While the outlook for the multifamily industry is inspiring optimism, several factors might still derail the sector’s recovery, said panelists on an Industry Leadership Roundtable, which kicked off the 2011 Apartment Finance Today Conference, held in Dallas earlier this week.
There’s no debate that the industry is in full recovery mode. Occupancies continue to trend upwards while a flurry of new development activity is starting up again. And the competitive landscape of the debt market continues to improve, offering borrowers more options beyond just Fannie Mae and Freddie Mac.
“The life insurance companies are voracious right now, the conduits are coming back, and it’s amazing how quickly the market has just come ablaze,” said Holli Leon, executive vice president at Pittsburgh-based PNC Real Estate. “It’s a harder win each and every time.”
Stronger All Around
Many owners are seeing some strong occupancy gains, and that’s leading to robust rent growth. LumaCorp, which owns 21 communities across several Texas markets, has seen its portfolio occupancy rise from 91.5 percent to 95.5 percent over the last 14 months. “Last year, we had very little pricing power,” said Rich Kelly, principal of Dallas-based LumaCorp. “But we’ve experienced 3 percent to 5 percent increases in the past six months.”
The transaction market is also improving as acquisition activity continues to rise. Acquisitions accounted for less than 30 percent of Freddie Mac’s total new business in 2010, but so far, year-to-date, that figure is about 40 percent and growing, said Mike McRoberts, vice president of multifamily production at McLean, Va.-based Freddie Mac.
And emboldened by favorable demographics, and the rising availability of construction debt and equity, more firms are breaking ground again. “There’s a lot of optimism right now. Those who are far-sighted were moving last year toward land, and starting the entitlement process,” says Doug Bibby, president of Washington, D.C.-based National Multi Housing Council. “We may be a little ahead of ourselves given what’s happening in the job market, but right now, we’re barely replacing what we’re losing to obsolescence: We may be undersupplied as early as 2012.”
Reasons for Pause
Despite the optimism, it’s still the early innings of the recovery and economic cycle, panelists warned. While more banks are stepping off the sidelines and issuing construction debt, for example, borrower scrutiny remains at an all-time high. The problem for developers now is dealing with legacy issues and how their balance sheets stack up after a tough few years.
“It used to be you could do $400 million of business on a $10 million balance sheet. Now the joke is, you need a $400 million balance sheet to get $10 million worth of loans,” says Trip Stephens, chief investment officer of Orlando, Fla.-based developer ZOM Cos. “The pendulum has gone way back the other way.”
The unemployment rate is slowly improving, but other economic factors are conspiring against those gains. The jobs recovery is very uneven geographically and by employment sector. There are still 17 states with jobless rates of between 9.5 percent and 14 percent. And while private market hiring is getting better, there’s been a large net loss of government jobs over the past year, which, in a fragile recovery, is hurting many smaller markets.
“We are seeing signs of job growth, but I’m not sure we’re seeing wage growth return,” noted Heidi McKibben, vice president at Washington, D.C.-based Fannie Mae. “We’re also still lacking consumer confidence, and those two factors will really hold us back in terms of a full recovery.”
Other factors throwing cold water on the optimism out there include the rising price of gas, the falling value of the dollar, rising commodity prices, and the rising national debt. “We’re looking at the possibility of a double dip recession, a strong chance for inflation, maybe huge inflation,” said Lee Harris, president and CEO of Overland Park, Kansas-based Cohen-Esrey Real Estate Services. “I’m really concerned.”
And as cap rates continue to compress—and not just in primary markets—some in the industry worry that we’re getting ahead of ourselves, that we might want to take a step back and temper our optimism. “Now that everybody’s feeling more optimistic, and buyers have a zeal to do business, we’re seeing a lot of very aggressive acquisition prices, and I question whether some of the prices are well-grounded,” said PNC’s Leon.