Multi-family is cool. Owning a single-family home is not.
That’s a bit of a generalization. But it does seem to be a trend, especially among younger consumers. They are more frequently choosing to rent today. They’re putting off buying a home.
It’s trend that doesn’t bode well for the single-family housing industry. It’s a good one, though, for multi-family developers and the companies that provide these builders financing.
For the August issue of Midwest Real Estate News I spoke with several multi-family lending specialists about the changes hitting the multi-family and single-family housing markets.
Gregory Warsek, senior vice president and regional manager in the Chicago office of Associated Bank, was one of these pros. He had a lot of interesting things to say about the multi-family market:
The multi-family sector doesn’t seem to be slowing down. Are you surprised at its continuing strength?
Gregory Warsek: It seems to be a perfect storm. It’s not just one thing in particular that is behind the strength of this sector. A lot of it is driven by the struggles of the housing market. The big buildup in homeownership across this country took people out of the apartment market and into homeownership. That depressed rents for a while. Then came the whole meltdown of the housing market. That has driven people back to apartments in droves for a lot of reasons.
When single-family is down, mutli-family has to go up, right?
Warsek: A lot of today’s renters used to own homes. They lost them to foreclosure, and now they are renters. There is also a new segment of renters who are not able to buy condos or single-family homes because of the tougher mortgage-lending requirements. Another group is choosing to rent for a longer period of time because they don’t view houses today as good investments. Then there are those who are choosing to rent because they are impressed by the amenities and lifestyles that some of the higher-end multi-family buildings offer them. Many of these buildings are filled with professionals in their mid-20s. These buildings on the weekend look like MTV spring break. The professionals living in them have no interest in buying in a quiet boring condo building.
The more upscale amenities are interesting. They certainly are attracting a new kind of renter.
Warsek: Some multi-family developers have created this environment that you can’t get in a condo building. The whole notion of getting out of school, getting a job a then buying a condo as soon as you can just isn’t all that cool anymore. A lot of kids don’t want to buy today. They want to keep their flexibility.
How long do you see this trend lasting?
Warsek: I think it will be this way for the foreseeable future. Eventually interest rates will go up. It will then be even less attractive to own. The mortgage rates are never going to be this low again. What’s amazing to me is that people today are moving into brand-new rental buildings instead of buying even though this is the lowest rates have been. All my multi-family clients are telling me that they are raising their rents by 6 or 7 percent, or as high as 20 percent, and they are still not losing tenants. There are bidding wars right now to get nice units.
How interesting is this new multi-family market to you?
Warsek: I am fascinated that the 20-something crowd is going into newer buildings, that they are seeking this attractive, fun lifestyle. But then there are the Baby Boomers. These are the people who are selling their primary residences in Chicago and have a place to go to in the Sunbelt. They may or may not own this new place, though. Instead of downsizing into another house or condo, a lot are starting to rent in these luxury apartment buildings. They turn the key behind them and they don’t have to do anything. They basically get a condo lifestyle without the significant capital cost or their maintenance. They get the condo lifestyle without the headaches that go with it.
What are banks looking for when passing out financing to new apartment projects?
Warsek: A year ago, we were talking about 65 percent loan-to-value, strong sponsorship and pricing in the LIBOR-plus-300 range. The market has since become more active. More banks are getting back into the market. The terms are now starting to drift a bit. You can get the same deal today at LIBOR-plus-200 or so. You can have 75 percent or even 80 percent loan-to-value.
– Dan Rafter