The current economic uncertainties have created a “two-city story” in the multifamily housing market as financial markets at large teeter against record-breaking growth in the sector, panellists at this year’s GlobeSt multifamily housing conference said.
“What’s different about the current situation is how quickly things have changed,” Cityview CEO Sean Burton said at a panel on institutional investing in the sector. “This is the fifth recession I’ve seen, but the speed at which it’s happened this time, the speed at which interest rates have gone up, I’ve never seen anything like it. And it creates crazy disruptions, but it’s very much a tale of two cities… You have this tremendous disruption caused by the financial markets and interest rates, and yet the assets are really performing. We’re still seeing incredible rental growth.”
In other words, assets are developing, but financial markets are “kind of messing things up,” Burton said.
However, transaction volume is actually declining, with panelists agreeing that buyers are “extraordinarily picky” and underwriting standards are being tightened significantly. Cap rates have risen in the sector and rental growth is slowing, prompting investors to shift their assumptions to a new curve and lower yields. As one panelist remarked, “Who sells in this market if they don’t have to?”
That’s in stark contrast to the past decade, when “every time you decided to take risk, you got rewarded,” said Ritesh Patel, CIO of Virtu Investments LLC. But while panellists agreed that the next 12-24 months will be difficult for many market participants, buying opportunities for well-placed buyers should abound.
“We’ve definitely got our heads down and are focusing on all our assets on getting every penny off the spend side, leasing really really tight and managing occupancy, proactively managing debt and looking at a specific debt schedule for each individual asset,” said Burton. “We have to stay ahead of potential problems, but what we learned in GFC was not to keep our heads down because there will be great buying opportunities.”
JP Morgan Asset Management’s Douglas Schwarz noted that “we’re not in a recession yet,” adding that “the economy is actually quite resilient.” He says the Great Financial Crisis has scarred some market participants — and that psychology may be driving much of the doom and gloom.
“Rents are obviously slowing down and there are a lot of signs that we could be in a recession in the coming months, but people are also scarred by 2009 and afraid of what’s to come,” he said. “The psychology of the last great recession was really painful. No one wants to feel that again…there’s that feeling of, “Did we all have these wonderful 10 years that’s being taken from us?” The fear part is much stronger than the fundamentals.”
Schwartz said he doesn’t expect a lot of deal flow over the next few quarters, but it “definitely feels like a great place to build a portfolio.”
“The fundamentals for multifamily housing are strong,” he said.
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