SEPTEMBER 2023 EDITION
Cost of Purchasing a Home Skyrocketing
The relationship is particularly broken along the coasts, as California, Seattle, New York, Boston and more face ever-mounting pressure on the single-family market relative to the rental market. In San Jose, for instance, mortgage payments are up more than $1,000 per month, compared to rents which are up far less. As a result, as long as rates remain high, new household formation will likely lean far more towards multifamily over single-family, counteracting the strong demographic trends that would ordinarily be driving strong single-family performance.
Especially Along the West Coast
I also encourage you to watch all of these short videos from my colleagues. They offer unique insights on some of the most important and relevant data points in commercial real estate today.
Cushman & Wakefield's Northeast EDSF team launched a useful update with their views of the debt market. They report that:
Greystone analyzed the Midyear Outlooks recently released by both Fannie Mae and Freddie Mac.
According to Freddie Mac's 2023 Midyear Multifamily Outlook, there is promising news for the multifamily sector. There has been a return to normal seasonal patterns following declines in 2022. Rental demand has re-emerged, marked by modest rent growth and steady occupancy rates. Despite slower growth and high interest rates pressuring property prices, the multifamily market remains a favored asset class, adapting to both immediate challenges and long-term trends, such as Generation Z's influence and a robust labor market. Read the rest of their review of Freddie Mac's Outlook.
Meanwhile, Fannie Mae reports that recent lower inflation figures have ignited hope among financial analysts, although the journey towards hitting the ideal 2-percent goal is still a hurdle, according to recent analysis from Fannie Mae's Economic and Strategic Research (ESR) Group. Their mid-year insights infer that minimal productivity increments make wage growth too elevated to permit inflation to come close to its objective in the near future. As a result, Fannie Mae foresees a series of interest rate increases and an incrementally restrictive monetary stance in the months to come. In particular, the current economic situation will have an impact on the multifamily sector. Here is Greystone's complete analysis of Fannie Mae's Outlook.
Last month we highlighted our national MarketBeat report and today we're including some recently published reports from three U.S. Markets - Phoenix, Chicago, and Atlanta.
- Phoenix publishes MarketBeat reports for office, industrial, retail, and multifamily. Their Multifamily reports date back to early 2022.
- The Chicago research team did a fun spin on MarketBeat reports, instead they found Five Facts about Multifamily conditions in the Windy City.
- The Atlanta office launched a Multifamily MarketBeat report at the end of last year. Their Q2 edition reported that demand strengthened and Atlanta experienced the first occupancy gain in four quarters.
And finally, we recognize that some of our multifamily clients also invest in the self-storage sector. As such, below please find a white paper produced by our Valuations & Advisory team at Cushman & Wakefield.
They found that key self storage real estate indicators normalized in the first half of 2023—primarily due to a deceleration in rent growth and occupancy—after achieving record-level market performance in 2022.
Secular demand trends and positive market fundamentals continue to attract investors, pointing to more favorable risk adjusted returns for the self storage sector.
Read more in the full report.
AUGUST 2023 EDITION
We remain focused on producing thought leadership that adds value to your business plan objectives. The first is the introduction of Cushman & Wakefield's MarketBeat report for the Multifamily Sector. This quarterly report will look at data and trends across the US, similar to the existing Office, Retail, and Industrial reports which Cushman & Wakefield releases.
Secondly, we recently released our Glide Path report, providing a synthesized view of the key themes and questions permeating the U.S. Capital Markets landscape.
And finally, we have redone the Archive for this newsletter, including pulling out all of our Market Spotlights for the year into an interactive map. This way you can read all of the markets we have highlighted, download our write-ups, and compare trends across the country.
We hope you enjoy reading these reports; and thank you for your partnership. Have a great rest of the summer.
What is your outlook for the multifamily market in Q3 and Q4?
Rob: Let me start by noting the market forecasts I’ll share today are from Fannie Mae’s Economics & Strategic Research Group and are not necessarily those of Fannie Mae or its management. They are not an indication of Fannie Mae's future business or results, and actual outcomes and their impact on Fannie Mae will depend on many factors.
