Understanding the forces that create markets is essential for lenders, real estate professionals, developers and investors. In this C-suite conversation, we discuss current developments in the multifamily sector with Jean-Laurent Pouliot, the impact of federal policy, the challenges of an aging rental stock, and demographics Opportunities brought by changing trends. Prio’s insights highlight the delicate balance required for a healthy market and provide a forward-looking look at what to expect going forward.
As with all things Fed-related, it’s not just about cutting rates; This has to do with market beliefs.
Housing line: What factors are currently driving near-term improvements in the multifamily sector? How important is the role of stable cap rates and higher net operating income?
Jean Laurent Pouliot: One oft-cited factor is that the clearing of rents and the resulting accumulation of bad debt following the lifting of the pandemic eviction moratorium has had a significant impact on real estate-level financials. It may seem strange to still be talking about the aftereffects of the pandemic in the second quarter of 2024, but even in the first quarter of this year we are certainly already seeing its deleterious effects. Now we’ve basically moved beyond that. We are now seeing demographic and immigration patterns driving demand in a market where rents are slightly softer. These factors contributed to the rebalancing of cap rates. Nonetheless, I believe there will be more normalization to come, especially in overbought and/or overbuilt markets.
hardware: How do you expect the upcoming Fed rate cuts to impact the multifamily housing market in the short and long term?
Japanese LP: As with all things Fed-related, it’s not just about cutting rates; This has to do with market beliefs. There is no doubt that our environment is better today than it was a year ago. Unless the economy weakens significantly, I believe Treasury yields are already within a trading range for the foreseeable future.
The long-term effects may be more pronounced. On the one hand, more attractive interest rates will keep some people off the sidelines. On the other hand, interest rate relief could increase the likelihood of another round of cap squeeze, making these deals less attractive and risky. In the short and medium term, we will see an increase in refinances of short-term outstanding prepaid debt taken out over the past 12-18 months, at a time when many are starting to see rental growth slow or even flatline.
hardware: Can you elaborate on the current supply-demand imbalance in the multifamily space and the challenges it poses to investors and developers?
Japanese LP: With interest rates rising rapidly, many investors have exited or completely exited acquisitions and/or infused capital expenditures into existing and aging multifamily stocks. Nowadays, property owners are no longer interested in housing that is more than 20-30 years old. The result is that otherwise decent, safe, and affordable multifamily housing has fallen into disrepair, exacerbating the national shortage of quality affordable housing. Compounding the problem, many lenders are also more picky about the years they choose to finance.
hardware: How does the aging rental housing stock impact the multifamily market?
Japanese LP: When interest rates are low and the bridge loan space is active, many players take the opportunity to buy aging stocks and reinvest. This is not enough to significantly alleviate the supply problem, but the curtailment of such investment activity will only make the situation worse. Additionally, the cost of rehabilitating aging homes is too high, and the only quick way to get investors to refocus on this important segment of multifamily housing is through financial incentives. Lenders can make a difference through programs explicitly targeting this sector. However, a better (and faster) option would be to provide meaningful incentives, such as tax breaks, for those willing to invest in aging housing.
hardware: Given projected population growth and increased demand for rental housing, what are the key long-term opportunities and challenges for the multifamily industry?
Japanese LP: Providing housing for immigrant populations from Latin American countries and other underdeveloped countries will be a significant challenge, but for those willing to invest the time, energy, and resources to provide affordable housing outside of major metropolitan markets, this An opportunity will also be provided.
It’s a matter of building (or repairing) the right inventory in the right place. The pandemic has created interesting internal migration patterns in places like the Sunbelt. While this pattern has slowed down (or even reversed), developers have taken notice and are building significant amounts of Class A housing in these markets. The result is that some markets, like Phoenix or Jacksonville, have an oversupply of multifamily housing, driving down rents and leading to significant concessions. It will take time, and there will be some pain, but there will almost certainly be a rebalancing of investments toward older, slower-growing but more stable markets.
Jean-Laurent Pouliot is Managing Director and Senior Production Officer of Arbor Realty Trust.
