Dan Palmier is founder, president and CEO of UC Funds.
He has been in the real estate and financing business for
more than 25 years, cultivating strong relationships with
leading senior lenders and real estate entrepreneurs. Palmier
believes strongly that real estate investment requires a
sophisticated understanding of finance, along with the
ability to see a partner’s vision and craft a sensible capital
solution. As founder of One Foundation, Palmier supports
many philanthropic pursuits, including the Catholic Schools
Foundation of Boston and New York, the Asian Christian
Academy, various missions in Haiti and more.
Reach Palmier at email@example.com.
Renters Are the New Gold Standard
Demographic shifts and housing-market realities favor a thriving multifamily sector
By Dan Palmier
During the second half of 2018, the com- mercial real estate market has adapted to major shifts occurring within the multifamily sector since 2017. Last year
saw a significant increase in renters over homeowners,
and investors have adjusted accordingly to take advantage
of the trend.
Moving their focus to renters could easily be the wisest
strategy for investors in the coming year. Mortgage
brokers should be equally proactive.
To benefit from the current profitability of renters,
commercial mortgage brokers must understand the
reasons behind their rise in value. They also should take
steps to capitalize on this market in the coming months.
Honing in on renters
As the multifamily sector continues to gain traction in
the context of rising home prices and tight inventory,
investors will look for opportunities and bigger returns
in value-add opportunities. Consequently, it’s important
for commercial mortgage brokers to align their goals
as well. In the Class B and C multifamily asset classes
especially, value-add business plans offer good upsides.
Tenants are willing to pay higher rents for higher-quality housing. It’s also important to keep in mind
that the multifamily sector will always be advantageous
for investors, simply because everyone needs a place
to live. This will never change.
Multifamily, unlike other commercial asset classes,
is insulated from a lot of downside risk. It will remain
attractive to investors even as the market ebbs and
flows because, with minimal risk involved, they can’t
go wrong. Brokers can adopt a similar mindset. When
it’s not a homebuyer’s market, multifamily rentals
become more attractive. There is profitability within
this asset class.
Projections by market experts have correctly indicated
increased interest in renting in the current real estate
climate. Homeowners are facing a significant increase
in interest rates and a reduction in tax benefits, so
potential buyers don’t have a strong economic incentive to purchase a home.
Renting is now a more appealing and sometimes
necessary option, given the current cost of living has
become too high for many people to venture into
homeownership. Cost of living aside, many high-earning
millennials also are more inclined to rent to accommodate
their lifestyles. Rentals offer less perceived risk and
more flexibility for young people not ready for a long-term commitment. Student debt is another factor, as
many millennials may prioritize paying off loans over
saving for a downpayment.
Americans over age 55 have grown more interested
in renting as well. Many baby boomers and empty nesters
are more inclined to downsize from single-family
homes into apartments. Many are looking to relocate
from the suburbs to urban environments, where they
often choose renting over buying.
Millennials and baby boomers who rent tend to focus
first on location. They view housing as an integral part
of their lifestyle, but tend to prefer spendy downtown
areas that offer easy access to transportation, work
and recreation. They also seek Class A amenities like
lounges, gyms and a built-in social atmosphere. Right
now, to achieve this combination, renting is the more
Leveraging the trend
Years of short supply have resulted in pent-up demand
in the multifamily market, with an upsurge in Class A
assets across the country. Today, wealthier renters
have plenty of options to choose from.
Developers are continuing to build luxury units
attractive to those looking for high-end accommodations
in central locations. Brokers working in this market
must take the opportunity to expand their client base,
as the demand for luxury rentals continues to increase.
Brokers in major cities also would be wise to monitor
the growth in popularity of micro units, a rising area
of interest among investors and more cost-conscious
renters. Micro units are smaller multifamily units (often
between 150 and 500 square feet) in major cities such
as Los Angeles and San Francisco. Entry-level executives
and white-collar workers, many of whom are millennials,
are willing to rent a small space for the chance to live
in a big city.
Of equal importance, investors also have started
diversifying into secondary markets like Houston;
Pittsburgh; Brooklyn, New York; Oakland, California;
and Kansas City, Missouri, where the institutional capital
is less expensive than in gateway cities like New York
or Washington, D.C. Assets within these secondary-market areas offer solid loan-to-value ratios for
investments and better overall yields, with less demand
chasing commercial assets.
Meanwhile, gateway cities are increasingly oversaturated with capital investment and development. Investors have become cautious with respect to these heavily
populated markets. Commercial mortgage brokers should
take note and begin assessing the needs of renters in
key secondary cities. Renters in these areas typically
have needs similar to those of individuals in gateway
cities. They want downtown accommodations offering
luxury amenities while staying within a certain budget.
As a result, secondary cities are steadily attracting
developers looking to make a mark by offering renters
Class A accommodations at affordable prices. Brokers
in secondary cities are likely to see more rental-property
closings and a surge of interest from potential clients,
especially millennials, looking to live in growing downtown regions. Today’s consumers also are attracted
to cities like Oakland that provide easy access to the
offerings of larger neighboring cities, with reasonably
priced housing options.
n n n
Changes in population and housing affordability are
leading more people toward renting, which means
investors are carefully eyeing opportunities designed
to meet this demand. Commercial mortgage brokers
can easily take advantage of the chain effect by adapting
their sales strategy to prioritize deal opportunities that
serve renters in both gateway and secondary cities,
and by closely monitoring the needs of millennial and
55-plus consumers. Both groups will continue playing
critical roles in the upswing of the multifamily sector.
Although the multifamily sector walks a fine line
between promoting affordability and avoiding a surplus of supply in some markets, it is still considered
an extremely valuable sector for investors. Commercial
mortgage brokers can use this information to pursue
lucrative business opportunities that address the needs
of today’s renters. Targeting renters now will provide a
significant competitive edge in the year ahead. n
should take note
and begin assessing
the needs of renters
in key secondary