While much of the economic data in recent months paints a mixed picture of the economy, the ongoing resilience in employment, strong housing demand, and current financial conditions do not point to an immediate downturn. We have therefore upgraded our 2023 GDP forecast to 0.1 percent from negative 0.3 percent on a Q3/Q4 basis, while also downgrading our 2024 forecast by a similar magnitude (0.8 percent from 1.2 percent). This reflects a shift in the start to our forecasted modest recession to the fourth quarter of 2023. Timing the business cycle is difficult, therefore there are substantive risks to our inflation, interest rate, employment, and housing forecasts. However, fundamentally, we believe that the multifamily sector will remain steady through 3Q2023 but begin to slow in 4Q2023. Demand has held up during the first half of the year, albeit at a slower pace than had been seen over the past two years. We expect that with the recession possibly occurring later in the year demand should hold up over the summer but begin to slow down during the fall. Our estimate for rent growth is between 1.5% and 2.0% in 2023 but with vacancy possibly increasing to between 6.0% and 6.5% due to elevated levels of new construction expected to complete and deliver this year.
Steve: Despite an unpredictable market thus far this year, as a business, we are quoting, underwriting and funding deals daily. We are focused on optimizing our volume cap, producing the right mix of affordability, volume, risk and economics. Market conditions have certainly impacted volume for the first half of the year and our forecast has been adjusted as such. Typically, we see volume pick up in the second half of the year. At present, it is unclear if this year will follow this historical trend. Regardless, we remain acutely focused, engaged and ready to execute the moment the market accelerates.
Click here to read the rest of the Q&A, including Rob and Steve's thoughts on the impact of loan maturities, industry trends they are watching, and more.
Greystone has observed a notable surge in HUD deals year to date, surpassing last year's figures by over 20% for the same time span. We have successfully secured new HUD transactions amounting to more than $3.5 billion so far in 2023.
- Growing demand for HUD's new construction product, 221(d)(4), has been significant as banks reduce construction lending
- HUD refinancings are penciling out to offer borrowers more proceeds than alternative options
- Rise in demand for HUD refinancings signals a positive shift in the market
HUD is an attractive lending option for market-rate and affordable multifamily properties and offers diverse solutions for refinancing, acquisition, rehabilitation, and new construction.
Greystone is the #1 Multifamily HUD Lender* and known for delivering creative capital solutions to clients. Click here to learn more.
*For HUD’s 2022 fiscal year. Based upon combined firm commitments received by Greystone Funding Company LLC and Greystone Servicing Company LLC and excludes risk sharing and hospital loans.
Following up on Part 1 published last month, Cushman & Wakefield’s Project & Development Services (PDS) team is pleased to introduce a streamlined process for owners and investors to inexpensively evaluate and quickly decide if a building should be further explored for a full conversion.
Key Considerations for Office-to-Multifamily Conversions:
- Abundant natural light, operable windows and shallow core depth to exterior windows are important.
- Conversions typically take less time and money than new construction.
- Less parking is generally required; areas can be converted into gyms and other amenities.
- Amenities are key to standing out against other residential projects.
- More municipalities are offering tax breaks as part of conversion economics.
Inspired by the data released in the U.S. Multifamily MarketBeat, we wanted to share the largely positive second-quarter performance across the Cushman & Wakefield Asset Services portfolio.
As one of the largest third-party property managers nationally, Cushman & Wakefield Asset Services data shows unique insights not available through third-party data sources.
- Properties managed by Cushman & Wakefield have continued to see occupancy expansion.
- Lease trade outs have slowed from all-time highs but remain well above the historical benchmark.
- Some metros with more construction activity have seen concessions remain somewhat elevated, but most markets experienced a similar trend.
|We’re excited to launch the latest edition of the Cushman & Wakefield and Greystone Insights Magazine. Click here to read the full edition.|
JULY 2023 EDITION
Good morning – hope your holiday weekend is off to a great start.
