocate to the Lone Star State from hubs like San Francisco, New York City, and even Chicago, bolstering its economy more and more.

One of the most popular relocation destinations in the country—Dallas-Fort-Worth-Arlington—saw a 17% population growth over the past decade, based on the report, leading, naturally, to increased demand for both housing and self-storage, and the market was quick to respond. Nearly 200,000 new apartments and 20+ million square feet of storage space was delivered during the decade, the most in any metro across the U.S.

Of course, Dallas’s quick recovery post-pandemic allowed for the resuming of construction much sooner than other markets. Almost 2.4 million square feet of new storage space and 26,000 new apartments delivered in 2021, according to RentCafe.

As for Houston, RentCafe also found that young professionals continue to flood in with the likes of Hewlett Packard, Maddox Defense, Axiom Space and Sun Haven relocating to the metro in the past few years alone, resulting in 15 million square feet of new storage space and 142,000 apartments delivering during the decade.

 

Source: People need more space, fortunately for self-storage

https://www.creconsult.net/market-trends/people-need-more-space-fortunately-for-self-storage/

 

U.S. Apartment Rents Decline For Third Straight Month

An apartment listing service has recorded the sharpest fall in rents since it started tracking the market five years ago, and it anticipates further declines through the winter.

Apartment List reported that its rent index fell by 1% nationally in November, the third straight month of declines. While rents typically dip this time of year, this is the second straight month of record declines, indicating a pricing correction due to changing economic conditions and cooling demand, according to the report.

"The timing of the recent cooldown in the rental market is consistent with the typical seasonal trend, but its magnitude has been notably sharper than what we’ve seen in the past, suggesting that the recent swing to falling rents is reflective of a broader shift in market conditions beyond seasonality alone," the report says.

Prices are up 4.6% year-over-year, a far cry from the record-setting pace of rent increases last year, according to Apartment List. In fact, rent growth has been slowing for months, and Realtor.com reported that it reached its slowest pace since early 2021 in September.

Third-quarter reports have also signaled that demand is shrinking. RealPage recorded 82,000 units returning to the market in Q3, the first time in 30 years that has happened, according to a report released in October.

"We did expect to see those numbers come down, but what was surprising is the level to which they did decelerate,” RealPage Head of Economics and Industry Principals Jay Parsons told Bisnow in October. "And then ultimately, seeing negative absorption in Q3 was a huge surprise."

The news of slowing growth is tempered by the fact that the overall pace of rent growth for 2022 is still higher than pre-pandemic rates, according to Apartment List. The firm's economists reported that vacancies are also lower than the pre-pandemic norm but may return to that benchmark in the spring of 2023.

 

 

Source: U.S. Apartment Rents Decline For Third Straight Month

https://www.creconsult.net/market-trends/u-s-apartment-rents-decline-for-third-straight-month/