When Zelman & Associates’ 2023 Virtual Housing Summit opens in September, Alex Virtue will take the stage as a newly appointed managing director who has been charged with expanding the firm’s investment banking coverage of multifamily and other commercial real estate property sectors.
Virtue joined the institutional research advisory and investment firm in May with over two decades of experience in mergers and acquisition transactions and capital raising across real estate sectors in both the public and private capital markets. His resume includes senior positions with Merrill Lynch, Eastdil Secured/Wells Fargo Securities, CBRE Capital Advisors and Xebec, an industrial developer and asset manager. Zelman & Associates, founded in 2007, was acquired by Bethesda, Md.-based commercial real estate finance and advisory firm Walker & Dunlop in 2021.
“My focus at Zelman and Walker & Dunlop is broadening the firm’s reach on entity-level transactions in multifamily and related housing sectors such as single-family rentals, built-for-rent, student housing, affordable housing and manufactured housing communities, as well as other commercial real estate sectors,” says Virtue “I would characterize my concentration as bringing traditional banking investment expertise, knowledge and services across the Walker & Dunlop platform and working with my colleagues to bring these advisory and capital-raising capabilities to Walker & Dunlop’s client base.”
Virtue will join his Zelman investment banking colleagues, Tony McGill and Graham Rives on a housing and commercial real estate M&A panel at the Zelman & Associates housing summit, which begins on September 18, marking the summit’s 16th year of bringing together institutional investors and industry executives. But just like other commercial property categories in 2023, the multifamily sector has seen investment activity as a whole plunge.
In the first half of 2023, only $55.6 billion worth of multifamily properties in the U.S. traded hands, a meager showing that represented a 68 percent drop from the previous year, according to MSCI Real Assets. However, signs of renewed activity are emerging, Virtue suggests. The volume of new multifamily listing assignments at Walker & Dunlop’s investment sales division has seen a significant increase over the past three months, and this pipeline of deals points to an improving outlook for the transaction market.
“I think that sellers will increasingly be more realistic in terms of pricing expectations,” he adds. “As a result, we could start to see greater transaction activity going into next year — and hopefully for the last four months of this year.”
Still, the lack of price discovery continues to confound the market, as it’s hard to gauge capitalization rates for certain properties in certain markets, Virtue states. That is leading to bifurcation between “haves” and “have-nots” in terms of assets and markets.
“Assets that are well occupied, have solid rent rolls and are in markets with steady rent growth are getting a lot of attention,” Virtue explains. “Assets with weaker fundamentals in markets that may be seen as overbuilt are falling into that ‘have-not’ bucket.”
To a large degree, the private and public multifamily markets have diverged, as well. The private real estate capital markets have been slow to adjust to the new interest rate environment, Virtue observes. That’s largely because would-be sellers to date have been holding out, and to the extent that they have had to negotiate with lenders to buy some time, they have done so.
Conversely, Virtue says, the public REITs sector re-priced relatively quickly when the Federal Reserve began hiking interest rates last year. As an example, today multifamily REITs are trading at a roughly 12 percent discount to net asset value, which works out to a capitalization rate in the mid-5 percent range.
That is providing investors with an opportunity to buy multifamily REITs at an attractive price relative to the private markets and realize attractive returns as the interest rate environment normalizes and the market gains clarity into valuations and economic conditions, Virtue points out. Additionally, unlike the Great Financial Crisis, REIT balance sheets today are well capitalized, with leverage levels of around 30 percent of total asset value, and largely fixed-rate, termed-out unsecured debt capital, he continues.
“REITs have great assets and great management teams,” Virtue declares. “And historically, while REITs react quickly on the downside, they tend to outperform on the upside.”
Sideline Capital Awaits Opportunity
Meanwhile, many of the concerns surrounding the private multifamily market revolve around bridge loans, which investors tapped over the past couple of years to take advantage of the extreme low cost and flexibility of the floating-rate debt. Oftentimes buyers used bridge loans to overpay for properties with the expectation that strong rent growth would boost cash flow to sufficiently service the debt.
But the Secured Overnight Financing Rate (SOFR) has ballooned to 5.3 percent from near zero over the past 18 months, according to the Fed, which is making it difficult for those investors to make their loan payments and refinance. REITs have dodged that storm because they, by and large, have investment-grade fixed-rate debt on their books, Virtue says.
Over the long run, however, the situation will open opportunities to mezzanine lenders and preferred equity providers to recapitalize private assets, he adds.
“Except for some markets with concerns about supply, multifamily rent growth and fundamentals still look good, and there are a lot of investors with dry powder sitting on the sidelines,” Virtue concludes. “As a result, I think we’re going to see opportunities for that capital to begin to deploy over the next six to 12 months.”