Multifamily Near-Term Recap and Forecast
Coming up on Multifamily Minute.
Sam Tenenbaum:Right now is the time in which multi family shines. Right? When we have these big dislocations, this uncertainty, the fact that occupancies, generally speaking, are north of 90% in just about every market around the country.
Abby Corbett:I think that proverbial kind of air pocket of supply is certainly acting as a strong conviction point for folks as you look cyclically ahead. So that's definitely encouraging. How do you contextualize all of this then really at the investment strategy level?
Sam Tenenbaum:It's very hard to say one specific investment thesis is clearly the dominant one and going to rule the day for the next cycle.
Host:All that and more on this episode of Multifamily Minute by Cushman and Wakefield. Welcome to Multifamily Minute, hosted by Cushman and Wakefield, where we dive into what's on the minds of investors, operators, and market observers in the multifamily commercial real estate market. I'm your host today, Abby Corbett, senior economist and head of investor insights for our think tank here at Cushman and Wakefield. And today, I'm joined by Sam Tenenbaum, my very esteemed teammate who acts as our head of multifamily investor insights. Sam is joining us today to share his perspectives on the multifamily sector, really from an institutional investment perspective.
Abby Corbett:Hello, Sam.
Sam Tenenbaum:Hi, Abby. Happy to be here.
Abby Corbett:It's our it's our first podcast. What do you think of that?
Sam Tenenbaum:I could not be more excited.
Abby Corbett:Are you excited? I'm excited too. We have to act normal, though. Right? I mean, that's that's part of this this whole thing.
Abby Corbett:I do have a set of real burning questions up my sleeve. But first, I think it would be helpful just to give our listeners a sense of baseline or level set. I often speak to the inflections that I'm following. So I'd love to see what you're feeling on the ground from an inflection standpoint and where we're at today.
Sam Tenenbaum:Sure. I mean, I think the biggest inflection we've seen in the overall market, pretty easy to point to for the first time, since 2021, we've actually started to see the vacancy rate decline quarter over quarter, not a huge decline, 10 basis points, but it's on the backs of really strong demand. So really strong demand has finally started to translate into vacancy declines right at the time as we start to see supply inflect.
Abby Corbett:Yeah. I think that caught us all by a little bit of surprise and caught the attention of the market. So definitely encouraging on that front. So the next kind of thought process or question that I'd love to walk through with you really just gets to the topic of supply with respect to the point of concern that it's been for investors. What's your take there on the supply side?
Sam Tenenbaum:Sure. So I mentioned briefly that it's inflecting. I think it's pretty clear we're either at or very close to the peak of new deliveries. It's it's always hard to to get an exact sense of where deliveries are because some projects slide to the following quarter or or the like as as delays happen during construction. But either we're at or very close to the peak or it's just behind us.
Sam Tenenbaum:We're we're kind of troughing from a from a occupancy standpoint and and from a supply stand, but we're we're peaking right now. And as we look forward, though, that that's sort of where where this starts to get really interesting. Because given where financing costs have moved and how far pricing is has, has shifted, Developers really aren't appropriately being compensated for the degree of risk that comes with building right now. And so we're seeing starts come down dramatically. Starts are down about 50% year over year.
Sam Tenenbaum:Construction pipeline is down about 30% from the peak. And so we started to see that kind of inflect as I mentioned earlier, all at the time, as we're starting to see maybe a floor get put under pricing as well. We're starting to see baby institutions come back into the market, not just looking to be active, just to kick the tires on sort of where the market is, but now actually bidding to try and win deals as we saw Blackstone and KKR in particular through the first half of this year.
Abby Corbett:Yeah. I mean, I think that proverbial kind of air pocket of supply is certainly acting as a strong conviction point for folks as you look cyclically ahead, so that's definitely encouraging. We're through kind of this really difficult period. We have this air pocket behind us. So how do you contextualize all of this then really at the investment strategy level?
Abby Corbett:And I say that kind of very broadly, but, you know, you have a lot of conversations with clients and investors out there. And I would imagine that sometimes folks are coming to you saying, well, are the same strategies of this last cycle still relevant today? Right? You know, the Sunbelt investment thesis. Where are your thoughts just from investment strategy, and where do those conversations tend to lead you?
