Tale Of Two Cities: As Financial Markets Soften, Multifamily Assets Continue Performing

The current economic uncertainties have created a “tale of two cities” in the multifamily market, as the overall financial markets waver against record-breaking growth in the sector, panelists said at this year’s GlobeSt multifamily conference. 

“What’s different about the current situation is how quickly things have turned,” said Sean Burton, CEO of Cityview, at a panel on institutional investment 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 rates have gone up, I’ve never seen anything like it. And it’s creating crazy disruption but is very much a tale of two cities….you have this tremendous disruption caused by the financial markets and interests rates and yet the assets are really performing. We’re still seeing incredible rent growth.”

In other words, assets are performing, but the financial markets are “kind of messing everything up,” Burton said.

Deal volume is indeed down, however, with panelists agreeing that buyers are being “extraordinarily picky” and underwriting standards tightening up significantly. Cap rates have ticked up in the sector and rent growth is moderating, causing investors to change their assumptions to a new curve and lower proceeds.  As one panelist remarked, “who is selling in this market if they don’t have to?”

That’s in stark juxtaposition to the last decade or so, when “every time you decided to take risk you were rewarded,” said Ritesh Patel, CIO of Virtu Investments LLC.  But while panelists agreed that the next 12 to 24 months will be difficult for many market participants, buying opportunities are likely to abound for well-positioned buyers.

“We definitely have our heads down and are focused across our assets on squeezing every penny out of the expense side, really leasing very closely and managing occupancy, being proactive on debt and looking at a specific debt plan for every single asset,” Burton said. “We have to stay ahead of potential issues, but what we learned in GFC was not to have our head too far down because there are going to be great buying opportunities.”

Douglas Schwarz of JP Morgan Asset Management noted that “we’re not in a recession yet,” adding that the “economy is actually pretty resilient.” He says the Great Financial Crisis left some market participants scarred – and that that psychology could be driving a lot of the doom and gloom.

“Rents are obviously slowing down and there a lot of signs we may be in recession in the coming months, but people are also scarred from 2009 and fear what’s coming,” he said. “The psychology of the last big recession was really painful. Nobody wants to feel that again…there’s this feeling of, ‘did we all have this wonderful 10 year run that’s about to be taken from us?’ The fear part of it is a lot stronger than the fundamentals necessarily.”

Schwartz said he doesn’t expect a lot of deal flow in the next few quarters, but that it “certainly feels like a great place to be building a portfolio.”

“Multifamily fundamentals are strong,” he said.