Multifamily investment benefitted from the uncertainties of the past year, but will the transaction volumes of 2021 be used to gauge the likely outcomes for 2022? Managing directors Todd Stofflet and Jason Stevens of Walker & Dunlop’s Chicago office review 2021 and what the trends of this year indicate for the direction of the industry.
REBusiness: What have you seen regarding multifamily investment activity this year?
Todd Stofflet, Walker & Dunlop
Stofflet: Early in the pandemic, we saw a lot of investment pull away from retail and office, focusing more on industrial and multifamily. In 2021, the multifamily sector has fared very well and a lot of new investors have entered the multifamily market. If you talk to some of our colleagues in the Southeast and the “smile states,” they will tell you that transaction volume has never been higher and the amount of capital chasing these opportunities has never been bigger. Across the country, it has been a very strong year for the sector.
REBusiness: Do you think 2021 will be a record year in terms of sales?
Stevens: If our pipeline is any barometer for that, the answer is “absolutely,” but it will be market dependent. What you’ll find is that sales in urban areas will be lower than historical averages, but suburban markets will set records in sales volume. From an across-the-country standpoint, multifamily in general will see record sales. We’ve never had more groups with more dedicated money seeking multifamily opportunity.
REBusiness: What kinds of firms/investors are you seeing involved in the market?
Stofflet: Obviously, this depends on the market, but, for the most part, all the institutions (Blackstone, Starwood Capital Group, etc.) are involved and they have plenty of money to buy assets. Whether the institutions are buying on their own behalf or in some sort of joint venture, they are definitely some of the most aggressive buyers out there.
In the secondary markets, we’ve seen regional and local investors very active given that some of the institutional money is not playing in secondary and tertiary markets. This has opened up the opportunity for family office and syndicators to get a little bit more aggressive and make acquisitions.
Stevens: With multifamily being a buzzword, regional and local investors are being asked to raise money right now for multifamily investment. It’s never been easier for country club money and syndicators to do that.
REBusiness: What sort of properties are garnering the most interest?
Stofflet: There is definitely money for all types of product. Institutions have raised plenty of money to all product types, whether that be shiny, high-rise downtown or suburban value-add. Cap rates have compressed so much that they’re pretty much equal across core, core-plus and value-add. Therefore, groups that may have spent a long time in value-add are starting to look at core and core-plus because they are getting the same yields and they don’t have to do as much work.
REBusiness: What are the deterrents for those investing in multifamily?
Stofflet: Competition. There is definitely frustration in the investment community regarding the competitiveness of the deals that are on market. We are seeing multiple rounds of offers, sealed bids and hard-money deposits in most marketing campaigns. We expect more of the same in 2022 as groups try and get money out.
Stevens: To no one’s surprise, it’s taxes. On the expense side, taxes and insurance significantly affect values. Buyers are going to the markets and the submarkets where tax expense is less onerous.
REBusiness: What regions or markets are you seeing a lot of interest in right now?
Stevens: We’re seeing a lot of interest in the smile states, but we are also starting to see some rebound here in the Midwest. There’s plenty of groups that are tired of competing against dozens of other firms with stiff competition, sealed bids and cap rates of 3 percent. They are starting to look into the Midwest for yields. Depending on what Midwest market you’re in, you’re probably looking at 4.5 percent cap rates.
People are starting to understand that the Midwest fared extremely well through COVID. Collections are at more than 94 percent across the region, occupancies are high and concessions are low.
We’re starting to see some groups pivot accordingly. For example, we have a deal right now in Kalamazoo, Michigan, that involves new money from a Western investment group making the decision to move some of their money into the Midwest. It is likely one of many Midwestern properties that they’ll acquire in the next couple of years, whereas historically they’ve been investing in the Pacific Northwest and Southwest. They’ve decided to come to markets where the natural resources — including water — are a bit more plentiful.
Many investors are looking for the yield opportunities that the Midwest can offer.
REBusiness: What is the availability of capital for investors?
Stofflet: The agencies are still being very aggressive in the debt that they’re putting out. Bridge financing has never been more attractive, given the interest-only periods and where the treasuries are.
There’s an outstanding amount of available capital right now. For the most part — as long as the asset is doing well and there’s a program and strong person behind it — I think capital is very excited.
REBusiness: What impact did COVID have on investors’ and lenders’ concerns on occupancy? Did any of those concerns come to pass?
Stofflet: In the short term, a lot of those concerns came to pass. There definitely was a pause. Most of the investment community was waiting to see if people were going to pay rent. The agencies required a reserve in place on mortgages for COVID-related concerns.
Earlier in the year, we were a little nervous about how the year would end up. But with occupancies and collections staying strong and agencies feeling that multifamily was a stable area to place debt, I think we’ve done very well.
Stevens: Very few rent rolls that we’ve analyzed have had any sort of COVID relief funds built in for people with open balances. For the most, part Midwestern fiscal conservatism has held true in this regard: In the Midwest, people make the choice to pay their rent before they buy their groceries.
As we’ve mentioned, this led to strong collections throughout the pandemic. We didn’t see those deep trenches of debt and open collections that we saw in a lot of other markets.
Stofflet: It’s important to say, there was an impact on rent. Whether it be from a concession standpoint or reducing rent in order to maintain occupancy through COVID (especially in urban centers), we absolutely saw that. There were assets that were probably 30 to 40 cents off their market rent through COVID. But as we’ve seen in September/October rent rolls, trade outs are anywhere between 20 and 25 percent, in most of those assets. We’ve gone back up to kind of the net effective rent we saw before COVID. There was a disruption, but it was truly just a hiccup.
REBusiness: What kind of interest are you seeing in single-family rental (SFR) and built-for-rent (BFR) product?
Stevens: In the Midwest, our Copper Bay SFR portfolio is the first big portfolio of SFR in the area. We’re gauging interest and types of buyers that are out there looking for that kind of property. It’s been a change in investment process to really focus on the renter who wants a single-point entry to his or her home. We saw that townhome product, that “through-the-garage-into-your-living-room product,” has really had a lot of appeal versus multiple touch points in conventional assets.
REBusiness: Looking ahead to 2022, what opportunities do you see for multifamily investors?
Stofflet: I think it will continue to be very hard to buy in the smile states, especially the Southeast, due to the incredible amount of competition down there.
We see the opportunity in the Midwest as we continue to see real rent growth. Kalamazoo, for example, had the highest rent growth in the Midwest this year.
I think if people are looking for a yield play in 2022, they will look at Columbus, Indianapolis and Chicago. I think that’s where you will find yield and probably a little bit less competition.
Stevens: A lot of investors are looking at what they call “in-migration” markets — Charlotte, for example. But Chicago itself is an “in-migration” market. And the people that are coming in and replacing those that are leaving are generally younger and wealthier. We’re an upwardly mobile market, although that’s not universally understood.
Stofflet: I think you’ll also see a resurgence of the urban core soon. I think people have spent enough time understanding that for the population centers in the United States, there has not been the mass exodus that was being played up in the media. For the most part, the major markets have good control on deliveries and new construction. Moving forward, I think there’s a lot of attractiveness to buying in urban centers, and we’ll see more transaction volume out of these large population centers than we did over the last two or three years.
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