The multifamily sector is still hot, and it doesn’t seem like that’s going to change any time soon. That’s the take of Jim McDevitt, president of Berkeley Point, a multifamily capital solutions provider. He recently spoke with GlobeSt.com about different lending trends in the multifamily sector, how the GSEs are doing, the impact of increasing home ownership and other topics. He also stresses that there is a strong demand for new product on the market.
GlobeSt.com: Are there any different types of lending trends in the multifamily sector that you see happening over the course of this year?
Jim McDevitt: The life companies will be a lot more active than they were in previous years, and CMBS players are beginning to be active again and will be able to compete in the multifamily sector, especially with special property types like student housing and military housing. The conduits are able to play in that arena. There are different things that they can do to be able to compete. They aren’t an imminent or huge threat to a significant portion of the multifamily space, but they are clearly on the horizon and a year ago we wouldn’t have even talked about them.
GlobeSt.com: What about uncertainty with the GSEs? How is that impacting lending?
McDevitt: The headline risk has dissipated. With agencies doing as well as they have done with their reporting in the last several quarters, we really don’t see that as a front-burner topic. A year ago if you’d asked me that question I would have said that it was at the forefront of everyone’s mind. Right now I think it’s probably a back-burner question. Some people think about it, but it doesn’t impact their borrowing decisions like it did a year ago, when they were trying to hurry to get things done. They’re saying that from what they can tell the agencies are going to be very similar to what they are now for the foreseeable future. Long term, there are probably going to be some changes, but it’s not a big danger like it was a year ago. And with all of the other stuff that Congress has on its plate, like the fiscal cliff, sequestration, the debt ceiling, immigration, guns, all immediate things that are taking up their political time right now, this topic of GSE reform will not be at the forefront for a while to come. There’s only so much time in the day. So GSE reform seems to be something that is not as pressing, especially with the agencies doing as well as they are right now.
GlobeSt.com: Are people concerned about a potential rise in home ownership?
McDevitt: When you combine it with household formation growth, as the recession winds down, and more households are created — Johnny is no longer living on his parents’ sofa and has gotten an apartment and three people that had to be roommates together get to move out on their own, to the Baby Boom generation downsizing from home ownership to apartment living — all of those things start adding up. You’ve got more household formation taking place. And credit still remains tight. It’s still harder to get a home loan than it was in 2006. As a result, you have a much better housing market than before, but I don’t think you’ll ever see the home ownership levels at the 66% range like they were a couple of years ago before the recession. In fact, they are inching down in the 62%-63%, which is probably a healthier level. Then add to that the fact that many homes are 60-to-90-days delinquent still. Those folks really aren’t owning that house, they’re renting it. So we’re probably going to settle to between 60% and 62% as it relates to home ownership. That’s a good number for us. What we’re not seeing, as of yet, is any downward pressure on vacancy rates for multifamily as it relates to how many single-family homes were put in the rental pool. That doesn’t mean it’s not going to happen, but we haven’t seen it. And I don’t think anyone’s looking at it as the big boogey man of the future. People talked about that, but they’re just not seeing it. The apartment sector is as healthy as its ever been in terms of rental demand. The better markets are hitting all-time lows in terms of vacancy rates.
GlobeSt.com: So I take it there is a quite a demand for new construction?
McDevitt: There’s a tremendous demand. For the last four years there has been none. So even though you have household-formation growth, for four consecutive years there have been next to zero construction starts. In 2012 it finally started to come in and in 2013 and 2014 there are plans to build significantly more volume. That becomes a market-by-market question. Is there a possibility that there could be overbuilding and we get over saturation? Sure, depending on where the credit appetite is and if banks are going to continue to make those construction loans. But the reality is, nation-wide, it would be tough to keep up with demand. But you would have to look market by market because some could get overbuilt.
GlobeSt.com: What is the biggest challenge facing the multifamily sector going forward in the next year?
McDevitt: As it relates to commercial real estate and the other asset classes, I just see multifamily continuing to be the darling. If there’s a challenge, it’s for investors to be able to deploy their capital and find the assets that they want and the returns that they need. There’s certainly plenty of liquidity to fund it, the fundamentals are great and only going to get better, so therefore I don’t see any challenges facing the industry, as far as a bad thing or headwind on the horizon. But if I’m an investor I’m probably frustrated that there isn’t enough product for me to get the returns that I need in the areas that I want to buy.