For more than 30 years, Arbor has been committed to growing financial partnerships that meaningfully impact communities nationwide. From planting trees to celebrate closed loans to supporting environmental organizations, our work has always been a win-win for our financial partners and the planet. But just as leaves change with each passing season, Arbor’s branding is evolving to seize the moment by embracing our roots with True Colors.
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.
Key Findings
Ivan Kaufman is the Founder, Chairman and CEO of Arbor Realty Trust, Inc. (NYSE:ABR), a leading multifamily and commercial real estate lender and real estate investment trust. Arbor manages and services a $42 billion real estate loan portfolio and has originated more than $20 billion in loans since 2021. Arbor is recognized as a top lender by Fannie Mae and Freddie Mac. Ivan is also the co-founder of Arbor Multifamily Acquisition Company (AMAC), an investment firm created in 2012, which owns and operates over 12,000 units and has acquired more than $2.5 billion of multifamily properties across the country. Through his successful development and evolution of many companies that span nearly four decades through all cycles, Ivan Kaufman is a trusted thought leader and pioneer in all aspects of commercial real estate finance.
Sam Chandan is a professor of finance and Director of the Chen Institute for Global Real Estate Finance at the NYU Stern School of Business. He joined the Stern faculty in late January 2022. From 2016 through early January 2022, he was the Larry & Klara Silverstein Chair and academic dean of the Schack Institute of Real Estate at the NYU School of Professional Studies, one of the world’s largest centers of real estate education. He is also the founder of Chandan Economics, an economic advisory and data science firm serving the institutional real estate industry, a contributor to Forbes, and host of the Urban Lab on Apple Podcasts. Dr. Chandan is chair of the Real Estate Pride Council, a global association of lesbian, gay, bisexual, and transgender leaders in the professions of the built environment. Dr. Chandan is a Fellow of the Royal Institution of Chartered Surveyors (FRICS), the Royal Society for Public Health (FRSPH), and the Real Estate Research Institute (RERI), and an Associate Member of the American Society for Microbiology (ASM). His multifaceted research interests address real estate as well as urban epidemiology and the preparedness of global cities and other systemically important urban areas in managing novel public health threats.
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Over the short-term, with the Fed embracing hawkish monetary policy, fears are rising that a recession may lie around the corner if we are not in one already. By increasing the cost of capital, a decrease in investment activity is the intended mechanism for pulling the reins back on the economy and cooling runaway prices. An echoing chorus of notable voices, including former Treasury Secretary, Lawrence Summers, has forecasted a near-term recession in recent months. Similarly, as captured by the Wall Street Journal Economic Forecasting Survey, which reflects the sentiments of a broad cross-section of leading economists, respondents pegged the probability of near-term recession at 49% when polled in July — up from 28% in April and 18% in January. As reported by Morning Consult, the technical declarations by the National Bureau of Economic Research mean little to the average American, with two-in-three adults thinking we are already in a recession.
Beyond just a recession, the specter of a stagflationary environment — where inflation remains untamed as the economy contracts — is the most significant macroeconomic risk on the table today. Disposable income per capita declined in 12 of the last 15 months through June — making recent history one of the most entrenched periods of consumer spending power loss on record (Chart 2). According to the U.S. Census Bureau’s Household Pulse Survey, declining spending power is having a tangible effect on the ability of consumers to afford daily expenses. In July, the share of households reporting at least some difficulty in meeting their expenses in the past week reached 65.5%.
In an economy where consumption accounts for the dominant share of gross domestic product, there is no plausible scenario where households can fall behind for an extended period without a commensurate deterioration in both spending and growth. While the probability of returning to a 1970/80s-style stagflationary environment remains low, its presence in the national conversation alone necessitates caution and vigilance from policymakers on both sides of the monetary and fiscal divide.
Within the market for rental housing in the U.S., the multifamily sector is uniquely positioned to withstand growing economic headwinds. An extraordinary run-up in single-family home prices and rising borrowing costs are pushing ownership out of reach for many first-time homebuyers. Mortgage interest rates are up above 5.3% in the second quarter of 2022, making the debt servicing costs for new homebuyers roughly twice as high as they were just one year ago. According to John Burns Real Estate Consulting, potential homeowners could expect to pay $839 more per month if they were to buy instead of rent, the highest such premium on record. Subsequently, the Mortgage Bankers Association notes that mortgage credit availability declined for the fourth consecutive month in June, and credit standards are significantly tighter today than before the pandemic.
Historically, where access to homeownership has declined, the rental market has benefited. Rental vacancy rates, which are currently at their lowest levels since the early 1980s, tend to move directionally with the homeownership rate (Chart 3). With barriers to homeownership mounting, the multifamily sector will likely have to make room for an influx of renters.
Beyond stable tenant demand, several other headline gauges of health continue to support confidence in the rental housing sector’s ability to withstand distress. Trepp notes in its tracking of CMBS loans that the delinquency rate for multifamily has continued to improve in recent months and sat at a benign 0.9% through July 2022. Further, asset valuations continue to rise, even as public equity markets are struggling, and the cost of capital is rising. According to
MSCI Real Capital Analytics, apartment prices continued to press higher, gaining 23.7% year-over-year and 1.6% month-over-month.
The WFH trend has changed more than workplace culture. Never have we found ourselves in a position where the workforces of our superstar cities, which comprise the lifeblood of their metropolitan economies, could completely divorce their housing decisions from their physical place of work. In no uncertain terms, the threat to costly superstar cities is real. The values of agglomeration, from both a lifestyle and a productivity standpoint, are significant. However, there is a limit on how much employees and employers will pay for this agglomeration premium when there are viable, cost-effective alternatives.
To cement competitive advantages and retain labor force talent, superstar cities, now and in the decades to come, require strategic investments. Structural affordability crises and a lack of infrastructure modernization are issues that will require expensive solutions, though their price tags will be dwarfed only
by continued inaction. More than ever, effective public leadership that understands these needs will be critical for the success of the nation’s largest cities.
Of course, public leaders need-not go it alone. Cities are symbiotic ecosystems that require buy-in from residents and private industry, not just local governance. Through deepening public-private partnerships (PPP), local leaders can access both the expertise and capital resources needed to accomplish transformational projects. In New York, from Hudson Yards and Moynihan Train Hall to Cornell Tech and the reconstruction of the World Trade Center, where there have been alterations to the urban fabric, it has required PPPs to graduate action plans into action. Elsewhere, Challenge Seattle’s efforts to bring ultra-high-speed rail and broadband internet access through the interconnected Pacific Northwest’s “Cascadia Corridor” is another example of an ambitious PPP course setting.
Inflation has exceeded the Central Bank’s initial expectations in both severity and duration. In the months ahead, the Fed plans to continue to engage in aggressive monetary policy, prioritizing re-asserting control of price dynamics over the longevity of the economic expansion. Still, the rental housing sector is in an idiosyncratic position of stability. The combination of risks to growth and rising rates may keep even more households in the rental market for the foreseeable future, buttressing the sector against growing macroeconomic headwinds. For cities, the time is now to leverage strengths — not rest on them. Otherwise, rental housing demand in the U.S. will begin to look more like a zero-sum game, where the superstars risk losing their shine.
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