Wrap Up Report: NMHC 2014 Apartment Strategies Conference
At the 2014 NMHC Annual Strategies Outlook Conference, NMHC President Doug Bibby outlined the Top Ten list of multifamily conventional wisdom that he hears every day in the policy arena. “Because we expect our nation’s housing policy to be on the defense for the next few years, we need to determine whether or not these sound bites really reflect what’s going on in the multifamily industry,” said Bibby.
So expert participants in the conference’s “Reality Check on Conventional Wisdom”panel were called upon to either confirm or refute the Top Ten list:
1. Whatever happens to Fannie and Freddie borrowing costs are going up.
Truth. “When GSE reform is complete, I believe there will be something - guarantee fees - that will cost the borrower something,” said David Schwartz, CEO and co-chairman of Waterton Associates. “On the Commercial Mortgage-Backed Securities, or CMBS, side I see similar issues as they implement different fees that will affect borrowers.”
2. There is more than enough capital “out there” to meet the industry’s needs overall.
Truth (sort of). “There appears to be plenty of capital out there, but if you get outside the primary markets, it’s probably much more difficult to borrow money,” said Greg Pinkalla, COO of Fairfield Residential.
3. We are starting to overbuild in more and more markets and we are building only high-end properties.
Conventional Wisdom. My answer would be simply “no” said Ron Witten, president of Witten Advisors LLC. “Demand grew faster than completions and there is a relative shortage in place today in the apartment sector,” he said. “The sector is only beginning to catch up with the undersupply in those markets.” Witten added that high-end properties are definitely not the only ones being built. “The truth is that Low-Income Housing Tax Credits, or LIHTC, starts and tax exempt bonds are really aimed at the middle of the market. We are building for both middle- and upper-price points as the economics dictate.”
4. Single-family rentals are no threat to our growth prospects as an industry.
Conventional Wisdom (sort of). Schwartz says that although he believes single-family rentals are not a threat, “They are ankle biting us a little bit. For example, we are losing residents to home rentals in Las Vegas.” However, he points out that the residential profile of single-family home renters is different from multifamily renters. “Our residents are single, less likely to have children and are interested in meeting other singles,” said Schwartz. “Single-family rentals attract middle-aged couples with children, so they would not provide a significant threat to multifamily.”
5. Millennials are the key to our future success, baby boomers are a side story.
Conventional Wisdom. Witten emphasized that the market will need to build more units for both sectors and that baby boomers will have a significant impact on the industry. In addition, panelist Mary Ann King, president of Moran & Company, pointed to recent data from NMHC research which found that “demographic trends pointed to baby boomers becoming a much more important customer segment in the coming decade.”
6. Renting is the “new normal,” a true generational shift in psychology.
Conventional Wisdom. Although it’s easy to make this assumption, the panel experts don’t see a psychology shift. Instead, they said, renters and homeowners are inherently different. “We continue to believe that homeownership is tied more to life stage,” said Witten. “Young people don’t want to be tied down, but once they get married they’re looking for good schools - and that means moving to suburban areas and not urban centers.” Schwartz agreed, but he also believes that renting is becoming a much more acceptable way of living as a result of the Great Recession. “In this prolonged down economy, renting has made sense because finding jobs and making money has been more difficult,” he said.
7. Ground up development makes better economic sense (with too much capital chasing too few purchase deals).
Conventional Wisdom (sort of). All the panel experts agree that this really depends upon the market. Specifically, ground up development is advantageous for a core strategy in coastal markets, but in constrained markets it makes less sense. “Not only does the type of capital influence your investment, but also whether or not it’s a constrained or coastal market,” said Pinkalla.
8. While many investment strategies can work, the bi-coastal or the (“sexy six”) markets match investors interest.
Conventional Wisdom (sort of). We know that the “sexy six”- Boston, New York, the San Francisco Bay Area, Southern California, Seattle and Washington, D.C. - never have a problem drawing the interest of investors. But according to Pinkalla there are other investment strategies that make a lot of sense if you’re looking for higher yields and are willing to take a risk. “If you’re a coastal centric investor, you’re going to miss the story of the next several decades,” he said. “Don’t think technology centers like Silicon Valley in San Francisco, think energy centers in cities like Dallas or Pittsburgh.”
9. Submarkets are always key but the smart money is on mediocre submarkets in great metros vs. great submarkets in mediocre metros.
Conventional Wisdom. “‘Location, location, location’ has always been an important threshold,” said Schwartz. “We have violated that threshold and it doesn’t work very well.” He points out that some people are making money in mediocre submarkets in great metros because they bought in 2010 through now - so that’s why this is being said now. “During a significant economic recovery you can get away with it, but at this stage in the recovery you wouldn’t,” said Schwartz.
10. This multifamily cycle will last longer than the average for a wide variety of reasons.
Truth. The panel experts agreed that the young population is a primary reason why this multifamily cycle will last longer. “The young adult population continues to grow and there is more growth to come,” said Witten. “Young people represent a lot of pent up demand that will be released out into the market.” Schwartz added that this would be particularly true if there is significant job creation and growth. “If that happens, it will enhance the cycle,” he said.