Interest Rate Increases Won’t Dampen Multifamily Demand

Multifamily has held onto its crown this year as the most favored commercial asset class. Even rising interest rates and the length of the cycle—which is close to being the longest recovery in history—aren’t enough to dampen demand. This year, transaction volumes will likely exceed 2017 levels with strong investor appetite throughout the country. For now, investors are remaining net buyers for the foreseeable future.

“The fundamentals are still extremely strong, and even though interest rates have moved up, it really hasn’t damped the demand for multifamily,” Gary Goodman, SVP of acquisitions at Passco Companies, tells GlobeSt.com. “We continue to be very aggressive in buying properties, and I don’t see that changing anytime soon. There is no reason for this economy to be derailed at this point. Cycles typically end because of an event, and that is hard to know. Right now, the fundamentals are so compelling that we will continue to be investors.”

Strong consumer demand is really driving all of this activity. Thanks to leftover effects of the financial crisis, demand for rental housing and apartments is exceeding the supply. In fact, there is a shortage of hundreds of thousands of units throughout the country. “Multifamily is the most favored of the four asset classes, and the fundamentals are very much in balance in terms of supply and demand,” Goodman say. “The demand is very strong, and we are seeing really good absorption throughout the country. It is going to take a sustained development pipeline of 350,000 units over the next 10 years to really satisfy the demand that is expected with retiring baby boomers and the millennial population that are looking for places to live.”

The supply shortage is exacerbated by the increasing cost of for-sale housing, rising mortgage rates and high student debt, all of which are keeping millennials out of the home buying market. “Millennials are challenged with respect to buying homes. They are baring a lot of student debt and they don’t have the down payments,” adds Goodman. “With increasing costs of owning homes now with interest rates rising, they are more likely to be renters than buyers.”

Of Passco isn’t alone. Multifamily is a hot asset class with strong competition for deals. To compete, the firm has carved out niche multifamily categories. “We like secondary and tertiary markets; newer suburban lease-up deals that are more challenged in terms of finding buyers; and properties where value-add buyers have completed the renovations on a property but haven’t leased it up,” says Goodman. “We own our properties for long term, so as long as it has been renovated to our satisfaction and it is an area where we aren’t going to see a lot of new development, we see opportunity for good rent growth in a property like that.”

The strategy is working. This year, Passco expects to exceed its 2017 transaction volumes. “We expect to exceed to volume that we enjoyed last year,” says Goodman. “Last year, we did about $600 million last year, and we expect to do $700 million this year.”

Goodman is speaking on these topics on the Transaction Talks: The Art of Multifamily Dealmaking panel at RealShare Apartments October 29 and 30. The panel will be moderated by Marc D. Renard, executive vice chairman of the capital markets group at Cushman & Wakefield, and includes Jonathan Moore, managing director at Brookfield Property Group; David Schwartz, CEO and chairman of Waterton Associates; Tim Hennessey, managing director at PGIM Real Estate; Mark Deason, managing director and head of U.S. asset management at Starwood Capital Group.

For more information on multifamily news, join us at RealShare APARTMENTS in Los Angeles, CA from October 29-30, 2018. This event attracts more than 1,000 of the industry’s top owners, investors, developers, brokers and financiers as they gather for THE MULTIFAMILY EVENT OF THE YEAR! This conference is powered by GlobeSt.com, the go-to-source for multifamily news and analysis. To register for RealShare APARTMENTS visit: https://www.eiseverywhere.com/ehome/302312/653773/.