Since the Fannie Mae Green Rewards program launched in 2015, green financing has become a mainstay of commercial real estate. In addition to reducing the environmental impact of multifamily housing, the Green Rewards program creates a triple bottom line with increased cash flows, higher quality housing, and lower energy and water usage. With a high upside and little downside, the program is well worth multifamily borrowers’ consideration.
From California wildfires to rising sea levels to Florida hurricanes, the direct and indirect risks of climate change have grown in recent years, making a more substantial impact on the multifamily sector. As the need for sustainability becomes increasingly apparent, lawmakers and lenders have advanced programs and policies that show “going green” is a win-win.
As housing costs spiral, rental affordability has become a more urgent issue, burdening a greater number of Americans. Arbor’s Affordable Housing Trends Report Spring 2024, developed in partnership with Chandan Economics, examines the major policies and programs shaping the marketplace at a time when overdue federal funding expansions have increased agency budgets.
In front of professionals and executives from more than 120 companies at the Real Estate Pride Roundtable in New York City in April, dozens of speakers shared honest perspectives on how far the commercial real estate industry has come on LGBTQ+ inclusion and how much more it has to go.
Lifestyle renters — those who have the means to own but prefer to rent or are willing to pay more for apartments with amenities — have become a key driver of rental demand in single-family rental homes, build-to-rent communities, and other types of high-quality multifamily housing. With this small yet influential demographic growing, our research teams examine and explain the factors driving lifestyle renter demand.
On balance, the SFR sector continues to demonstrate strength amid economic turmoil, attracting increased attention from the broader multifamily investment community.
With nearly one-fifth of multifamily properties now over 65 years old, it’s time to consider solutions for rejuvenating the rental housing stock in the U.S. While building rehabs are a tried-and-true solution, build-to-rent (BTR) is an alternative that is well-positioned to expand as Americans increasingly favor renting over homeownership.
In a year when inflation and elevated interest rates weakened affordability, the rental housing sector strengthened and expanded. An analysis of newly released U.S. Census Bureau Housing Vacancies and Homeownership data shows the number of rental households climbed in 2023.
Key Findings
Reinforcements, however, are on their way. After months of legislative inaction, the 2021 Consolidated Appropriations Act passed both congressional chambers on December 21 and became law on December 27. The newly approved spending earmarks $900 billion for additional COVID-19 relief aid, including a partial reinstatement of the disaster unemployment benefits and a $25 billion Emergency Rental Assistance program. While the rental assistance program is undoubtedly a welcome sign to struggling renters and landlords alike, a RealPage analysis of the program indicates that the $25 billion is likely not enough to address all concerns. Moreover, the analysis suggests the allocation process is not well-aligned with state and local needs.
According to Chandan Economics, small multifamily asset pricing has recovered from the early spring — a positive symptom of the market’s deep pool of liquidity. While cap rates remain exceptionally low by historical standards, they did jump by their widest quarterly margin since 2009. All else equal, the ongoing pressures created by the pandemic and continuing recession are not overly affecting the small asset subsector compared to the rest of the multifamily market, and targeted agency support has, to date, been effective in avoiding worst-case scenarios.
Buyers pulled back in second-quarter 2020, with multifamily transaction volume for the quarter falling 67% from the year prior, according to Real Capital Analytics. While buyers have started to return in recent months, the pace of recovery remains slow. The prospect of finding distressed deals has kept many would-be buyers on the sideline.
Lenders, meanwhile, have remained active. The availability of refinancing capital has meant that property owners with expiring mortgages, or simply those that want to access their accrued equity, are not disposing of their assets from a disadvantaged position. Refinancing activity as a share of total small multifamily lending ranged from 61.2% to 66.7% between first-quarter 2019 and first-quarter 2020. Since the onset of the pandemic, the refinancing share has soared, reaching a new high of 78.5% in the fourth quarter (Chart 5).
