A Q&A Session with Ivan Kaufman and Sam Chandan on multifamily construction, lending and the small balance apartment sector.
For over 20 years, Arbor has helped multifamily real estate investors achieve their financial goals. In March 2017, Ivan Kaufman, Chairman, President & CEO of Arbor, sat down with Sam Chandan, Silverstein Chair of the New York University SPS Schack Institute and Founder of Chandan Economics, for an in-depth conversation on the state of the multifamily market. Here is the second part of that conversation.
(The following is excerpted from the March 10, 2017 episode of The Real Estate Hour, a weekly SiriusXM Business Radio show powered by the Wharton School of Business. The text below is edited for clarity and brevity. You can listen to the full show by clicking here, or read the first part of the Q&A by clicking here.)
One of the things that I’ve been hearing from colleagues is a sense that some of the major construction lenders — particularly regional banks and larger community banks — are beginning to tighten up on standards. Have you seen real change in the availability of construction loans?
The appetite for construction lending has changed dramatically. There are very few lenders who are active in that space, and the advance rates for construction loans have gone down significantly. You used to be able to borrow at 70%, perhaps sometimes 80% of value — that’s now down to the 50% to 65% range.
The number of lenders went from around 15 active lenders down to 3 to 5 lenders. So there’s clearly a shortage of construction lending from the commercial banking industry. A lot of that is being made up by the private sector now. You have many private firms such as Arbor who are now more actively engaged in the construction lending business.
With loan to cost numbers down to the 50% range and data showing meaningful increases in underlying construction costs, it’s got to be getting a little bit tougher to build. That has to be acting as a headwind to the pipeline.
Add in rising land prices as well. It is much more difficult to build and deliver in today’s climate.
We’ve talked about the national level, but when we’re looking at the apartment market on a local basis, where are you seeing the strongest gains in property income?
The gateway cities — whether it be New York, Los Angeles or San Francisco — have shown tremendous demand. There has also been a lot of building. Still, there are great fundamentals.
It’s interesting because everybody is waiting for the shoe to drop, to see that perhaps there is too much unit delivery. But these markets are still consistently tight. We’ve been reading that there are now rental concessions for the first time this cycle in New York and some other gateway markets due to supply. But the absorption is still strong overall.
It’s all about changing market conditions in this week’s collection of the top multifamily reads. With 1Q commercial/multifamily borrowing up from a year ago, investors are still actively searching for upside potential in commercial real estate. Much of this is driven by where young renters are choosing to lives, so an examination of the top suburban markets for where Millennials are moving is timely. Multifamily Executive has also put together a list of the Top Rental Markets for Millennials that takes into account commute time, school rankings and median rents. Of course, in ten years, those commute times could be much shorter thanks to self-driving cars and their potential to alleviate traffic.
via Mortgage Bankers Association – May 4, 2017
“MBA said a rise in originations for healthcare, industrial and multifamily properties led the overall increase in first quarter commercial/multifamily lending volumes compared to a year ago.”
via Time – May 3, 2017
“Thousands of millennials are moving to the suburbs of Riverside, Calif., San Antonio, Texas and Orlando, Fla. The burbs of those three metro areas saw the greatest growth in the number of adults aged 25 to 34 between 2010 and 2015.”
via Multifamily Executive – May 3, 2017
“What’s so special about Milwaukee? Besides its famous breweries, the Midwestern city is home to the country’s top rental market for millennials, according to HomeUnion, an online real estate investment management firm.”
via CNBC – May 2, 2017
“Driverless cars could make these parking lots a relic of the past and save on costs. Some architectural companies are already preparing for the obsolescence of the parking garage.”
via Axiometrics – May 2, 2017
“As the slow recovery from the Great Recession nears the end of its eighth year, many people are starting to wonder when the U.S. economy may next go into recession, and how that might affect the apartment market.”\
via Builder – May 2, 2017
“The technology is still in its infancy, but it could greatly change the way buildings are produced. The goal of the MIT team was to create a robot and a building process that mimicked the way things are built in nature.”
via U.S. News – April 28, 2017
“If initial experiments and trials are successful, renters throughout the U.S. could be seeing smart-home technologies like Amazon Echo and after-hours concierge chatbots turn an apartment rental into a personalized experience aimed at maximum convenience.”
A Q&A Session with Ivan Kaufman and Sam Chandan
For over 20 years, Arbor has helped multifamily real estate investors achieve their financial goals. In March 2017, Ivan Kaufman, Chairman, President & CEO of Arbor, sat down with Sam Chandan, Silverstein Chair of the New York University SPS Schack Institute and Founder of Chandan Economics, for an in-depth conversation on the state of the multifamily market. Here is the first part of that conversation.
