Rising interest rates, a potential economic downturn, and continued inflation are key concerns for multifamily executives today and into the future.
“The ongoing negative impact of the global economic and geopolitical pressures that have contributed to interest volatility, inflation, and ongoing supply constraints do not appear to be abating,” says Diane Batayeh, CEO of Village Green. “And while I don’t think we’ll experience a full-blown recession akin to 2008-09, I do expect to a more mild one, which will continue to fuel decreasing apartment values and increasing operating costs, along with higher cost of capital, thus impeding supply. Our already imbalanced supply/demand ratio will tilt even further, and the lack of affordable housing in the U.S. will be even more pronounced going into the fall and next year.”
Robert Hart, president and CEO of TruAmerica Multifamily, adds that he is concerned about a possible recession in 2023 that could lead to some softening of rental demand if wage growth stalls and household formation slows.
Batayeh, Hart, and Waterton chairman and CEO David Schwartz will provide a top-level view of the challenges and opportunities facing the industry as part of the annual executive power panel at the MFE Conference, Sept. 28-30, at the Bellagio in Las Vegas.
Another issue Hart is watching as we head into the fall is the potential impact of rent control.
“There is a groundswell of rent control movements occurring in purple and red states, such as a Colorado and Florida, that could become real and also restrict a landlord’s ability to mark to market their rents.”
Additional pain points that the executives continue to face are escalating costs for payroll and other operational expenses.
“Some of the biggest cost increases we’ve seen have been in labor, insurance, and real estate taxes,” explains Schwartz. “To navigate these increases, we are using more technology to increase team productivity and create more flexible schedules. For insurance, we are evaluating coverage and limits, implementing more risk mitigation, and rewarding teams for lower incident rates. We also are using technology for risk mitigation. Real estate taxes require a robust tax assessment protest team.”
Batayeh says Village Green also is seeing these same pain points and is taking similar proactive approaches, such as forming master policies to help deal with insurance costs and formulating tax appeal plans that have been “moderately successful.” On payroll, she adds that the increases are being driven by fewer people in the job market as well as other industries recruiting talent by over-paying and offering attractive sign-on bonuses.
“We are navigating this by virtue of enhanced benefits, a keen focus on culture and employee engagement, and other tangible but not so easily quantified perks, like flex schedules, remote working, extended parental leave, high retirement benefit matches, etc.,” she says. “These things have allowed us to attract and retain talent, without having to over-pay.”
Despite the challenges, the executives remain optimistic as they look to the future.
“Today, our industry is stronger than ever as far as supply of rental housing relative to demand,” says Schwartz. “We believe it will remain a great environment for investing and building multifamily housing for the foreseeable future.”
Hart agrees that he expects consumer rental demand to remain strong for the next decade or more with household formation and U.S. population continuing to outpace new construction.
“Multifamily housing has generally always fared well, regardless of economic times. It is a ‘necessity’ asset class, so the risk is generally lower than other asset classes when there is this much volatility in our world,” says Batayeh. “While we can certainly be impacted to some degree, our lows are never too low so long as we are smart and measured in our approach and always thinking about the long game.”