The business, demographic and political landscape has changed significantly both recently and throughout the tenure of many multifamily CEOs. During the 2017 NMHC Annual Meeting, five CEOs—Greystar Real Estate Partners’ Bob Faith, Kettler’s Bob Kettler, Marcus & Millichap’s Hessam Nadji, Steadfast Companies’ Ella Shaw Neyland and Waterton’s David Schwarz—took stock of some of the big changes and how that might shape their business strategy going forward.
Q: How do you think the new administration will affect the multifamily market?
Bob Faith: “I have given up trying to predict this year. First of all, as you travel around, people are always asking, ‘Do you think Trump’s going to get the nomination? Do you think Brexit will happen? Is Trump going to win the election? I’ve just been wrong on everything.
All we know at this point is that we don’t know. We, as an industry, are going to have to stay focused on the things that are critically important to us. But, I do take a little bit of comfort in the fact that he’s real estate guy, but maybe I’m wrong about that, too.
Hessam Nadji: We are definitely seeing a high degree of wait and see. Leading up to the election, everyone expected a degree of the same. But whether you like Trump or not, everything has been thrown out the window. No longer is there any confidence in what will happen. So, all of a sudden, all kinds of possibilities are on the table that weren’t. … At the end of the day, it’s a more growth-oriented alternative to the same old, same old. There are risks to that, but there are positives.
Ella Shaw Neyland: There’s a general feeling that we have a president that’s a businessman—and a real estate businessman at that. … I do believe he thinks that a strong real estate economy is a strong American economy—and that’s a positive.
Q: What important changes in the market are you seeing?
HN: It’s a time to be more realistic. The perfect storm of positives—low supply, preference to rent, low interest rates—many of those things are changing. Rent growth is clearly slowing. In terms of valuation, not only are seeing the impact of the higher interest rates but also slower rent growth.
So, in 2017, we’re in for a soft landing. Going into 2018 and 2019, supply is going to pull back. It’s already happening. Either we’re learning and self-governing or the capital has been more disciplined, but there’s definitely a pull back. You can already see that in the equity for development deals.
EN: Just look at the 75 million millennials. A third of them aren’t even looking for apartments yet. And then look at the average age of a renter. When I started out [in this business], the average age of a renter was late 20s; now it’s 30s, early 40s. Older people are aging in place. People older and older are living in apartments. …
Also, this on-demand economy is growing—the way people pick houses is really changing and we’re learning. … People are also picking lifestyle cities. I think we’re going to be divided into either we’re working or we’re playing.
Bob Kettler: We have a specialty in affordable housing. What can we do to provide more affordable housing? We’re still trying to do some tax credit deals, but they are almost impossible to do because land costs have gotten so high.
So, to grow, we needed to bring in real high level professional management. … We’re also trying to become more efficient in our operations. … And in terms of making apartments more affordable, we’re trying to use technology.
Q: There are clearly affordability challenges for some segments of the renter population. Short of subsidies, how can we increase the supply of more affordable apartments?
BK: There aren’t any imminent subsidies coming. In all of our zonings going forward, we’re being mandated to have a much larger proportion of affordable housing units. In fact, we’re moving from about 8 percent to 12 percent of units. That’s just a drop in the bucket. … [Moreover,] tax-credit properties are hard to pencil now. … So, it’s really a limp-along strategy.
BF: Think about how much subsidy we have given to the single-family homeownership sector over the years. What if we were to take that capital and put it into subsidies so that you can build stick-built product that meets affordability requirements.
The problem is that today you don’t have an economic motivation to build affordable housing in volume. If we can make it profitable to build affordable housing, we’ll be cranking it out. Forcing us to do in in our conventional product isn’t even going to scratch the surface. …You can’t force luxury builders to create enough affordable housing downtown to solve your problem.
David Schwarz: There’s talk about a standard [income tax] deduction, from which renters will benefit, as part of the Republican blue print on tax reform. But, even though Congress isn’t touching the MID [mortgage interest deduction for homeowners], the home builders and Realtors are all fighting this. So, it would be tough to transfer money from the MID to affordable housing.
Q: Do you see any changes to rental or homeownership rates coming?
BK: I just think the numbers, the metrics and the dynamics of the mortgage market are such that you aren’t going to add that many more buyers. I think Millennials will move out to the suburbs—every survey says that within five years they want to buy a home in the suburbs. But I think homeownership stays pretty flat at a 63 percent homeownership rate.
EN: Wealth creation in America is so challenged. … Baby boomers created a lot of wealth through homeownership. But today people’s financial well-being, or lack thereof, is exacerbated by the fact that they aren’t buying homes. So, as you look at housing formations, more are going to be renters.
HN: The preference to rent is the pillar here. There are structural changes on the demand side that make it very, very favorable for apartments.
BF: Baby boomers are going into their latter years, and some of those people are going to get out of homeownership. I think there will be pressures that keep homeownership rate where it is, or even tick down.