Berkadia Webinar Charts What’s Ahead Following “Incredible Year for Multifamily”

“Without overstating the obvious, 2021 was an incredible year for the multifamily industry,” Berkadia CEO Justin Wheeler said at the outset of the firm’s 2022 Forecast webinar. “Resurging payrolls, a wave of new household formation and an ever-growing barrier to homeownership helped fuel robust apartment fundamentals. We also saw leasing reach its highest level on record. And all of this against a backdrop of pandemic and related economic uncertainty.”

Even as that uncertainty continues, CRE activity is robust and rent growth and occupancy are expected to easily outpace pre-pandemic levels, Wheeler added. He expressed optimism about prospects for the industry generally and for Berkadia as 2022 unfolds. He cited “a tidal wave of maturing loans, a growing pool of yield-hungry investors and continued liquidity support from government-sponsored entities.”

Wheeler set the stage for presentations from Berkadia’s in-house experts and Aneta Markowska, chief financial economist, Jefferies Financial Group. Although most would agree that “inflation is the number one issue or question facing investors at the moment.,” Markowska would focus on the labor market.

She said the question of whether inflation is real has been settled; it’s here. The debate has shifted to how long it will last and what it will do to the economy, i.e., will it squeeze purchasing power and ultimately cause the economy to crash, or can the economy flourish alongside inflation? Answers to both questions lie in the labor market.

“My view is that we are headed toward the tightest labor market conditions since the 1950s,” said Markowska. The result will be more wage inflation, which will keep inflation going through 2022 but also lead to more purchasing power.

Providing an overview of apartment trends was Mary Ann King, co-head of investment sales and head of Berkadia’s Institutional Solutions, powered by Moran. These included long-term trends that Berkadia sees continuing and even accelerating because of the pandemic, along with emerging developments that industry members are watching.

The flood of capital has broadened geographically in recent years, King noted. As recently as 2012, 50% of all apartment investments were concentrated in just five major markets: Dallas, L.A., Atlanta, New York and Phoenix. By 2019, investors spent 70% of their dollars across a much broader landscape. COVID has accelerated the geographic dispersion of capital, “but it was a trend that was already well underway.”

Private investors continued to dominate multifamily last year, deploying 65% of the capital in 2021. “But the search for yield attracted other types of buyers as well,” said King.

Institutions accounted for 24% of the capital deployed, with the remaining 11% share coming from REITs, foreign capital and other investors. Portfolio sales were at an all-time high, representing 22% of all apartment sales in 2021.

“So even though we expect interest rates to rise in 2022, we still expect interest in apartments to remain strong from all types of investors,” she said.

The supply-demand imbalance in the apartment sector is continuing. Over the past 12 years, an average of 300,000 units have been developed annually while 342,000 units have been absorbed. In 2021, there were 673,000 units absorbed versus 364,000 delivered, the strongest absorption pace on record going back to the 1990s. Even as deliveries are expected to increase in 2022, the supply profile is expected to continue.

Meanwhile, rents and occupancies have also been increasing steadily over the past nine years. “The continuously strong fundamentals in the apartment industry will continue to make it a beacon for investment capital,” said King. That means that the compression of cap rates is anticipated to continue.

Ten emerging trends that investors should consider in 2022:

1) Macro migration trends are changing, with the South seeing stronger population growth than the U.S. generally.

2) Micro migration trends matter too. Despite what the popular press is reporting, “not everyone in California is moving to Texas.” About a third of the households that left Los Angeles in 2021 went “right next door” to the Inland Empire, for instance.

3) Single-family rentals have transitioned from a niche category to one of the hottest today.

4) A scalable capital markets solution, the JPA (joint powers authority) deal, has emerged in California to provide affordable housing for the missing middle.

5) The impact of an increasingly complex legislative overlay on project and portfolio NOIs.

6) The pace and profile of urban recoveries.

7) The impact of changing work patterns on renters’ locational and product preferences.

8) The increasing appetite for workforce housing.

9) The increasing focus by capital providers on sponsors’ ESG profile, goals and accomplishments.

10) The increasing focus by management companies on smart home, digital communication and self-guided leasing technologies.

Looking at investment sales volume generally, “Many of us predicted that 2021 would be a bounce-back year, but I’m not sure that any of us predicted the 75% year-over-year increase” in transaction volume, said EVP and co-head of investment sales Keith Misner. At Berkadia in particular, deal volume for all of 2020 was $8 billion, versus $7 billion in December 2021 alone.

On the loan origination side, Hilary Provinse, EVP and head of mortgage banking at Berkadia, pointed out that in 2021, the firm couldn’t rely on Fannie Mae and Freddie Mac quite as much as before, since their multifamily caps were lowered to $70 billion each. “So we were going to have to rely on other capital sources to step up, and step up these sources certainly did,” she said. Every lender demonstrated appetite for multifamily, and all increased their holdings of mortgages last year.

Although the Mortgage Bankers Association hasn’t yet released final figures on commercial real estate and multifamily loan originations for 2021, it has projected $578 billion in loans backed by CRE last year, which would be a 31% increase from 2020 and just below 2019’s record of $600 billion. Provinse noted that Freddie Mac released its estimates, citing a $450-billion market for multifamily mortgages, a 25% year-over-year increase.

Just as multifamily’s strong fundamentals are continuing to drive investor demand, Provinse said they’re also propelling lender demand “and the need for really creative structured financing for these acquisitions.”

While life companies and commercial banks were “unbelievably active” last year, Provinse said the real story was the emergence of debt funds and bridge financing. There were more than 100 new debt funds in the market last year.

Often, Provinse pointed out, they’re capitalized by institutional investors. “A lot of these investors are really looking to diversify their real estate strategies, and so they’re moving down the capital stack and putting money to work on the debt side of the business in addition to the equity side.”

Thanks to a surge of CLO activity on Wall Street, the funds were able to offer interest rates comparable to banks’, and often with higher leverage. The emphasis of these funds continues to be shorter-term loans and transitional strategies for owners. A 2021 trend in CMBS issuance—single-asset, single-borrower deals—is likely to continue into 2022.

The GSEs will continue to be the benchmark for multifamily lending, Provinse said. FHFA raised their multifamily caps to $78 billion each, but also required that 50% of their business be mission-driven affordable housing. Therefore, this segment will see the GSEs’ most aggressive pricing.

At the company level, Berkadia’s 2021 origination volume was $40 billion. This was a record as well as a 50% increase from 2020. The company also had a banner year in other origination metrics, as Provinse discussed.

Summing up, Provinse said, “We have many reasons to continue to be enthusiastic about the opportunities in the multifamily market.” Dori Nolan, SVP, national client services, concluded the presentation with a Q&A session.

Replays of the Jan. 13 webinar are available by clicking here.