James Cope: An erosion of the own-first mindset

Midwest Real Estate News recently spoke to James Cope, senior vice president with Walker & Dunlop’s Milwaukee-based Capital Markets division, about the continuing multi-family boom across the Midwest. Here is what he had to say about the strength of this commercial sector.

When you look at multi-family today, what do you think is behind its tremendous performance?
James Cope: From my seat, it’s first the lack of sufficient liquidity in the single-family market There are restrictive underwriting criteria that are still in place today. That reduces the availability of homeownership to people who may otherwise be interested in owning a single-family home. Those people instead have to rent.

What about the changing attitudes that people have about owning a home?
Cope: There has been erosion of the mindset that ownership is always better than renting. People are looking at rentals today as giving them more freedom and flexibility. They have seen people who have been caught in a home watching their investment deteriorate. It is hard to get out of a home that is losing value. With a home, you lose your mobility. There is a growing number of people who have a preference for renting over owning. Will that be a long-term trend? Only time will tell. People’s memories tend to be short. We’ll have to wait to see how it all plays out.

Are there any other multi-family trends that you’ve noticed?
Cope: Interest rates being ridicously low helps the capitalization of these projects. Developers are able to build toward a lower return-on-cost today and have it make financial sense where it wouldn’t have four or five years ago. Developers are seeing higher rents. They are seeing higher demand. That leaves a reduced hurdle on return-on-cost. Cap rates have moved down. If developers once needed a 7 percent return-on-cost, they can now build toward a 6 percent return-on-cost.

What do developers have to show today to get financing for multi-family?
Cope: There needs to be more equity in the transaction and a stronger balance sheet. They also need the fundamental of a good real estate location. They need to be able to show that they have the ability to hit the rental projections that they have targeted.

Are you seeing more developers approaching you with multi-family projects?
Cope: Generally, yes. There is more activity. But the activity in our market in Wisconsin is not overly robust. The stronger players are picking their spots.

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