Near-term survival loomed as a major concern for small and medium sized multifamily businesses at the Middle Market Multifamily Forum’s sixth annual Northeastern conference. High interest rates, inflated construction costs and substantially decreased transaction volumes are among the hazards facing the sector, said panelists.
Despite the bleak funding landscape, however, speakers remained optimistic that there are pockets of opportunity in the current market, from the affordable housing sector to certain aspects of development and identifying reliable capital sources.
Investors adapt
Many speakers attributed the state of the dealmaking landscape to the Federal Reserve’s policies, which have led to the highest funds rate in more than two decades. As of the second quarter of 2023, investment sales were down by 71.8 percent year-over-year, according to a report from Newmark. Those numbers seem unlikely to rebound soon and waiting out the storm may not be an option. “Survive to ‘25 is not even enough,” reflected Ira Perlmuter, Chief Investment Officer at IJP Family Partners, a family office based private equity firm. “You are going to see 36 months of really tight problems,” he added.
While multifamily is facing broad difficulties, some subsectors are hurting significantly more than their peers. Teodora Zobel, Chief Investment Officer at Midwood Investment & Development, which focuses primarily on opportunities in the Northeast and on the West Coast, identified enterprises that rely on regional banks as facing the most risk, alongside assets that have smaller room for growth. “People won’t just be able to say that market values are the same. There will be a write-down of rent-stabilized apartment buildings,” Zobel said. On the flipside, Zobel identified properties in southeastern markets, such as Orlando and Miami, which have experienced strong in-migration over the last several years, as the most worthwhile pursuits in the near-term.
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Panelists spoke extensively about where they see the most lucrative investment opportunities. Perlmuter said the development of workforce housing around New York City is a “safe bet,” due to the high demand and low supply. Still, building affordable housing around the region is proving to be difficult and uneconomical, especially following the expiration of the state’s 421-a tax exemption, with no replacement on the horizon. For Zobel, despite her firm’s ability to get deals done, the current lending environment around the city has led to “holding your nose cash flow levels,” signed under negative leverage.
Development dilemmas
The dilemmas outlined by Perlmuter and Zobel’s are issues that have impacted the affordable housing sector, as owners and operators face problems balancing accessible rents with a community’s long-term viability. “Are you doing it to solve the housing crisis or are you doing it for economics?” asked Chris Cordes, Real Estate Portfolio Manager at PPR Capital Management. “It has to be a balance between the two.”
That is easier said than done for some owners, who say that a lack of meaningful government subsidies, coupled with the current lending environment, has forced them to convert to market rate or otherwise face unsustainably low property values and net operating incomes. “If you are ready to put your hard-earned money into buying an asset and committing resources, it (becomes) difficult to incentivize people unless a big portion of your business plan is (already) written off,” explained Steven Kachanian, managing principal at Klosed Properties.
Simply put, the government needs to intervene to allow for affordable properties to remain economically viable. “Unless there is some [legislative] intervention… we will continue to see a shortage. There is no incentive to put money into those units,” Kachanian concluded.
Contingencies for success
On a separate panel, a group of capital markets and investment management experts explained how they are adjusting to the current landscape, making the most of stringent lending terms and scarcity of debt.
“Your best lender is your existing lender,” said Gary Newman, Managing Director of BrightSpire Capital. “There is such a dislocation in the market between the bid and the ask that there are not a lot of sales or investment transactions that make a lot of sense to us.”
Some transactions become “victims of circumstance,” said JC Clemens, managing director & chief production officer at Flagship Capital Partners, who noted that successful deals often involve portfolios of thousands of units in states benefitting from strong demographic trends.
Some developers have turned to agency lenders as a last resort, particularly with insurmountably high bid-ask gaps existing in nearly every negotiation. “We’re hoping that they will step up, especially (in place) of small balance lenders, said David Cohen, managing director & chief production officer at Ready Capital, a publicly-traded finance procurer.
All of this is taking place at the same time that more than $1 trillion in existing loans face maturation. Investment experts are hoping that the Federal Reserve eases up on rate hikes and eventually ratchets them down. “Hopefully we’ll see rates coming down, which will give borrowers some breathing room,” said Newman.
