Six Questions for Doug Bibby

(Mark your calendars: RealShare Apartments Oct. 20 in Los Angeles.)

WASHINGTON, DC-After the Dow tumbled 5.5% and Standard & Poor’s downgraded mortgage lender Fannie Mae and Freddie Mac on Monday, Doug Bibby, president of the National Multi Housing Council, was, in one word, "shell-shocked" by the news. “This is different from 2008 in many respects, although certainly the turmoil in the markets is quite similar,” says Bibby, who predicts that the debt crisis could make it harder for the CRE community to do business in the multifamily space going forward. He talked with GlobeSt.com about his perspective on America’s fiscal health and housing.

GlobeSt.com: We hear a lot about multifamily being the darling of the commercial real estate industry right now. But after the debt-ceiling crisis and Monday’s S&P downgrade of Fannie Mae and Freddie Mac, what’s next for multifamily lending?

Bibby: I think the downgrade will make it a little more costly for them to raise debt. That may translate, in some way, to higher mortgage costs, although, if you look at the long-term where mortgage rates are right now over the last 25 or 30 years, they’ve been incredibly low. As for the spending, it is hard to say where they are going to cut discretionary spending. In a general sense, anytime you take spending out of the equation in a very fragile economy, you are taking away stimulus. When you take away stimulus, you are taking away the opportunity to create jobs. The apartment industry really depends on job growth. I think the combination of the downgrade and the spending going out of the economy could just make it tougher to do business. In the context of what’s happened since 2008, there has been well-below norm building in multifamily. The multifamily industry is right now not even keeping up with the stock that’s lost each year. Over the last couple of years, we haven’t produced enough new units to make up for what we lose to obsolescence and lost stock. We’re going to need 300,000 units a year just to meet the demand in front of us. I don’t think these dislocations will have a material impact on debt financing for new construction. The banks are starting to come back into that business. This is different from 2008 in many respects, although certainly the turmoil in the markets is quite similar.

GlobeSt.com: In what ways is NMHC advocating for rental housing on Capitol Hill at the present time?

Bibby: In February the Treasury came out with three options for the reform of the housing finance system. So we’ve been sort of preparing ourselves to really advocate for a really balanced approach for housing finance reform that really takes in the interest of multifamily as well as single-family. All of the focus is on single-family right now because it is broken. It is far bigger. It is five or six times the size of multifamily and it’s broken. What we are advocating for, and what we are trying to convince policymakers about, is: don’t come up with a one-size fits all approach to single-family and expect it to work perfectly for multifamily, because we are very skeptical of that. They are two very different businesses. A single-family home mortgage can basically become commoditized. It can basically be packaged and sliced and diced and put into securities. It is much more of a commodity than a multifamily loan. If you could have an apartment community that’s worth $50 million and one that’s worth $250 million, and when you’re underwriting that risk with all that has to do be done in that, it’s a very different set of circumstances. We are just cautioning policymakers not to come up with a solution that is so driven by single-family that they cause harm to multifamily.

GlobeSt.com: Given HUD’s high volume of multifamily mortgage applications, what do you believe are the problems exacerbating the nation’s shortage of workforce housing?

Bibby: Like I mentioned before, the biggest problem is lack of job growth. Coupled with that was the availability of debt financing and what debt financing was available was very, very pricey with very low LTVs and very high debt coverage. It really made it unprofitable to do. The result is that the banks basically got out of construction lending in 2008, and then have largely been out of it since then. All that application for construction financing went into FHA. They had roughly five times the volume that they normally had. FHA basically was the lender of last resort for multifamily. All the prime quality borrowers didn’t have to go to FHA and they didn’t because it’s more bureaucratic. That’s the issue today, number one, the jobs aren’t being created and number two, the debt financing wasn’t there anyway, and only now is it starting to thaw. We need to produce at least 300,000 units a year to really keep pace with what we have to do.

GlobeSt.com: At the same time, HUD announced the availability of $95 million under the federal Sustainable Communities program. What are your thoughts on smart growth and the development of transit villages? Do you believe they are a viable model for the entire country, or do more rural areas face challenges?

Bibby: I’m a big fan of smart growth and of sustainable growth. There’s been a resurgence about how people are gravitating back toward the cities. The good news is that people are coming back to where there’s infrastructure and you can build on top of that infrastructure. The bad news is the more dense your population, you’ve got to figure out how to house that population, and near transportation nodes makes a great deal of sense. That’s the way you could bring more people in and put them near subways, rail stations, bus stations, and so on, so they could get to their jobs without having to drive in from 45 miles away clogging the roads and all the other problems that you have from that. I really applaud what HUD, the DOT and DOE are doing in their partnerships. I think it is a great initiative.

GlobeSt.com: What’s the state of equity availability for new multifamily construction?

Bibby: It is excellent. There is plentiful equity capital out there, but the problem has been debt. Equity has been ready to jump in and invest. It’s a very attractive sector to be in. Equity investors want to be in multifamily housing. That isn’t an issue.

GlobeSt.com: Lastly, is renting considered the “new normal” to you and why? And since you just agreed to a three-year contract extension at NMHC, what are some of your goals in the coming years?

Bibby: I am not sure renting is the new normal. I think there is a growing appreciation for renting as a really viable housing alternative. Remember that we went through 16 years of cheerleading for homeownership as a can’t miss investment under eight years of the Clinton administration and eight years under George W. Bush. Housing was touted as a can’t miss investment. And unfortunately, what millions of homeowners have found, through foreclosure and loss of their homes is that housing is shelter and not an investment. If you go back to 1950 to 2000, the average annual appreciation of a single-family house was seven-tenths of 1% per year for 50 years. Meanwhile in the equity market, it was about a 4% return. Then from 2001 to 2006, the average annual increase in a single-family house price was 10%, so that went up 50% in five years. That’s what we are dealing with. People got sold this bill of good that the way to make your wealth and the way to climb the economic ladder is to go buy a house. And now, unfortunately, it put millions of people who couldn’t qualify and couldn’t sustain homeownership into homes, and now they are in trouble. We want to make sure housing finance reform doesn’t harm multifamily in the process. And today was a further indication that they are going to have to tackle tax reform. We want to make sure, again, that tax reform does not harm real estate. It took a long time to come out of the 1986 Tax Act and it took a long time for real estate to recover. We basically want to make sure that we reform taxes in a way that isn’t punitive to real estate.