eCore23 Fireside Chat: Arbor and RXR CEOs Discuss Business, Politics, and Multifamily
At the eCore23 Summit in Miami in November, two long-time colleagues who first met in the 1990s, Arbor Chairman and CEO Ivan Kaufman and RXR Chairman and CEO Scott Rechler, hosted an exclusive hour-long Fireside Chat before an intimate group of multifamily leaders, where Kaufman emerged as the optimist.
“I’m extraordinarily bullish because right now, we’re in the highest cap rate and the lowest advance rates, which is where I want to be, and I really believe from a multifamily perspective, this is going to be the greatest 12 months that we’ve had in front of us,” said Kaufman.
A Time Unlike Any Other
“This is not like ’08,” Rechler said. “I would say, as an industry, we’re in the first inning of what’s going to be a long game.”
“We saw some financial shocks in March with the regional banks, but there’s more that’s going to come because you can’t raise rates as quickly as [the Fed] did and not expect there to be financial shocks,” said Rechler, who is on the Board of Directors of the Federal Reserve Bank of New York.
“What I will say is they are hell-bent on not lowering interest rates until there’s not a flicker of a chance inflation is coming back. So even if you’re in a situation which I could see, where the headline inflation number drops below 2%, I don’t think rates are going to come down.”
Kaufman added that the Federal Reserve has been slow to react and correct because of the use of lagging indicators. “My feeling is that they are going to hold us longer than they should, and the economy really has significant signs of slowing down,” he said.
Superstar Regions Supersede Superstar Cities
Kaufman and Rechler, whose companies are both headquartered in New York, also dissected the reasons why New York City stands out among all other U.S. cities.
“What makes New York and all great cities successful is the talent. So as a market for multifamily, it’s a 2% vacancy rate in New York right now.”
But, Rechler added, times are changing. His company, RXR, has expanded its business outside New York to other cities with high levels of talent migration flows, good education systems, quality healthcare systems, and strong leadership. Kaufman has also expanded Arbor’s office presence in Miami, Boston, Newport Beach, and Buffalo in the past year.
“You need to really have a superstar region,” Rechler said. “You need to not only have the city center, but you need to have the connectivity that people can find good qualities of life at a more affordable price.”
For example, New York City has 8 million residents, but 20 million people can get there in 45 minutes, creating a vast talent pool. Rechler said he sees similar attributes in Phoenix, Dallas, Denver, Tampa, and Raleigh.
The Strong Fundamentals of Multifamily Endure
Kaufman told the audience that the silver lining of the rental housing market is the strength of the labor market. “If we can put the people to work, everybody who owns class B and class C will be pretty happy, because you’ll have a lot more occupants who are paying rent,” he said.
Rechler and Kaufman also covered how multifamily was hit with a “double whammy” when a period of historic highs collided with a new chapter of high interest rates. Despite significant dislocation today, Rechler agrees with Kaufman that multifamily will rebound faster than other commercial real estate classes in two to three years from now.
“I think the fundamentals in the rental sector are good, and that’s why we’re investing in a lot of multifamily,” he said.
Rechler spoke about how changing demographics are influencing future multifamily demand.
“I like the higher end because I think part of it is there’s a change, as I said, in how people work, there’s a change in how people live,” he said, mentioning how empty nesters, who want convenience and flexibility, are a cohort that is going to drive demand for rental housing.
“One area that we like a lot is construction financing because you’re building products that will be delivered on the other side of this,” Rechler said. “You’re investing today at great terms, not a lot of competition, and yet you’re delivering two years from today.”
Kaufman, whose company launched Arbor Private Construction as a new area of focus in 2023, is bullish on construction lending because there is less competition from banks right now and deliveries will not occur for several years when the economic environment is expected to be different.
The Spiraling of Insurance Costs
Kaufman and Rechler also briefly delved into the impact of rising insurance costs on the commercial real estate industry.
“There’s obviously some things like in places where there’s extreme weather like here or other parts around the country that have their own nuances,” Rechler said. “The bigger structural issue is that there’s a clog in the reinsurance market.”
“There has been discussion about trying to think about whether there’s a way to create more liquidity in the reinsurance market, which is something I think that ultimately needs to get done.”
Rechler added that even though insurance premiums have jumped, the federal government has become leery of intervention after the great financial crisis.
Looking Ahead to the Next Cycle
Although borrowing costs have increased sharply, Kaufman said that opportunities for lenders and owners are phenomenal today. “I do see the fundamentals as being very strong. With interest rates higher, people are not buying homes, they’re renting,” he added.
“We all know the last 12 months have been very painful, he said. “The next 12 months, it’s going to be a lot to manage, but I think the outlook is very bright.”
Watch the full Fireside Chat video to learn more.
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