We are excited to kick-off our July edition of Multifamily Monthly with a brief Q&A featuring Blake Okland, the newly appointed Chief Revenue Officer for Greystone. Blake has been a force in the multifamily sector for many years. His expertise, experience and client-centric mindset will be a valuable addition to the Cushman & Wakefield Greystone joint-venture.
Many of our readers are familiar with the positive impact you've had in the multifamily sector, but for those that don't know you well, can you share more about your background?
I started my career as an analyst at Security Capital Atlantic, which became Archstone in 1998. I then moved to CBRE in Atlanta and was there until 2004 when I joined ARA as a partner in the Carolinas operation.
At the time, we were comprised of 7 offices and grew to 27 offices, then forming a debt joint venture with CW Capital. It was an exciting time of growth and I was fortunate enough to be on the Executive Committee nationally from 2006 forward. I was serving on that committee as our President during the Great Financial Crisis in 2009/2010 which was a huge challenge and served as a catalyst for us to look at our path forward as a collective. By 2013, there was a groundswell among the partners to roll-up & sell the company to expand our capabilities. We were also increasingly preoccupied with satisfying our clients' desire for us to have full national coverage AND continuity across offices, as well as building a fully-integrated capital markets solution platform with global capital reach. That was a huge order at the time!
Me and two other senior partners led the committee to explore that and we ended up selling to Newmark in 2014/2015. I stayed on as part-time Head of US Multifamily Capital Markets during the transition and decided to move into that role full time in 2017. At the time, we had a joint venture with a fabulous capital markets solutions firm based in London called Knight Frank (hence our name at the time, Newmark Knight Frank) that was active throughout Europe, the Middle East, and Asia and I was honored to be included on their Global Capital Markets board to help further our ability to monitor capital flows across the globe and deliver our clients a truly global perspective. We did that across all product types and had representatives on that board from Office, Retail and Industrial as well. All in all, it was a great journey and provided many experiences I look forward to drawing upon this experience as I move into this next stage of my career.
What drove you to this opportunity to serve as the Chief Revenue Officer for Greystone?
Many reasons. I had gotten to know Steve Rosenberg over the years and was very drawn to the culture he and his team had built. That was pretty much "love at first sight." Greystone also reminds me so much of the glory days at ARA as it relates to values, entrepreneurship and dynamic capabilities / talent. So many talented people with the capabilities of radically impacting a client base for good in so many ways gets me really fired up!
I also had been heavily involved in the process of integrating the debt and sales functions throughout my career, but especially in my Newmark years, so that overlap with this new opportunity is a natural fit. From my time on the Global Board, I became educated on how difficult it is to build a truly global enterprise. Cushman is one of those globally recognized brands, and in my opinion that takes several generations to build and the fact that the joint venture with Cushman and its well known brand can be utilized as a springboard is a truly unique combination and opportunity for explosive growth.
Blake, you have seen several market corrections, where do you see the opportunities in today's environment?
There has never been an environment in my career with more disruption in real estate that will create new opportunities for new capital solutions. Many trends were slowly making their way through the real estate ecosystem that were put on hyper-speed due to Covid. The resulting stimulus, subsequent inflationary pressures and higher interest rate environment will continue to be transformational across all property types to varying degrees. I think the environment for the next couple of years could resemble some combination of the real estate recoveries from the wreckage of the S&L crisis subsequent massive reset in the real estate markets in the post RTC mid-90s, but also will carry some characteristics of the transformative period after the Great Financial Crisis in the early 2000-teens. In the event we see elevated rates for an extended period of time, the opportunities to provide solutions to complex problems for our clients will be abundant, and client motivation to consider transformative things to get through those problems will be at an all-time high. It is an exciting time to be designing solutions and figuring out how best to bring them to the market.
KEY CONSIDERATIONS FOR OFFICE TO MULTIFAMILY BUILD-OUTS — PART 1
Many occupiers are now migrating to the very highest quality office options, while downsizing their footprints upon relocation. This is leaving many older office buildings cash-strapped and struggling to maintain and deliver the office amenities necessary for a brisk lease up. In this challenging environment, some office building owners are considering office asset conversion to multifamily residential.