Sam Tenenbaum:Sure. I mean, I think right now where we are today, it's very hard to say one specific investment thesis is clearly the dominant one and going to rule the day for the next cycle. Some of that is a function of the uncertainty in the capital market space. Some of that's just general uncertainty about the market. Some of that's just a function of investing.
Sam Tenenbaum:You have to make a bet and sometimes the bets pay off and sometimes you wish you put your money somewhere else. In the past cycle, Every investor was chasing the sun up. There is huge population growth, huge demand growth, lots of economic growth. He was very easy to kind of chase as an investment thesis. And it made sense in a lot of cases, but obviously it was also followed by the developers who build a ton of new construction, certainly the epicenter of where we saw most of the construction, over the past few years.
Sam Tenenbaum:You think about Austin, you think about Nashville, some of the markets, which were obviously investor darlings and did very well in 2021, and have sort of come back to Earth as the new supply is delivered, which is obviously forcing up vacancies and and creating a little bit of challenge there. You know, that said, I think it's also worth pointing out that a lot of these markets are some of the most in demand places in the country. So far this year, the top four markets for demand are Dallas, Houston, Austin, Atlanta, and Phoenix, Orlando, and Nashville are also right behind them. If you think about Texas in particular, in the past year, population growth among major metros or metros with more than a 1000000 people saw about 800,000 net new people into those cities. Of that, 33% of that growth came from Dallas and Houston law.
Sam Tenenbaum:Right? So that's a huge level of population growth in terms of apartment demand. We're clearly seeing that as well. What we're seeing right now in terms of weakness in the sun belt is really a function of just new supply, which will eventually be absorbed as we continue to see the demand momentum we've seen this year. And you think about the level of population growth that's still happening in the sun belt.
Sam Tenenbaum:That's, you know, the majority of population growth in major metros are happening in the southern part of the US, you know, 5, 6, 7, 8 times more than any other region in the country in terms of population growth. So as the economy either screws recession or enters recession, then comes out of recession, the general population movement towards the southern part of the US is certainly going to be there. It just comes back to the supply question. Right? These are generally pro supply markets, pro pro housing development markets.
Sam Tenenbaum:And that's a good thing over a long term if you think about your renter, you're trying to keep your rent affordable. It just eats into returns from an ownership standpoint, as you're just competing left and right with construction, when the markets start to heat back up again.
Abby Corbett:I think you bring up a really good kind of prescient point for the industry right now, which is probably an entirely separate podcast, but it just gets to, you know, the juxtaposition of affordability and what that means for households and the country at large. So that's definitely something to kind of weigh against the supply constraint elements of, of those kind of strategies.
Sam Tenenbaum:I think to the other point that, that you were making earlier with the broader strategy of, of what makes sense in the next cycle, You know, in a, in a higher interest rate environment, as we, we expect to see here at Cushman and Wakefield, it may make some sense to look at some often overlooked areas of the country. And there are some markets in the Midwest that have really compelling demographics, which is a strange thing to say about the Midwest, given all of the things that we've seen over the past decade plus in the Midwest. You know, but I think there, there is good real estate just about everywhere. And as long as you're appropriately compensated for it, whether that's lower basis or better outlook and returns and the like, the point is that there's great real estate everywhere and a market location will drive a lot less of the return move forward as it has maybe in the past where, you know, everyone who bought into Phoenix and Vegas and Austin, Dallas, you know, in 2016, got paid very handsomely for that. I think it will be less market driven and more getting back to real estate, foundational questions on what basis are you buying at?
Sam Tenenbaum:Will there be exit opportunities for that product and sort of the location, location, location real estate axiom?
Abby Corbett:The point that you bring up too, is there's always opportunities to differentiate from a strategy standpoint. And I think that this cycle will have been a challenge for some, particularly, you know, that had floating rate debt and that are working through that, and there's opportunities to kind of infuse capital into those Houston's of the world for folks that are interested in recaps and so on. But you always have the contingent out there who's interested in the Midwest thesis and so on and the stability and and lack of volatility there.
