Posted November 14, 2023
Q. We’ve seen data from the Home Builders Association showing a strong dip in permits pulled in 2023. What’s your assessment of trends in the market, both single-family and multifamily?
A. The demand for housing is still very strong. With single-family home new builds and multifamily units each continuing to slow, we are starting to see a supply issue and increased demand.
Q. How is that impacting your space in multifamily?
A. You have probably heard the statistic that KC metro historically absorbs 2500 units per year. That is a number I heard when I entered the MF industry over 13 years ago. While people still use that number, the demographic of renters has evolved to a much larger group, and we have continued to absorb more than that. That said, the smaller number of permits will likely create a pent-up demand.
Q. What do you believe is driving the permit trends?
A. There are three:
Mandated Affordability if you use incentives – As can be seen around the country and history in general, when you force subsidy of units, the cost of the others needs to go up to cover the delta. This ultimately drives up the rent on 80 percent of the units, which are harder to justify in the market. If you don’t increase the cost of the non-subsidized units, we have seen NOIs decrease as much as 8 percent, which kills most housing opportunities in today’s high-cost market. The obvious statement is not to use incentives, but then things like QUALITY urban infill and high-density development just don’t pencil, and become unfinanceable.
Interest Rates – The super-low-interest-rate world we all lived in created a trickle-down effect where cap rates were low, interest carry costs were low, money market returns were low and all of these things combined created a great opportunity to maximize returns. Now investors have multiple other safe places to park capital and get returns, while not as good as historical real estate returns, these opportunities have not been around and create more competition for equity. Cap rates have risen due to the cost of long-term debt, reducing the value at an exit for investors. While I firmly believe the multifamily market returns are still great, it is a change of pace from what we saw these past several years and has caused deals that were thin, to maybe not pencil and/or caused some investors to wait and see what happens. Whenever there is uncertainty in the market, money sits on the sideline waiting for opportunity, and we are seeing that now.
Misinformation – There is a lot of national news beating up on real estate in general. The truth is, the majority of the info those articles are based on are coastal and major cities. The Midwest market is still strong.