A tale of two cities: As financial markets soften, multi-family assets continue to perform

Current economic uncertainties have created a “tale of two cities” in the multifamily market, as global financial markets balk at record industry growth, panelists said at this year’s GlobeSt multifamily conference.

“What’s different about the current situation is how quickly things have changed,” Sean Burton, CEO of Cityview, said during a panel on institutional investment in the sector. “This is the fifth recession I’ve seen, but the speed at which it happened this time, the speed at which rates rose, I’ve never seen anything like it. And it creates a crazy disruption, but it’s really a tale of two cities… you have this huge disruption caused by financial markets and interest rates and yet assets are really performing. We are still seeing incredible growth in rents.

In other words, the assets are doing well, but the financial markets are “sort of screwing it up,” Burton said.

However, trading volume is indeed down, with panelists agreeing buyers are “extraordinarily picky” and underwriting standards are tightening significantly. Cap rates have risen across the sector and rental growth is moderating, forcing investors to change their assumptions to embrace a new curve and lower revenue. As one panelist noted, “Who sells in this marketplace if they don’t have to? »

That’s in stark juxtaposition to the last decade or so, when “every time you decided to take a risk, you were rewarded,” said Ritesh Patel, CIO of Virtu Investments LLC. But while panelists agreed that the next 12-24 months will be challenging for many market participants, buying opportunities are likely to abound for well-positioned buyers.

“We definitely have our heads down and focused on our assets to extract every penny on the expense side, rent very closely and manage occupancy, be proactive on debt and look at a specific debt plan for each asset” , Burton said. . “We have to stay ahead of potential problems, but what we learned in GFC is not to get our heads down too low because there will be big buying opportunities.”

Douglas Schwarz of JP Morgan Asset Management noted that “we’re not in a recession yet,” adding that “the economy is actually quite resilient.” He says the Great Financial Crisis has left scars on some market participants – and that psychology could be behind much of the disaster.

“Rents are obviously slowing down and there are a lot of signs that we could be in a recession in the coming months, but people are also scared of 2009 and fearful of what’s to come,” he said. “The psychology of the last great recession was really painful. Nobody wants to feel that again… there’s that feeling of, ‘Have we all had this wonderful 10-year run that’s about to be taken away from us?’ The fear part is much stronger than the fundamentals necessarily.

Schwartz said he doesn’t expect a lot of deal flow over the next few quarters, but it “certainly looks like a great place to build a portfolio.”

“Multifamily fundamentals are strong,” he said.