Considerations for Converting Office to Multifamily
This option requires careful analysis from multiple perspectives, including that of the build-out process. The following are some key considerations for conversions. Please see a more detailed list in this graphic.
- Zoning Guidelines
- Floor Plate & Building Core Layout
- Apartment Unit Depth
- Structural Considerations
- Façade Considerations
- MEP Infrastructure and Venting
- Government Incentives
Cushman & Wakefield’s Project & Development Services (PDS) practice can help investors assess the risk and reward of an office to multifamily conversion.
Look for Part 2 of this article in our August edition.
Q&A WITH DOUG DUNCAN, CHIEF ECONOMIST AT FANNIE MAE
Greystone had the opportunity to chat with Doug Duncan, Chief Economist at Fannie Mae, and gain valuable insights into the ever-evolving world of housing and finance. Doug shares his expert perspectives on the current market trends, economic outlook, and the impact of policy decisions on the housing industry. A word upfront from Doug: The views I’m sharing today are my own, not necessarily those of Fannie Mae or its management.
What is your interest rate outlook for 2023 and how does this shape your expectations for multifamily sales activity and multifamily lending?
We expect the U.S. 10-year Treasury rate to average 3.5% across 2023 and then to drop slightly into 2024 as the expected modest recession slows economic activity and inflation.
Has the runup in interest rates slowed single-family home sales enough to meaningfully support demand for multifamily housing?
The sudden rise in residential mortgage rates has slowed purchase activity and slowed house price appreciation, although not as much as we expected. There is still significant pent-up demand as Millennials, many of whom have financial strength, look past today’s higher rates to bid on homes not that there are fewer bidders to compete against. That said, we expect rents to be flat to slightly higher this year.
Click here to read more Q&A with Doug, including his thoughts on labor markets, demographic changes, and new supply within multifamily.
We’ve seen significant growth in our readership over the past few months. For those interested in reading past editions where we’ve covered trends across the sector and highlighted other select markets, please visit our archive.
Thank you for your partnership. We wish you a great rest of the weekend and a happy 4th of July!
JUNE 2023 EDITION
Good morning – hope your weekend is off to a great start.
This past month, the U.S. Census Bureau released new population estimates that track population movement across states, markets, and counties. This data is especially important not just to multifamily investors, but to the CRE community at large. Our Head of Multifamily Insights, Sam Tenenbaum, released a synopsis of the data this past week. The last bullet, which digs into the fastest-growing markets in the nation, ties in perfectly with this month’s market spotlight, where we highlight the incredible growth we’ve seen in the Carolinas.
On behalf of our multifamily professionals across Investment Sales, Debt, Asset Services and Valuation & Advisory, we appreciate your partnership and look forward to a successful second half together.
INTEREST RATE MARKET PULSEAfter a volatile first half of the year, where do you see interest rates settling in Q3/Q4?
Unless we see further substantive improvement in inflation, we are anticipating that interest rates stay in the current range of 3.50% +/- 25 basis points (as measured by the 10-year Treasury rate). Two and a half months ago, the 10-year Treasury rate marked a recent high at 4.06% (on 3/2/23) just before the insolvencies of Silicon Valley Bank and Signature Bank. 10-year Treasuries dropped some 40-50 basis points in the three to four days following this event, and have been in the range of 3.50% since then, +/- 20 basis points. Our view is based on an expectation that the US inflation rate stays sticky and further improvement will be slower to achieve.
What about inflation?
We have had a steady improvement on inflation over the past year – the CPI, year-over-year, broke through 5.00% for April 2023 (4.90%). That’s down from 6.50% earlier this year (and from just over 9.00% last summer). This inflation improvement so far was the “easy” part – largely “transitory” due to supply chain disruptions and demand for excess goods due to the COVID pandemic. Getting from around 4.9% inflation down to the 2% Fed Reserve target inflation will likely prove more difficult. Also, we don’t expect inflation to reignite; the Federal Reserve is pursuing a hawkish/restrictive monetary policy which is likely to result in a recession later this year (and the hawkish Fed policy will combat inflation and keep longer term interest rates from moving higher).