Sam Tenenbaum:To be clear too, I mean, there's there's compelling investments in the West Coast if you believe in the AI revolution, the growth that's there. And there's probably no market that's been hit, you know, by the pandemic worse than the bay area. And if you believe long term that when the agglomeration effects that exist in the bay area and then have existed in the bay area for decades now, you know, riding that wave up at at a very compelling basis today was is certainly a strategy that could work over the next cycle as well.
Abby Corbett:Yeah. I mean, I think we see strong evidence of that just within the pipeline and and deal flow that we see internally within our capital markets platform taking shape and already realized on the West Coast recently. So so okay. I have 2 more questions for you for our very first podcast together, Sam. So this this next one, I think, is a little bit more of a zinger for you.
Abby Corbett:Wanted to make sure you got warmed up here. But we've seen the expansion of niche and alternative sectors. Right? They've been gaining significant attention from an institutional portfolio management standpoint so much so that NACREF has even expanded their NPI to include all of those types of assets, right, subtypes. So I'm curious what your take or position or response would be in in terms of whether you feel there's still kind of room and traction and attention to traditional multifamily in portfolio management today and the conversations that you're having or, you know, it's is the rise of alternatives and niche capturing so much attention that you're kind of being pulled in those directions as well?
Sam Tenenbaum:It's a great question. You're really trying to get me today, Abby. I can tell. As I think about, you know, where multifamily fits within portfolios right now, there's 2 there's 2 different approaches. Right?
Sam Tenenbaum:You could take the wisdom of the crowd approach, which I think is pretty clear that most investors believe in the multifamily story. If you just look at fundraising, since 2020, there's been, you know, more than $165,000,000,000 raised for residential specific funds. That doesn't include any of those diversified funds that obviously will have fairly large residential components as well to them. But that, that $165,000,000,000 figure is twice the size of, of industrial, which is the next largest product type that that funds have been raised for. And so there's there's clearly capital out there ready and willing to chase multifamily and believing in the multifamily story.
Sam Tenenbaum:But if you if you're looking for my opinion, look, I believe that there will be a place for multifamily and portfolios. If you look at, you know, Odysee allocations, multifamily allocations have been rising with core open ended funds portfolios, which I think is, you know, another, another wisdom of the crowds approach that you can take. But when I think about multifamily, it's inherently a defensive asset class, right? If you think about it, it's, it's really the only needs based asset class. People need to live somewhere in a way that, you know, maybe they don't need office space.
Sam Tenenbaum:They don't need as much retail. You know, they're not doing much shopping, whether that's online or in person. And so that has impacts for businesses and get a much larger degree than you see in the multifamily space. All that said, though, with the exception of 2021, which was obviously an aberration for a lot of reasons, it generally doesn't see huge outperformance from, from the overall trend line in terms of returns and the like. Some of that is a function of the amount of capital that's chasing the space.
Sam Tenenbaum:And some of that is also looking forward. Right? Multifamily doesn't have the same kind of onshore and near shoring trends that, that the industrial market has. It doesn't have the same demand for data and data centers and power and the like that, that sector has, we don't expect it to be the biggest outperform or over the long term as the economy starts to heat back up and we start to get into, you know, a more normal part of the cycle. But right now is sort of the time in which Molton family shines, right?
Sam Tenenbaum:When we have these big dislocations, this uncertainty, the fact that occupancies, generally speaking, are north of 90% in just about every market around the country speaks to the relative defensive nature of the asset class over a longer timeframe as well.
Abby Corbett:I love that. I, I, and, you know, I think that defensiveness and stability of income returns and so on is is so thematically meaningful right now. So I think I think you're right. And, you know, you you kind of actually transitioned perfectly into my last question for you, but and touched on it a little bit just with respect to conviction points. Right?
Abby Corbett:Conviction points for the sector at large. You obviously touched on kind of the the stability of fundamentals, the needs based kind of demand side profile. Are there any other points that you would love to mention to the audience before we before we end our very first podcast together, Sam?
Sam Tenenbaum:For for sure. I think the other component of the niche conversation or the multifamily niches, right? It's not just conventional multifamily that has some legs. I think you think about senior housing in the gray of America and how much demand we're going to see from big boomers that are maybe sizing out or aging out of their single family homes, or just aren't able to keep up with the single family lifestyle and need to be in somewhere with a little bit more care. You think about that component, you think about the single family rental market.
