Lately, business media outlets have sounded alarm bells regarding the commercial real estate sector, peppering in dramatic terms like “tsunami” and “crash” to illustrate what they’re forecasting as an impending crisis in the market.
We’ve been closely monitoring these articles, and we share the consensus that several formidable economic factors are converging within the commercial real estate arena. These include lingering supply and labor challenges stemming from the tail end of the COVID-19 pandemic, interest rate hikes aimed at taming inflation but triggering secondary effects, and a series of recent bank failures that have unsettled lenders. Throughout this period, we’ve been diligently examining the impact of tightening credit, steeply rising interest rates, and looming distress within the multifamily sector, as well as addressing issues specific to our target markets, such as oversupply, regional-based insurance costs, and the lack of availability for financing.
The firms highlighted in the multifamily news articles acquired assets at peak prices, relying on variable-rate debt during a time of near-zero interest rates and historically high rent growth. Now, with approximately $980 billion in multifamily real estate debt maturing over the next few years and a much different interest-rate environment today, some firms are in real trouble. Today, these firms are grappling with the reality that their assumptions about cheap debt and rising rents are misaligned with reality and the profitability of their investments is in jeopardy.
Some struggling firms will yield to economic pressures and potentially surrender real estate assets to financial institutions. The majority of multifamily developers and owners, however, are not facing these dire circumstances, including Roers Companies. We focus on preferred equity investments and ground-up development projects with conservative estimates and assumptions in our underwriting.
Let’s take a closer look at the headlines and what Roers Cos. is actually seeing.
THE HEADLINE: High Interest Rates Make It Impossible to Pencil a Deal Right Now…
THE TRUTH: Roers Cos. has a Competitive Advantage
There’s no doubt that the interest rate environment today is much more challenging than it was two years ago. Margins are slimmer and fewer projects are penciling out and moving forward because of the impact of high interest rates, reduced lending activity, and less-favorable loan terms. While we have to work a little harder to get deals done than we did before, Roers Cos. has an incredible advantage over many other multifamily firms: in-house general contracting. One project we broke ground on in 2023 experienced an interest-rate increase that meant an additional $850,000 in project costs. However, with our in-house contracting team at the helm — plus an overall construction slowdown leading to more bidding competition among subcontractors — we were able to secure $2 million in construction savings that more than compensated for the elevated interest rate.
THE HEADLINE: Apartments Are Being Overbuilt…
THE TRUTH: The Oversupply Narrative is Exaggerated
Contrary to headlines around oversupply and record-high building activity levels within the sector, the uptick in new multifamily construction in 2021 to early 2023 does not mean there’s widespread oversupply. Experts estimate there’s a gap of nearly four million homes and apartments in the U.S. today that’s expected to grow to 6.5 million by 2030. Recent data from RealPage shows multifamily construction groundbreaks have plunged in 2023 to pre-pandemic levels, so even with a temporary influx of new supply and softening rents in some markets, the imbalance will be short-lived. At Roers Cos., we continue to be bullish about the opportunity for new multifamily projects. In 18 to 30 months, the projects we’re funding today will open their doors — just in time for institutions to resume their multifamily investment and acquisition activity, and for our properties to welcome residents ahead of the competition.
THE HEADLINE: Rent Prices Are Plummeting…
THE TRUTH: Asking Rent Nationwide Has Actually Increased
While rent growth is cooling compared to historic highs seen in 2021 and early 2022, rental rates remain strong in most U.S. markets. On a month-over-month basis, asking rents nationwide have risen every month so far in 2023 according to data from RealPage. In fact, in a July report from Yardi, the industry leader in property management software, their latest data showed a $7 increase in the average U.S. multifamily asking rent ($1,726 = avg. rent in the U.S.) across 140 markets studied. All in all, “normal” asking rents are the new normal— which is how our projects are underwritten at Roers Cos. We don’t bake in assumptions of 10% or 20% rent growth; it’s typically 2-3%. Even so, last year our portfolio saw an impressive increase of 11%.
THE HEADLINE: There’s a Lack of Demand for Multifamily…
THE TRUTH: Occupancy Rates Remain Strong
The extreme rise in home prices and mortgage interest rates continue to price out potential homebuyers. According to CBS News, we’re witnessing the largest buy-versus-rent gap since 2006. Renting has become significantly more economical. In a report from March of 2023 published by the National Multifamily Housing Council (NMHC), it costs on average $1,176 more per month to own a home versus renting from a professionally managed apartment complex. Market-rate apartments like those offered by Roers Cos. remain attractive to renters. Occupancy nationwide is averaging 95% and our sites align with that. Demand is steady and rent prices are solid.
As we monitor the economic outlook in 2023, our team is confident that multifamily properties remain a compelling investment option within the real estate landscape. Roers Cos. is a leader in multifamily real estate investment, development, construction, and property management. We have a proven track record of success in developing and managing high-quality multifamily properties, and our team is committed to providing our investors with opportunities for stable investments with the potential for attractive returns.
If you have questions about these market insights or current investment opportunities with Roers Cos., contact our investor relations team or take a closer look at the investment hub on our website: http://www.roerscompanies.com/investment
NO OFFER OF SECURITIES; DISCLOSURE OF INTERESTS: Under no circumstances should any material enclosed herein be used or considered as an offer to sell or a solicitation of any offer to buy an interest in any investment. Any such offer or solicitation will be made only by means of the confidential Private Placement Memorandum relating to the particular investment. Access to information about investments with projects undertaken by Roers Companies LLC, Roers Companies Project Holdings LLC, or any of their respective affiliates is limited to investors who either qualify as accredited investors within the meaning of the Securities Act of 1933, as amended, or those investors who are generally are sophisticated in financial matters, such that they are capable of evaluating the merits and risks of prospective investments. Investment outcomes vary. Past success does not guarantee future results.
SOURCES: CBS News, CNN, CoStar, Fannie Mae, JLL, Multi Housing News, NAHB, The New York Times, RealPage