Click Here to Read Serafino's Answers to Questions about Regional Banks, Recession Impacts on the Multifamily Sector, and Tools the Fed Can Use to Influence Inflation Rates.
With Cushman & Wakefield’s property management platform of more than 178,000 units managed nationwide, we understand the value of the insights obtained from our own managed portfolio.
- All eyes remain on operations: our team has onboarded 10,048 units this year across the country, and one common theme we continue to hear from our clients is a laser focus on outperforming the market, operational efficiency, and our proven consistent and stable operations.
- Nationally, trade outs remain strong in in both new leases and renewals. We have seen new leases and renewal trade outs converge, seen in the graph below. These trade outs have accelerated since the start of the year and continue to outperform the long-run average.
- Workforce housing outperforms with limited new competition. We continue to see rent pressure in the Class B and C space. That said, all classes have seen performance improve as we enter peak leasing season.
- Evictions are on the Decline. These peaked earlier in the year as courts freed up, and continue to decline over recent months. As a share of our occupied units, we have seen evictions come in by 20 bps, and are now tied with the lowest rate over the past year.
- At the same time, delinquencies are down significantly. Today’s delinquencies are lower than at any point since the onset of the pandemic, indicating renters continue to meet their obligations even as inflation takes a bite out of real incomes.
On the latest episode of GLOW CRE, a new monthly podcast sponsored by Greystone, hosts Pamela van Os and Pharrah Jackson interview Susan Tjarksen, Managing Director at Cushman & Wakefield. A successful entrepreneur based in Chicago, Susan has sold two CRE businesses and works on high-profile structured finance and development deals in the Midwest.
GLOW CRE is an honest look into what it’s like being a woman in real estate finance, and Susan’s episode is chock full of salient advice and actionable insights on how to get to the top. Listen to the episode here.
Connect CRE also recently spoke with Susan Tjarksen in advance of an event in which she is presenting. Click here to read the transcript and learn more.
We’ve seen significant growth in our readership over the past few months. For those interested in reading past editions where we’ve covered trends across the sector and highlighted other select markets, please visit our archive.
Thank you for your partnership and we wish you a great rest of the weekend.
MAY 2023 EDITION
Note from Leadership
One of my colleagues shared a great saying with me this week: “the dream is free, but the hustle is sold separately”. I love it! And how especially fitting in today’s environment. I’m incredibly grateful to all our multifamily professionals that are going above and beyond to help our clients navigate through the challenges and opportunities of this market. And it’s very encouraging to see the positive impact across our four businesses.
- In April, we closed over $3.3 Billion in Sales Transactions and have over $5.6 Billion Under Contract scheduled to close this Quarter. We’re tracking to performance levels not seen since June of 2022.
- Our Equity, Debt & Structured Finance team has been equally as active closing over $1.0 Billion in Volume in April and has over $1.6 Billion closing this quarter.
- Greystone has seen applications reach new heights. Incoming requests are up 2X compared to the fourth quarter, and April’s volume is up 30% compared to April of 2022. Year-to-Date applications have crossed $8 Billion through April as Agencies continue to step in to provide liquidity to the multifamily industry (more on the topic later).
- Our Property Management arm, which manages more than 170,000 units nationally, saw property visits up 16% year-over-year. Across our 80+ lease ups, we saw average leases signed per month increase from 16 units in January to 23 units to end the first quarter. Both statistics demonstrate rebounding renter demand heading into the peak spring and summer leasing season.
- Our V&A business has seen a meaningful uptick in bid activity, reflecting a thawing lending market. Our pipeline is up 115% over the fourth quarter. In April alone, the team received 800+ Multifamily RFPs across the US which is 5x higher than September of 2022.
We compiled a short deck recapping the first quarter, including some proprietary data to help keep our clients up to speed.
Agencies Poised to Take Back Market Share
In the wake of the banking crisis that has unfolded over the past few months, the market is witnessing a sizable shift in the multifamily financing environment. As the only asset class with government-backed debt, lending from government agencies was already on the rise to start the year. It is poised to continue re-growing its share through the rest of the year as other lenders further step back from loan origination.
