The multifamily sector continues to thrive, with demand for new apartment developments soaring across the Midwest. Jim Doyle understands this. He’s executive vice president in the Cleveland office of Bellwether Enterprise and has seen just how steady the demand for multifamily financing has been.
Midwest Real Estate News recently spoke with Doyle about the strength of this sector, what Bellwether looks for when evaluating financing requests and what the future might hold for the multifamily sector.
Here’s some of what he had to say.
Multifamily has been hot for a long time. Are you still seeing plenty of financing requests for this sector today?
Jim Doyle: We are definitely seeing a steady stream of financing requests for multifamily. There’s actually been maybe a little bit more deal flow with interest rates where they have been lately. The fears of cap rates increasing have been set aside. People are looking at the interest rates and trying to lock them in. There’s been a steady stream of refinance requests and sales.
Why do you think demand has been so strong for so long for multifamily?
Doyle: There has been a lot of talk about Millennials not wanting to buy houses But realistically, in this housing market, the number of housing starts is still less than half of its peak before the downturn. A lot of those houses are being built on the higher end of the price point. There aren’t as many new starter homes being built. That drives people to rent longer.
At the same time, the trend has been to go urban. Millennials and empty nesters both want to live downtown. We haven’t seen any slowdown in that desire, so that has boosted multifamily, too. Millennials will still buy houses and move to the suburbs. But there has been a slowdown compared to other generations in when these younger adults are buying. They are buying, but they are waiting longer to do it.
How about in your immediate market? Are you seeing a lot of demand for multifamily properties in downtown Cleveland?
Doyle: There has been a lot of new apartment product in downtown Cleveland itself. A lot of people want to live in downtown Cleveland. There have been several hundred units delivered in the core and in the Ohio City neighborhood. We are still seeing that new construction coming online, so the downtown market is still doing very well. We have occupancy rates of 95 percent plus in our downtown developments.
Maybe there is a little bit of pressure on the very high end of the market right now. Everything that has been delivered in the downtown area as of late has been in the highest end of the market, Class-A or Class-A-plus units. We might be seeing a little pressure there that has not been in the past. But almost everything built downtown is in the upper tier of rental rates.
Given that so much of the new product is in the upper end, is there a strong demand for affordable multifamily developments?
Doyle: There is definitely demand for affordable apartment units. But it’s also about making the numbers pencil out. It’s tough for developers to make a project pencil out if you don’t get a certain rental threshold. You need some sort of subsidies to make affordable apartment developments work. The city of Cleveland would certainly like to see more affordable apartment housing. There is a demand for that space.
We’ve talked a lot about urban multifamily. But what about in the suburbs? Are you seeing a lot of demand for multifamily in the suburban areas?
Doyle: There are still a lot of trades going on. There’s not as much of the new construction in the suburbs. Most of the financing requests we’ve seen for the suburbs have been for the acquisition and rehab of older products. We are having no occupancy issues in the suburbs. Suburban developments have maintained strong occupancies, too. The suburban developments have benefitted from the rising rents in the urban core. Developers are able to up rents in the suburbs, too. They might not be able to ramp them up to the same level as in the urban core, but they are able to increase them to a higher level than in the past.
Do you see any signs of a slowdown in the multifamily sector?
Doyle: In our market in Cleveland, there is not an oversupply of multifamily. We haven’t seen prior to 2011 or 2012 new apartment construction in the urban core here in 20 years. We had a lot of pent-up demand for multifamily. Even now, we are only delivering 500 to 1,000 apartment units a year. Some other markets are delivering much more than that each year. I don’t think we are overbuilt.
Across the country, there aren’t too many markets that have been overbuilt. We are not hearing worries about too much supply from our capital sources. Even in cities such as Dallas and Austin where there has been so much construction going on, we aren’t hearing that equity or capital sources are trying to pull back. When there is still capital available, there will still be units delivered.
What does Bellwether look at when evaluating requests for multifamily financing?
Doyle: We are still looking for experienced sponsors with good management. If a sponsor is looking to execute a rehab, we want to see if that sponsor has done one before. Not a lot has changed in what we are looking for. Our decisions are largely driven by the sponsors. Then we look at the properties of the asset itself, its location, its quality and the history of the asset itself.