Multifamily Housing
We continue to see stagnation in the commercial real estate market. For as long as lenders continue to conceal their problem loans by extending maturities, renegotiating notes by capitalizing payment arrears, or overlooking multiple breaches of loan covenants, this will inhibit any return to market normalcy.
One asset class that has continued to trade through the doldrums is multifamily housing. Thanks in no small part to government sponsored lenders that have continued to supply credit for investment properties and development projects. Mulcahy Capital is being kept busy in the multifamily space, financing apartment investments, however we have seen an uptick from developers requesting construction financing for apartments, student housing and assisted living.
Multifamily Development
There are a number of factors favoring developers undertaking new multifamily developments. There was a drop off in development activity over the past few years resulting in a much reduced supply of new units to the market. Construction costs have also declined in line with the down economy, with some estimates of a 20%-30% drop in labor and material costs. Add these factors to the changing demographics and it would appear that now is a very good time to return to multifamily development.
The baby boom generation has begun to enter retirement age and this will see increased demands on assisted living housing. This generation will be on the look out for premium amenity packages catering to an active lifestyle. The echo boom generation is beginning to leave high school. Their generation is going to college in ever greater numbers creating huge demands on existing student housing which is insufficient in units available and also insufficient in amenities sought after.
Young Graduate Renters
It is not surprising that a recent survey conducted by Apartments.com has highlighted a robust job market as being the number one concern for recent college graduates in deciding upon where to relocate. Rent affordability is the second key consideration. Graduates are newcomers to the job market and their entry level positions typically offer lower salaries which impact their housing expense.
While these young renters look to save as much on their housing expense as possible, they also seek out residences offering the best amenities. They look for apartments offering high speed Wi-Fi connections, and proximity to shopping and recreational activities.
The results of the survey of the top 10 best cities for recent college graduates are as follows: Atlanta, Phoenix, Denver, Dallas, Boston, Philadelphia, New York, Cincinnati, Baltimore and Los Angeles.
What Crash?
Private equity funds and REITs have amassed huge war chests of cash in anticipation of an impending commercial real estate crash. There is documented evidence of both lender portfolio loans and Commercial Mortgage Backed Security (CMBS) loans that are coming to maturity over the next three years that even under the most fluid of credit markets would find it difficult to pass normal underwriting standards. Underlying cash-flows on these assets have deteriorated, capitalization rates have increased and the previous highly levered loans are no longer available.
There is a growing school of thought that this anticipated crash will not materialize. It says that a recovering economy will return cash-flows to previous levels and that this recovery will also return investor demand for real estate which will consequently put downward pressure on Cap rates. This argument would also need to rely on lender underwriting to return to the looser standards from before the credit crisis.
Some recent real estate transactions seem to also belie the crash hypothesis. Prime assets located in prime locations are still commanding valuations comparable to the top of the market. These prime assets will always achieve high premiums and investor interest. As already mentioned, there are war chests primed with cash and pent up demand for transactions. Many of these fund managers need to transact in order to trigger their fees and while waiting for the right distressed opportunities to present themselves they will trade on relatively risk free prime assets at high valuations.