The modern lending environment has changed drastically as new debt sources came into play. Until the Great Financial Crisis (GFC), government agencies were relatively minor players in the multifamily debt market. From 2000-2006, agency lending as a share of total borrowing averaged just 16%. The bulk of financing was done through CMBS and banks, which represented about 75% of the overall sale and refinance volume during that time frame. That changed after the agencies went into conservatorship. During the financial crisis, the agencies provided nearly 75% of all multifamily debt from 2008-2012.
Multifamily Lending Activity Breakdown
Since the GFC, the agencies have been the dominant source of multifamily debt capital, displacing CMBS and bank lending. Government agencies have represented about 58% of total multifamily loan originations since 2010, representing a key source of liquidity in the capital stack. Conversely, banks represent a much smaller share – about 20% of overall multifamily lending since 2010, indicating that the banking crisis shouldn’t create significant concerns for liquidity in the multifamily sector. However, before the onset of the COVID pandemic, the agencies’ share of lending had been falling for years as the lending environment diversified, with banks, debt funds, and life insurers buying into the positive multifamily story. When COVID hit, agencies again leaned in to provide much-needed liquidity – offering up 60% of all multifamily debt in 2020.
As the apartment market saw a significant recovery, agencies lost share despite reaching their caps. Borrowers shifted to lenders who were more willing to underwrite the extreme growth that was occurring across most of the U.S., especially favoring debt funds offering competitive bridge debt. As a result, the agencies’ market share tumbled to the lowest levels since the agencies entered conservatorship.
This year, we have already seen an uptick in liquidity provided by Fannie and Freddie. Through the first quarter, agencies have stepped up, improving their share by nearly nine percentage points. While we’re not even halfway through the year, based on our proprietary data, we expect that share to increase, given the level of interest for agency loans.
Greystone has seen a significant uptick in loan requests over the past two months, quoting both refinancing and acquisition debt. These two months are the highest level of activity since 2021. Agency pipelines are ballooning, with longer times to get quotes back out, given the level of interest seen. If this activity level holds, agencies should be able to hit, or at least approach, their lending caps this year, even amid economic uncertainty.
Greystone Monticello Bridge Platform Overview & PREMIUM PRICING PROGRAM
Greystone Monticello’s Bridge Loan Program has the capital capacity and creativity to structure the best bridge loan for our clients. Borrowers are cautiously pursuing bridge loans due to rising interest rates and pricing disparity between buyers and sellers. The prevailing floating rate index, 1-month CME Term SOFR, is currently over 5.0% and all-in rates typically exceed 8.0%. Therefore, a shift in the bridge customer base has occurred with the many bridge loan opportunities requiring a short-term solution, such as a newly constructed lease-up transaction, or a recapitalization of an existing transaction. Greystone Monticello’s Bridge Loan Program is strategically designed to meet the market demands as our loans allow for a no-penalty prepayment after 6 months. Additionally, we have rolled out a Premium Pricing Program that provides Year 1 pricing of 225-250 bps over SOFR, a discount to market spreads of approximately 100 bps.
We are committed to understanding our borrower’s business plans, to provide tailored short-term loan solutions for lease-up, value-add, or lease-trade-out strategies.
Please reach out to your Greystone representative to learn more about our Bridge programs. If you do not have a representative; CLICK HERE.
NCREIF Q1 RECAP
- Value-write downs continued throughout Q1 as properties reappraised to reflect the rising interest rate environment.
- The private, institutional side continues to lag adjustments seen throughout the public side; however recent quarterly changes are helping to align the two.
- Income returns (of around 1% for the quarter) continue to offset negative capital appreciation dynamics, though not enough to lift Total Return into positive territory.
- All property types registered positive annualized NOI growth, with Industrial leading (13.9%), followed by Apartment (8.3%) and Retail (6%); Office positive at 2.8%.
- Appraisal-based valuations are adjusting to the rising cap rate environment; however, their backward-looking nature is generating a widening gap to what is actually trading.
Senior Managing Director
Cushman & Wakefield
Managing Director and
Head of Agency CMBS
Trading at Greystone