Sam Tenenbaum:We'll talk about that in terms of a point of conviction for the conventional market as well. But you think about how unaffordable the single family market is today by comparison. There's a huge wave of demand for would be buyers, but right now it just doesn't make a whole lot of sense for to, to buy a home relative to renting, which is the conversation that most people have to have. And that doesn't obviously get into the huge shortage that we talked about earlier with the affordable housing shortage that we have in this country and the huge demand that's piling up waiting at the door to get into all of that capital and affordable housing and also lowercase ag affordable housing as well. But in terms of other other points of conviction, we talked about the durability of occupancies.
Sam Tenenbaum:I think it's also worth pointing out that since 2000, there has been one quarter of negative demand for multifamily and it was barely negative. It was less than 2,000 units of net move outs, that happened in the Q4 of 2022. There is a huge demand for housing across the US degree of housing shortage varies depending on what source you're looking at. But generally speaking is between 1,000,007,000,000 units, which is obviously a huge gap between where we need to be and where we're headed, over the next few years as that supply pipeline shuts down, as we've talked about earlier. And so we're we're just going to exacerbate that for both on the conventional side, but also all of those subtype side sides as well in terms of of niches.
Sam Tenenbaum:You know, we can talk about the single family market with just a little bit more detail here. One of the favorite ways that I like to talk about the single family market and the dislocation. Sure. You could look at the mortgage payment versus run and the huge divergence there. But the way I like to think about it is how much home could you buy today?
Sam Tenenbaum:If you wanted your mortgage payment to be what rent is at the peak of the market, when you could buy the most house, if you just used average rent, you could buy a house that was about $500,000 which was give or take 40% above the US median home price. Right. So if you think about what that means and what you'd be giving up to leave your great class a apartment luxury product, right? You're buying a nicer house, maybe a newer house, a bigger yard, more amenities. Maybe it's got a pool.
Sam Tenenbaum:So you're really not sacrificing as much. Whereas today, the home that you'd be able to afford is about $330,000 That's a 30 plus percent reduction in buying power. And by the way, that home is also 15% below what their median home is trading for on today's market. Right? Cause we haven't seen a huge home gross adjustment.
Sam Tenenbaum:And if you think about what that means, you're further out. You have a smaller house, less amenities. You're maybe trading in what was a 15 minute commute from your apartment building to now a 30, 45 minute commute because you have to live between an inner ring and outer ring suburb. Is that really something you're willing to do when you could just keep renting for a few more years and hope that the market normalizes? No, most people aren't.
Sam Tenenbaum:Right. And that's why we've seen the client in the home ownership rate over the last few quarters and, and why, you know, we expect there to be this big dislocation moving forward, because if we are in a higher interest rate environment, Mortgage rates probably aren't coming down to a point in which we'd unlock a lot of that demand. And quite honestly, I'm not sure the fed wants to see that either given the inflation run up we had when we did unlock a lot of that demand.
Abby Corbett:Yeah. And I mean, I think you bring up a, a great point, which is, as we think about the fed and, and just the, the near term uncertainty, kind of we all get so weighed down and and that and the volatility and what's what's gonna happen in the the immediate near term with the Fed's cutting cycle and so on. But all of the conviction points that you lay out, I think you did a really great job providing me that confidence and perspective, the the longer term and bigger picture tailwinds for the sector. So high five. High five, Sam.
Abby Corbett:That was very helpful. Well, I have to say this has been a a good first podcast high five to to you, Sam. Thank you for all of your insights and perspectives.
Sam Tenenbaum:Thanks for having me.
Abby Corbett:Yeah. You're welcome. I I do believe you're going to join in future sessions as well, so I'll have to stay tuned for that. Well, thank you all for joining us for this very first edition of Multifamily Minute. Visit us at cushmanwakefield.com backslash multifamily minute for more info, and be sure to subscribe or follow us on Apple Podcasts, Spotify, or your podcast app of choice.
Abby Corbett:Thanks so much, and see you or listen to you next time.
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