November 2002.
Up until that point, I had no idea the English language included terms like cap rates, mezzanine debt, and value-add.
Over the past 15 years, I’ve learned those terms, met a number of you (and hopefully learned what’s important to you as business leaders), and seen an apartment industry come full circle—pulling itself out of recession to hit unprecedented heights, then falling into even deeper recession and coming back to enjoy an even more sustained period of growth.
But now, more than a half decade into this run, the future suddenly seems a little less certain. It’s not just the election of Donald J. Trump. Before Election Day, concerns about rent ceilings, oversupply, construction debt, equity interest, and—of course—interest rates could be found on a list of most apartment executives’ headaches heading into ’17. “Two years ago, I had a little better feeling about the world of interest rates than I do today,” Jay Madary, president and CEO at JVM Realty Corp., in Oak Brook, Ill., told me before the election.
Then, Nov. 8 happened and nobody seems to know what to expect. Along with a border wall, Trump committed to a strong spending package that promises to pump life into the economy and, by extension, jump-start housing demand.
“A lot of the Trumpian policy is the use of fiscal policy,” David Schwartz, CEO and co-founder of Chicago-based apartment owner Waterton, told me the day after the election. “His policy, such as infrastructure, defense buildup, and tax cuts, is all fairly powerful fiscal policy that could create an abundance of jobs and create demand for housing. The bulk of that demand will likely be in rental. I think that will be good.”
But there’s a flip side: Strong government spending could push interest rates, leading to concerns about inflation. “I think there are more inflationary expectations because of that,” Schwartz told me. “Higher interest rates can be a negative as far as valuations and borrowing costs.”
Of course, apartments have traditionally been seen as a hedge against inflation. Sure, borrowing costs rise, but so do wages and rents. So, that outcome might not be so bad. “I’m comfortable that multifamily can be a hedge [against inflation],” Robert Lee, president and COO of Los Angeles–based JRK Property Holdings told me before the election.
But there’s another element to the infrastructure package that might be a concern, particularly to multifamily execs who build or renovate apartments: A $1 trillion package will attract labor, but what does that do for the multifamily construction industry, which is already facing labor shortages? In early December, the Associated General Contractors put out a report declaring, “Employment Hits Eight-Year High in November; Spending, Job Openings Rise.”
Just imagine how hard it will be for multifamily developers if construction firms working in infrastructure create even more competition for labor, particularly if immigration policy further cuts into the number of available workers.
So, if you look at President-elect Trump’s policies through the prism of multifamily, there are a lot of trade-offs. Infrastructure spending probably means more demand, but it may make construction labor even more challenging to secure. And rates could rise.
It’s a mixed bag, and no one knows what will happen (and the ramifications for affordable housing, with a housing novice in Ben Carson leading HUD, will probably need another column—or five—to dissect).
But there’s one thing of which you can be sure: Multifamily Executive, through its print magazine, website, and conferences this March in Vail, Colo., and September in Las Vegas, is committed to keeping you abreast of what’s coming and what it means to you. And that includes listening to your concerns and feedback. I’d love to hear what’s on your mind. Write to me at [email protected] or call me at 202-736-3371.
