If record attendance at the National Multifamily Housing Council’s Annual Meeting was any indication, the multifamily asset class is more desired than it has been in decades and fundamentals are strong. Rates and supply concerns aside, there are some simple truths to the industry. Our growing population, from Millennials to Boomers, has a growing preference toward renting, whether that’s due to student debt or being burned during the last downturn.
Here are some key takeaways formulated on the hustle between the Waldorf and Hilton towers:
Blurred lines: Core-plus is the new value-add
After two flaming-hot years, value-add has become so overheated that investors are looking at core-plus deals, where a newer vintage with less work means a measurable pop in yield. Equity capital chasing these deals are allocating larger percentages of their funds for acquiring multifamily.
Why are these typically conservative owners taking a harder look at older product (even eight-foot ceilings?!) in secondary and tertiary markets? The ongoing need for workforce housing. A huge mass of renters will never be able to pay luxury, Class-A rents, and you can’t build affordable housing with today’s soaring construction costs.
Competitive agencies: Fannie and Freddie love green
Fannie Mae and Freddie Mac owned an unprecedented 50 percent of the market in 2017, lending $138.6 billion in debt capital, and both agencies expect 2018 to be another big year. In addition to middle-income and affordable properties, as well as transit-oriented development, the agencies are hungry for sustainable projects, which accounted for a third of their volume last year.
“The agencies are continuing to focus on green building and energy efficiency when evaluating opportunities,” says JLL Senior Vice President Paul Smith, our Ohio-based Midwest and Great Lakes agency production lead. “These types of improvements allow them to be more aggressive in a lower-cap-rate deal and offer investors a significant pricing break that’s worth exploring.”
Great expectations: Renters’ amenity demands
With renters’ expectations for perks and extras far greater than 20 years ago, highly amenitized properties continue to be the talk of NMHC. Renters have a lifestyle to which they’ve become accustomed, but investors and developers have also made some interesting observations—nobody’s using large amenity rooms and floors.
In the next phase of the amenities arms race, the key is going to be intimacy of amenity space, either with smaller, organic gathering spaces throughout the building or thoughtfully designed larger spaces that allow for more private gatherings. For some examples of savvy developers already on this track, look at Fifield’s The Sinclair and Gerding Edlen’s latest projects.
Detroit came up frequently as one of the next markets to watch, given its strong fundamentals and relatively little supply in the works. Already, we’ve seen it to be a high-yield market and consistent outperformer, and we expect it to be one of the hottest Midwest markets in 2018.
Unsurprisingly, much of the programming at NMHC touched on tax reform in one way or another, and sentiment was positive. The multifamily world expects the national homeownership rate to suffer, as new legislation and rising interest rates have reduced the incentive to own a home.