Business is strong for commercial lenders across the Midwest. And fueling this business? Financing requests for the construction, acquisition and refinancing of the region’s hottest asset class, multifamily properties.
Just look at the numbers for commercial finance company Berkadia. Pete Benedetto, senior managing director with the Southfield, Michigan-based office of the company, said that before the housing crash in 2008, Berkadia’s Detroit office, the one Benedetto manages, would close 100 deals a year for about $1 billion.
During the last two years, the Detroit office has closed financing deals worth $1 billion and $1.2 billion. This year, the office is on track to close $1.3 billion of financing deals, Benedetto said.
And the Detroit office isn’t the only Berkadia office doing well. Benedetto said that business has been steadily growing throughout the company.
Leading the growth at Berkadia? The still-soaring multifamily market.
“It comes down to the fall in the homeownership rate in the single-family market,” Benedetto said. “People are renting by choice today. They want to move into the center of cities. People always talk about the Millennials choosing to rent. But we are also seeing strong growth in the number of renters who are 55 or older. People are getting older. Housing prices are rising. These factors are all combining to drive the growth in the multifamily sector.”
Benedetto doesn’t see this trend ending. During a recent trip to Chicago, the finance pro said, he heard from several people that everyone in Illinois seems to be moving to the downtown of the city, with McDonald’s moving its headquarters from suburban Oak Brook, Illinois, to the center of the city being the prime example.
A growing number of employees – especially Millennials – want to live where they work. They don’t want to commute two times a day to far-off suburbs. This is forcing companies to either move their headquarters to the center of cities or open branch offices in these downtowns to cater to these workers, Benedetto said.
“It’s a bit of a chicken-and-egg thing,” he said. “Whether people are moving to the cities because that’s where the companies are moving or companies are going to the center of cities because that’s where potential employees want to work, it’s hard to say. But generally these days, companies are choosing the CBDs over the suburbs.”
Benedetto points to his own market, where downtown Detroit is going through a bit of a construction and population surge. Benedetto said that developers are racing to provide new housing in downtown Detroit, a part of the city that has seen a dearth in new housing for decades.
“I’d say that Detroit is a resurging city right now,” Benedetto said. “We are now seeing the construction of new housing in downtown Detroit.”
Are lenders worried about overbuilding in the multifamily market? For the most part, no.
Benedetto said that there are isolated pockets of overbuilding in certain markets. But he said he hasn’t seen this yet across the Midwest.
“The long-term projections for housing suggest that the need for new housing is definitely outpacing the supply,” Benedetto said. “There is a robust need for additional housing. While we might have a temporary oversupply in certain markets nationally, generally this housing will be absorbed.”
The bigger worry for Benedetto is the lack of affordable housing available in the multifamily market. The vast majority of new apartment projects today, whether in Chicago or Minneapolis or Kansas City, cater to the higher-end buyer. They come with monthly rents that far too many potential tenants can’t afford.
Developers face plenty of challenges when attempting to build affordable multifamily developments. But Benedetto said the need is there, and that cities and states should offer whatever incentives they can muster to boost the stock of affordable units for their communities’ renters.
The industrial sector is a hot one, too, and Berkadia is receiving plenty of financing requests from buyers and developers in this area, too, Benedetto said.
The distribution and logistics side of the sector is especially strong, Benedetto said, thanks, of course, to the soaring popularity of online shopping. Companies need a greater number of distribution centers to better serve customers who order product on a Tuesday and expect it at their door by no later than Thursday.
“The rise in industrial has come at the expense of brick-and-mortar retail,” Benedetto said. “That doesn’t mean that physical retail is dead. You still can’t get a haircut online. You still can’t order a beer and sit with your friends online. Service-based retail will remain in demand. It’s the big-box side of retail that is taking the hit today.”
When deciding whether to approve a financing request from developers, owners or buyers, Berkadia looks at a host of factors, Benedetto said.
Berkadia lenders first look at the merits of the deal and the market, Benedetto said. Is there a continued demand for the product type in a particular market?
Berkadia then looks at the experience of the developer, investor or owner. If a developer has had success in industrial but is branching out with a first retail project, Berkadia lenders might be wary. The same holds true if a developer who has thrived in Pennyslvania is asking for dollars to finance its first-ever project in Michigan.
“What is their experience? And what is their experience in this particular market?” Benedetto said. “If there’s a Phoenix developer coming into Michigan, we might ask what that developer knows about Michigan. What can that developer do to prove to us that the developer knows how to succeed in a different market?”