Thanks for Joining Us in Miami—and Online!
Last week, NMHC welcomed multifamily economists, researchers, analysts and self-identified data nerds of all stripes to Miami for the annual NMHC Research Forum. For the first time, the program was also available via live stream for those unable to attend in person.
The topic du jour decidedly was whether a recession was a go or no-go. However, discussions also centered around capital flows and investment trends, the changing regulatory environment, demographics, new supply and much more.
Here’s a look at our top five takeaways from the event.
A year ago, the Federal Reserve began tightening monetary policy to counter inflation. Raising the Fed funds rate by 450 basis points was widely expected to result in recession, yet the unemployment rate is at a 50-year low while consumer spending remains robust.
But give it time, said Ryan Sweet, chief U.S. economist for Oxford Economics. “A recession is more likely than not. It should come in the second half of 2023. It’ll be mild, your garden-variety downturn.”
Sweet said a key metric to watch was the “prime age in employment to population” ratio, which measures workers ages 25 to 54. It’s very strong right now with more than 80% of those in that category employed.
And that’s really frustrating the Fed. The Fed needs the unemployment rate to rise to somewhere between 3.5% and 5%. However, many companies, particularly in retail and restaurants, are hoarding employees, hedging recessionary fears by cutting hours in lieu of layoffs.
As a result, the Fed is not just hitting the brakes when it comes to monetary policy, it is pulling the emergency brake to try to hit their goal of 2% inflation. Experts expect not only a potential further tightening in May but more interest rate hikes.
Investors are increasingly factoring the severity of some of these regulations into their investment decisions. During a panel discussion, Greg Willett, first vice president and national director of research for IPA Advisors, made the case that apartment investment for dealmaking lately has been flowing to low-regulation markets and away from those with more regulation.
Sunbelt markets account for the bulk of these low-regulation markets. And it’s there that the lion’s share of deal flow and dollars are going. In contrast, the Northeast, Chicago, the West Coast and Washington, D.C., are more highly regulated. High-regulation markets have accounted for about a third of all transactions over the past two years. However, the share used to be much higher. High-regulation markets accounted for about half of all transactions from 2010 to 2017, with the decrease in share beginning in 2018. In the past 10 to 15 years, only 35.7% of all transactions occurred in highly regulated markets, Willett said.
Investments in new development and construction are following a similar pattern but not as pronounced. Expensive gateway markets are still attracting development deals, but similarly, companies are looking to diversify their portfolios a little more.
Rent control is the big regulatory burden that bogs down markets, as has played out most recently in Oregon and St. Paul. Results from the June 2022 NMHC/NAHB Cost of Regulations Report found that nearly 88% of respondents reported avoiding working in jurisdictions with rent control.
January 2022 NMHC Quarterly Survey of Apartment Conditions found that roughly one in four respondents (26%) said they had cut back on investment or development in markets where the local jurisdictions have either imposed/strengthened rent control measures or were considering doing so.
But rent control isn’t the only regulatory issue stymying investment activity. Pandemic-induced eviction bans also have given investors cause for pause. Los Angeles just ended what had been the longest-running ban. Collections there were habitually problematic as a result because there were no consequences for nonpayment. People simply chose to not pay their rent.
Somewhat related to evictions, resident fraud is an emerging regulatory issue that could ultimately ripple through the investment world. Resident screening practices are under attack in some places and yet operators are struggling mightily with rampant fraud. Willett said it was estimated that as many as 30% of renter applications will be fraudulent in some markets. Sixty percent of residents got into their homes with fraudulent IDs.
Storms, floods, droughts and other extreme climate events have increased casualty risks greatly across all real estate classes. Insurance costs globally have been up, up, up for the past five years—and are all above the 30-year average. Insurers are now looking more immediate at 5- and 10-year trend lines instead, with the result being skyrocketing premiums as they reprice risk.
Industry experts don’t see these trends reversing as the climate crisis accelerates.
During a related panel discussion, NMHC shared preliminary results from an upcoming insurance survey report, which features responses from more than 150 diverse multifamily firms. When asked what the largest loss categories respondents faced in the past three years, fire was first; freezing was second (mostly due to winter weather incidents in Texas and Atlanta); water and flooding (not wind-related) was third; and windstorm/hurricane was fourth.