(The following is excerpted from the March 10, 2017 episode of The Real Estate Hour, a weekly SiriusXM Business Radio show powered by the Wharton School of Business. The text below is edited for clarity and brevity. You can listen to the full show by clicking here.)
Ivan, the inauguration is behind us and the President is well into his first 100 days. Based on what you’ve seen so far in terms of this administration’s policy priorities, are there any changes in your outlook for the economy overall in 2017?
We all understand that interest rates have risen — and they’ve risen significantly. The 10-year Treasury rate, for example, has gone as high as 2.6%, and it’s floating in the 2.4% to 2.5% range. So it’s up 75 to 85 bps, and there’s an expectation that there will be some level of further increases on a quarter-to-quarter basis. Higher rates certainly have a direct impact on the valuation and underwriting of multifamily assets.
With respect to the other policies that are being discussed, I think it’s early. Clearly, there is the sense that there is going to be some level of economic prosperity and job growth within the United States. These factors have positive influences on rental growth and homeownership. But I think it’s too early to really understand the impact of some of the proposed policies.
I think we economists have a very similar sense of things. It is still unclear as to the exact policies that will be enacted. But there does seem to be this sense of optimism. When we look at things like the consumer confidence indices or measures of sentiment — people are fairly confident. I think that’s part of what’s feeding into the higher interest rate environment.
As you have pointed out, we have seen signals from the Federal Reserve that they anticipate a series of rate increases over the course of 2017.
How does optimism for the economy feed into expectations for multifamily demand drivers? Here I’m thinking about growth in the number of rental households. What is happening with job growth? Do you see it potentially moving in tandem with income growth over the next year?
Wage growth and rental growth have not run in tandem. Rental growth has clearly outpaced wage growth. When thinking about job growth, we already have somewhat of a tight labor market in terms of unemployment. It’s logical to take the position that additional job growth will yield some wage growth. This has an impact on underwriting multifamily assets.
Most lenders project flat rental growth when looking at property. We’ve had unprecedented rental growth over the last five to seven years. We’ve seen that in spite of the fact that the wage growth has not been that dramatic. If in fact we see some real job growth — which will translate into some wage growth — perhaps there will be some additional growth in rents.
But on a macro basis, flat rent growth is the way creditors are viewing rental income streams for the future. There are pockets with supply and demand imbalances which will see some rental growth. But overall, a flat to modest increase is the outlook.
Higher interest rates obviously have a direct impact on the mortgage rates that we pay in the United States. So much of the dynamic following the housing crisis has really been about the interplay of the questions: Do I want to own a home? Can I get a mortgage? Do I want to be tied down? Do I want to be in a suburban area?
I think you have continuing demand for rentals. But as mortgage rates go up, do you see this potentially having a significant impact on the balance of renting versus owning? Higher interest rates make home buying more expensive.
I think first you have to understand how quickly the affordability factors have changed since the election. Rates went from 3.5% or 3.75% up to 4.5%. That’s a 25% increase. Most people buying homes are fairly stretched as is. So I think either they can’t afford the home they were looking at before, or there will be some level of price adjustment.
If they can’t afford the home they were looking for, then perhaps they will look towards rental housing. There could be a little bit of a boost in rental housing. I don’t think home prices will adjust down in such a short period of time. Maybe we are looking at a short-term demand driver for rental housing until interest rates are sorted out — or until home pricing has adjusted accordingly.
We do tend to focus a lot of our attention on the relatively younger renter — the Millennial demographic — that wants the walkability and the flexibility that comes with being a renter instead of an owner. But on the other side of the demographic spectrum, we’ve also got Baby Boomers that are increasing in numbers very rapidly. We might conflate Baby Boomers with empty nesters who have seen their youngest children move on to start their own families. Is this group part of the demand equation right now?
Well, it’s interesting. I think the dynamics of the empty nester, later household formation and the psychological impact of the housing crisis have all combined to contribute to higher demand on the rental side of the market.
With later household formation, apartment living and urban demand may begin to translate back into homeownership at some point. We haven’t seen it yet, but we’ve heard from people who have been renting that are now starting to have families. They are looking back out to the suburbs. But we haven’t seen the full materialization of this trend yet.
(Stay tuned for Part II of Ivan Kaufman and Sam Chandan’s conversation on the multifamily market.)