Berkadia Webinar Forecasts Opportunities Along the “Bumpy” Road to Price Discovery
For a quick reminder of how much change the capital markets environment has undergone in the multifamily space over the past year, Hilary Provinse, Head of Capital Markets and Production Strategy, Co-Head of Mortgage Banking and Institutional Solutions at Berkadia, said on Berkadia’s Jan. 24 2023 U.S. Forecast Webinar, the Mortgage Bankers Association (MBA) was projecting a 31% increase in debt originations for the year.
“Multifamily-specific projections were also bullish: a 25% year-over-year increase,” said Provinse. “The 10-year Treasury was around 1.75% and we were still questioning whether inflation was transitory. The Federal Reserve had yet to do a single interest rate hike. That’s right—the federal funds rate was still at zero. Floating rate caps were also affordable; a 4% strike on a two-year cap cost a whopping nine basis points. Debt fund and bridge options also abounded. There were over 100 different funds in the market at this point last year.”
Fast-forward to January 2023: the Fed has increased its benchmark rate several times and the MBA is projecting that origination volume will contract rather than expand. The year ahead is also expected to mean adjustments to pricing expectations. “We have the belief and the hope that once the Fed stops hiking interest rates, it will allow for price discovery to occur in the investment sales market,” Provinse said. “We do think volumes will be backloaded for the year.”
“Price discovery also means that capital stacks are going to look different than they did two years ago,” she continued. “Call it rescue capital, preservation capital, preferred equity, whatever you want to call it. As price discovery occurs in the market, it’s important to know how to access capital up and down the stack in order to keep transactions flowing,” she added.
As to the timetable the Fed is likely to follow, Jefferies chief financial economist, Aneta Markowska, said it’s likely that we’ll see a 25-basis-point increase in February, to be followed by another in March and another in May. “Our outlook is that the Fed will get to 5.1% in terms of their terminal funds rate,” Markowska said on the Berkadia webinar. “They’ll probably hold it there for the rest of the year” because the central bank will wait until either inflation dips to 2% or the unemployment rate rises to 5%.
“That’s probably not until early 2024,”’ she continued. “But then we do think that they’ll be in a position to actually cut rates pretty aggressively.”
Following Markowska’s presentation on the economic outlook, Mary Ann King, co-head of Institutional Solutions for Berkadia, provided guidance on the investment outlook for the coming year while waiting for “the next great cycle” to begin. “Investors should look for sellers who have the need to create liquidity in their portfolios to manage redemption queues, sellers with loan maturities that can’t be refinanced at current rates because of leverage constraints or sellers with assumable financing,” King advised. “They should consider recap options where one partner needs or wants to sell and the other partner wants to stay invested.”
“Investors looking for yield should consider niche sectors within the apartment space,” she continued. “Build-to-rent and workforce housing are niche sectors that do seem likely to overperform. Investors will want to consider the product types and submarkets that are likely to experience the greatest demand during the new normal. They should look for investments in markets with manageable political and climate risks, as well as properties that are being future proofed with features like managed wi-fi.”
Further, said King, “Investors should look to align themselves with sponsors that can execute well managed and efficiently capitalized affordable housing strategies. They should consider value-added investments that address both ESG and DEI concerns. Investors should look to invest with management companies that have the digital technology to minimize payroll costs and with sponsors that understand the metrics of successful office-to-resi conversions.”
Ernest Katai, EVP and head of production at Berkadia, walked webinar attendees through a history of the company and the leadership positions it holds in today’s commercial real estate investment market.
“If you look at mortgage banking, we’ve done about $75 billion in loan originations over the last couple of years. And if you look at investment sales transaction volume, we’re at about $49 billion over the last two years,” Katai said. He noted that represented “considerable growth” from 2014, when the company did $4 billion in investment sales and $10.5 billion in mortgage banking.
The growth trajectory continues. 2021 saw the acquisition of Moran, which raised Berkadia’s profile in the institutional space, while 2023 is already seeing a new global alliance with Knight Frank—discussed on the Jan. 24 webinar, with Berkadia’s co-head of investment sales Keith Misner joined by Knight Frank’s global head of capital markets Neil Brookes—as well as Berkadia’s debut in the medical and life sciences sector. And although ‘things started to get really quiet” in the fourth quarter of 2022, Katai said that as of early in Q1 2023, “we’re picking up momentum.”
He acknowledged that “there will be challenges in the market. That road to price discovery could be bumpy, and although there will be economic challenges and uncertainty, we believe this will bring many opportunities this year. In addition to Fannie Mae and Freddie Mac, life companies and banks will continue to be players and there will be significant construction take out opportunities.”
The hour-plus webinar concluded with Berkadia CEO Justin Wheeler interviewing Sharon Wilson Géno, the incoming president-elect of the National Multifamily Housing Council (NMHC). Wheeler asked what issues the NMHC will be addressing under her leadership and Géno replied, “Housing has never been a bigger issue on the national stage or in state and local jurisdictions. So, there are a number of issues floating around.”
Most of these issues, she said, emanate from one of two buckets. “One of them is housing affordability, and there are a number of proposals that have been floating around in that bucket. It falls on the federal level, but also on state and local levels.” The other related component is the issue of rent stabilization, which is occurring mainly on the state and local levels.
“But both of those I see as branches rooted in the same trunk, which is housing supply,” said Géno. “We simply do not have enough housing, in the right places, that suits the population across the country. And that’s an issue that we’ve got to address.”
Paul Bubny serves as Senior Content Director for Connect Commercial Real Estate, a role to which he brings 13-plus years’ experience covering the commercial real estate industry and 30-plus years in business-to-business journalism. In this capacity, he oversees daily operations while also reporting on both local/regional markets and national trends, covering individual transactions across all property types, as well as delving into broader subject matter. He produces 15-20 daily news stories per day and works with the Connect team and clients to develop longer-form content, ranging from Q&As to thought-leadership pieces.
Prior to joining Connect, Paul was Managing Editor for both Real Estate Forum and GlobeSt.com at American Lawyer Media, where he oversaw operations at both publications while also producing daily news and feature-length articles. His tenure in B2B publishing stretches back into the print era, and he has served as Editor in Chief on four national trade publications.
Since 1999, Paul has volunteered as the newsletter editor of passenger rail advocacy groups (one national, one local).