Risk modeling software is an available tool for owners and managers and can help firms more accurately assess various risks inherent in their portfolios. However, the NMHC survey found that 59% of responding firms don’t use it.
For Laura Craft, head of global ESG strategy at Heitman, the challenge is not just identifying risk but figuring out how to live with it. Firms have to continue to invest in markets where people want to live, but they need to try to quantify how much additional risk is out there and map out how the firm is going to account for it.
According to Steve Guggenmos, vice president of research and modeling, investments and modeling for multifamily mortgage giant Freddie Mac, major capital providers and institutional investors are taking a second look at their insurance requirements to more appropriately assets climate risk so healthy investment can continue in the markets where people want to live.
Guggenmos said Freddie Mac sets its insurance requirements based on replacement cost value. However, when it comes to flooding, Guggenmos said Freddie Mac is trying to “plug the gap” in the market by only requiring flood insurance for the first two floors.
While legacy regulations have long stymied multifamily supply in many jurisdictions, more and more states, counties and cities are taking a different approach to policies to address affordable housing shortages. Increasingly, they are offering a blend of incentives and regulatory reductions to increase housing supply, mitigating some of the detrimental effects of decreasing affordability.
During a panel discussion, affordable housing experts said governments at the state and local levels are largely thinking thoughtfully and proactively about how to effectively increase supply through incentive programs and regulatory reform.
In some cases, that has meant changing building codes to relax single-family-only (SFO) zoning restrictions, eliminate parking mandates or allow accessory dwelling units (ADUs).
In others, it has meant tying funding to housing production goals and increasing transparency around performance. Massachusetts, for example, has moved to tie infrastructure dollars to housing development. States such as Florida and Washington are requiring jurisdictions to publish data on permitting delays to better identify and address bottlenecks that slow down new production.
But it can be difficult for jurisdictions to identify which policies are most likely to deliver the effects they desire. To this end, David Garcia, policy director at the Terner Center for Housing Innovation, discussed his organization’s new policy dashboard for Los Angeles. The new tool allows users to play with different regulatory or zoning policies, using modeling software to predict how the policies would affect housing development over a 10-year period.
While the tool is limited to Los Angeles, Garcia said the exercise illustrates a new approach to finding solutions that other jurisdictions could use as a model to adopt or scale.
However, more broadly speaking, jurisdictions need to look more to tech and innovation to help address their housing shortages, said Arica Young, associate director for the Underserved Mortgage Markets Coalition (UMMC) and Innovations in Manufactured Homes Network at the Lincoln Institute of Land Policy.
Young said that jurisdictions won’t be able to catch up on the home building they need if they don’t change the way we build—and that means modernizing building codes to allow for new kinds of construction. Manufactured and modular housing are answers, along with 3-D printing and panelized construction.
Intermediate- and long-term U.S. Treasury yields began rising three years ago after falling for almost 40 years and are now at their highest levels in more than 10 years. Realized cap rates have not followed suit thus far, but investment transactions have slowed greatly as valuations remain up in the air and lenders pull back.
Jim Costello, chief economist for MSCI Real Assets, said the price-gap expectation between buyers and sellers is widening and is back to where it was in 2020. “It's saying that from current price levels you need about another 10% decline in apartment prices to be able to equilibrate buyer and seller interest in this. So it's an interesting situation of buyers and sellers still staring at each other across the table and not willing to move so much yet,” he explained.
There’s also growing concern around distressed loans as the timeline for loan maturities ranges from now until 2027. In 2028, the number of loans up for repayment drops off. “We’re hearing, ‘Survive ‘til ‘25 and then refinance,’” Costello said.
The counts of unique lenders are way down—in multifamily but also across all asset classes. Loans are over-allocated on apartments right now, and lenders need those projects to finish before they make new loans. Delays in apartment starts are no longer based on supply chain issues, the reason now is getting financing.
See Who Was at the 2023 NMHC Research Forum
Click to view photos of your colleagues, friends and coworkers who attended the Miami event.
Economic Insights for Uncertain Market Conditions
How are regional bank turmoil, inflation and forecasts of continued interest rate hikes impacting multifamily? Host Alison Johnson is joined by Dr. Brad Case, Chief Economist and Director of Research for Middleburg Communities for a multifamily-focused analysis that puts current market conditions in context. Listen here.