Commercial Multifamily Real Estate: Less Headwind, Strong Economy at Our Tail

The MBA’s Jamie Woodwell sees a robust demand for housing over the next decade

In a recent Commercial Real Estate Finance Council markets report, Jamie Woodwell concluded, in part, “Commercial and multi-family real estate finance is at the end of the latest Act in a long-running play.”

Woodwell — vice president of the Mortgage Bankers Association’s Research and Technology Group — would indeed say the sphere is in a new act. It’s one that’s not defined, like the last one, by emerging from the recession. But this new act is similar, as the positive indicators for success are still going strong.

“For a number of years there, post-recession, we were in this situation where the markets were both benefitting from a growing economy as well as having a whole lot of tail winds that were coming from just coming out of the recession,” Woodwell said. “What we’ve seen the last year or two — and, actually, bleeding into this year as well — is really a continuation of the strength in the economy. So, we’re no longer getting out of the recession, really, but we’ve got a very strong economy at our tail.” Most economists expected to see interest rates rising and the growth of the economy to slow a bit, he said — but that hasn’t happened: “What we’ve seen is a lot of that growth, the strength of the job market, the strength in the economy and the low interest rates, extend into 2019 as well.

“So, while I said we are into that next act of the play, it seems like the beginning of this act is still carrying on a lot of the themes and energy from the end of the last act.”

Woodwell spoke with Mortgage Media’s Eric Souza, prior to this week’s Commercial/Multifamily Serving and Technology Conference in Los Angeles, about the commercial and multifamily real estate markets, and how it is functioning in the current economy.

About 1.6 million new households were created last year in the United States, Woodwell said — which corresponds to an obvious demand for housing, both in the single-family residential market and the multi-family market within CRE (including rental properties, condos and so forth). The two markets don’t have to be — and aren’t — in tension, he suggested; they’re “on parallel paths,” and it’s not a zero-sum game, in which someone choosing to own is a blow to the rental market.

“I think what we’re seeing right now is that there is just such a surge in demand for housing, and actually, across those single-family and multi-family, we’re not building as many new units as there are new households being formed,” he said. “So, I think what you’re seeing there is that the single-family and multi-family markets are both getting a little bit of a boost from that household formation that we’re seeing. And the demographic trends on that continue to be favorable.”

There’s a particularly strong demand for multi-family rental, due to the growth of the millennial cohort, who tend to rent longer than previous generations — which is bring met by a strong new supply, with roughly 600,000 multi-family units under development right now, Woodwell said, noting that’s a level not seen since the mid-1970s. At present, he said, the demand and supply are pretty evenly matched.

Demographic and social trends, along with economic growth, bode well for the housing market as a whole, Woodwell noted: “There should continue to be very robust demand for housing for the next decade.”

Granted, it’s only human — especially if you’re a human who went through the financial crisis and subsequent downturn — to wonder when the other shoe is going to drop. “Growing up in Pittsburgh, if it was sunny today, I might be going and getting ready to grab my raincoat for tomorrow,” Woodwell quipped, noting that one can look at the economy and the housing market that way.

But he doesn’t see that other shoe dropping anytime soon.

“If you take a step back from that and look at the fundamentals, the commercial real estate market’s fundamentals continue to be pretty darn strong, if you look at where the markets are, if you look at where valuations are, if you look at, certainly, loan performance,” he said.

So what does the April jobs report — which looked strong, Souza noted — mean for CRE? Different impacts across, different property types, Woodwell explained:

  • More people with jobs means more people in a position to start — or maintain — a household, which is good for housing demand in general, both single- and multi-family.
  • The long run of employment growth — the longest we’ve seen, Woodwell said, means a net benefit for the office market. Granted, efficiencies in space usage, downsizing of space per employee, more people working remotely and the like provide something of a headwind — but the surge in overall employment counteracts that.
  • A strong economy and employment growth translate to growth in retail sales — both online and in brick-and-mortar sales. And strong retail has a ripple effect into the industrial sphere as well, driving more demand for warehouse space, research-and-development space, and the like.

“So, without a doubt, the strong economy and the healthy job market and helping pretty much all sectors of commercial real estate,” Woodwell summed up.

Taken together, this is a good time and place to be, Woodwell concluded — good for builders, for sellers, for buyers and borrowers, and hence for lenders:

“I think, in general, when you look at where the market is right now — particularly the real estate finance market — you’ve got good solid fundamentals, you’ve got strong property values, and you’ve got very low interest rates. So all of it means that we’ve got a very active lender base out there, looking to make commercial real estate loans. I think if you’re a property owner, certainly a time to be identifying opportunities there and how the financing matches up with your property, and your plans for it.”


Commercial/Multifamily Real Estate Finance (CREF) Markets – 2018