What to Make of the Multifamily Market
By Michael Richardson
September 9, 2019
Michael J. Richardson is chief commercial officer with CrediVia, a commercial loan marketplace for simpler, smarter, faster real estate financing. He boasts more than 25 years of successful sales and sales management experience, and now leads the maturation strategy of CrediVia's expanding platform. His executive background spans SaaS, information and technology services. He comes to CrediVia after more than 15 years at Reis, where he played a central role in building the company's reputation and market reach as it stands today.
Commercial real estate financing has resurfaced as a viable growth opportunity, evidenced by the emerging class of fintech suppliers boasting shiny new platforms dedicated to these loans as well as the pursuits of nonbank lenders, credit unions and community financial institutions vying for a share of the market.
And, it helps that regulatory decisions have prompted favorable conditions for smaller institutions to get involved. For lenders looking to expand and diversify their CRE loan portfolio, the current state of the market and the level of complexity for funding in various niche sectors must be considered. Evaluation of these factors today will notably point to multifamily lending as a smart move.
Bullish CRE market data tells us a lot about specific multifamily financing opportunities, general homeownership trends and the general consumer economics. Here a few highlights to note:
Millennials Taking Over the Market
Probably not to the surprise of many, the bulk of today's rental market is made up of a younger demographic and there should be no expectation that this will change. According to data from NMHC, 50% of renters are under age 30 (https://www.nmhc.org/research-insight/quick-facts-figures/quick-facts-resident-demographics/#RentOwn).
Though there has been a recent increase in the percentage of Millennials who are becoming homeowners, plenty are still renting. Data from the Census Bureau finds that the homeownership rate rose in fourth quarter 2018 to 64.8 percent, which marks an increase from a nearly record low of 62.9 percent in second quarter 2016 (https://www.housingwire.com/articles/48317-homeownership-rate-rises-to-four-year-high-as-millennials-are-finally-buying-homes).
Give Me All the Tech
Those still renting are also more willing to spend more on rent. According to Bureau of Labor Statistics data, spending on rental shelter continues to increase among Millennials, rising 3.2%. Part of this spend can be attributed to the generation's preference for feature-rich housing, stacked with smart automation and connected devices. Tech-friendly units are not found to be luxuries, but are more so considered necessary amenities--in rental spaces and in new homes.
New Meaning to ‘Location is Everything'
Another main preference for renters is access to downtown districts. The trend of wanting to live in a community where they are able to live, work, exercise, socialize, etc., in one area spans beyond Millennials. A recent survey by the National Association of Realtors found that half of those polled indicated they would prefer to live in communities "with smaller houses and smaller backyards, but within easy walking distance to local restaurants, retail offices and arts and cultural institutions." Property owners have been taking this into account; in fact, in 2017, more than $1.3 trillion was spent in the United States on construction projects with 80 percent allocated to some type of mixed-use property.
The bottom line? While homeownership numbers may start to shift for Millennials in the near future, those who continue to rent expect tech-friendly mix-used properties, particularly situated with easy access to desirable districts.
Landlord-offered incentives--including breaks on rent or requested upgrades to gym memberships--are already being offered to keep occupancy rates high. Eventually, rent growth will slow despite the incentivizing. Even still, multifamily investments will not lose their edge. Instead, property owners will be kickstarting renovations to remain competitive in their respective markets. Updating hardware or installing higher quality, energy efficient fixtures and appliances that offer lower energy costs go a long way with tenants. The same is true for making property investments that reflect their lifestyle, such as rethought parking or rideshare design, pet-friendly spaces or communal areas.
Multifamily loans are great opportunities for both seasoned and first-time lenders. Deals are typically uncomplicated and less riskier compared to other CRE assets, and yield fairly fast returns. Plus, rates can be locked in for longer terms.
CBRE's 2019 U.S. Real Estate Market Outlook suggests, "The multifamily sector will continue to attract high levels of investment and debt capital, and workforce housing will remain an appealing investment strategy given its favorable supply and demand balance." Multifamily loans already make up close to half of the commercial real estate market, and signs suggest room for additional growth.
Demographic data still supports a preference for apartment living over homeownership in many regions, with occupancy rates steady if not rising. Housing construction also still lags behind the current demand based on the rate of household formation or need for replacement housing. Investments in affordable housing have particularly found renewed interest. Why wait?
(Views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA Insights welcomes your submissions. Inquiries can be sent to Mike Sorohan, editor, at email@example.com; or Michael Tucker, editorial manager, at firstname.lastname@example.org.)