The credit quality of the U.S. government is perceived as unmatched, making the price it pays for its debt an approximation for the risk-free interest rate. The risk-free interest rate is embedded within the yield structure of all other market returns, including cap rates. Investors require additional compensation when accepting additional risk. We can infer this risk premium in small multifamily by looking at the difference between asset cap rates and 10-Year Treasurys.
Despite increased concerns over property-level operations during the pandemic, 10-year Treasurys rates sank to new lows. As both occurred in tandem, small multifamily cap rates moved like a rope in a game of tug of war. On net, falling Treasury rates won out, and cap rates ticked down in the second and third quarters. In the fourth quarter, growing optimism about the economic recovery in the year ahead led Treasury yields to do the unthinkable: rise (albeit marginally). Treasury yields averaged 0.86% in the fourth quarter — a 21 bps rise from the previous quarter.
With small multifamily cap rates rising by less than Treasurys in the fourth quarter, the risk premium narrowed to 452 bps (Chart 10). The spread is down by 21 bps from its recent high of 473 bps set in second-quarter 2020. The risk premium measured between small multifamily and the rest of the multifamily sector recovered slightly in the fourth quarter, doubling from 21 bps to 42 bps (Chart 11). Moreover, the fourth-quarter average brings the spread directly in line with the average set over the 12-months ending March 2020.
Loan-to-value ratios (LTVs) on small multifamily loans continued their vertical descent in the fourth quarter, averaging 65.2%. After topping out at 70.6% in first-quarter 2020, LTVs proceeded to fall by 237 bps in the second quarter, 71 bps in the third quarter, and 232 bps in the fourth quarter (Chart 12).
Across the rest of the sector, LTVs resumed a sliding trajectory in the fourth quarter as well. Average LTVs for all multifamily properties dropped by a substantial 346 bps from the previous quarter, reaching 66.5%. From the high point reached in the fourth quarter, LTVs for all multifamily properties are down 614 bps. According to Chandan Economics’ initial fourth-quarter estimates, the LTV spread between small multifamily all multifamily stood at 131 bps, nearly half of the 246-bps spread measured in the previous quarter.
Debt yields — the ratio of net operating income (NOI) and loan balance — for small multifamily loans jumped by 53 bps to 8.2% in the fourth quarter of 2020, the highest level seen since third-quarter 2019 (Chart 13). The trend was similar for all multifamily properties, where debt yields rose by an appreciable 88 bps to 7.5%.
The spread between small multifamily and all multifamily debt yields fell to 64 bps in the fourth quarter, the lowest level on record (Chart 14). Debt per dollar of NOI, the inverse of debt yields, fell for both small multifamily and all multifamily loans in the fourth quarter. Small multifamily borrowers are securing an average of $12.24 in new debt for every $1 of property NOI, down 84 cents from the prior quarter and 6 cents from last year (Chart 15).
Reaching herd immunity is the single most important factor for a sustained recovery, and the continued vaccination rollout credibly brings that reality within sight. The most recent McKinsey projection (as of November 2020) forecasts that the U.S. will hit herd immunity and a return to somewhat “normal” life around the third or fourth quarter of 2021. While there is hope on the horizon, the labor market may see further deterioration in the months ahead. After months of slow progress, more jobs were lost than added in December, and a reprieve may not come until the spring. As long as there is a labor market in crisis, the financial wellbeing of renters will remain a concern. Still, according to NMHC, renters have, with some local exception, successfully prioritized their monthly rent obligations so far during the pandemic.
The success of small multifamily operators in 2021 will likely be increasingly sensitive to local factors. One of the biggest open questions heading into the new year is whether or not the outflowing pour of residents from high-priced markets into less expensive metro areas and suburbs will continue at such a robust pace. All else equal, there is little evidence to suggest that the small asset subsector nationally is underperforming the market for larger properties. Moreover, small multifamily renters are often less transient and are less likely to transition into homeownership, preserving short-term apartment demand. The small multifamily sector outperformed downside projections from the early spring, and its penchant for stability does not appear at risk, even as 2021 may prove to be a bit darker before the dawn.
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