Understanding the forces creating the market is indispensable for lenders, real estate professionals, developers, and investors. In this executive conversation, we talk with Jean-Laurent Pouliot about current dynamics in the multifamily space, the impacts of federal policy, challenges posed by aging rental stock, and opportunities created by shifting demographic trends. Pouliot’s insights highlight the delicate balance necessary for a healthy market and give a prospective view of what to expect in the future.
As with all things Federal Reserve-related, it’s not just about the cuts; it’s about the market’s belief.
HousingWire: What factors are currently driving short-term improvements in the multifamily sector? How significant is the role of stabilized cap rates and higher net operating incomes?
Jean-Laurent Pouliot: One often-cited factor is the clean-up of rent rolls after the rollback of pandemic-era eviction moratoriums and the resulting accumulation of bad debt, significantly impacting property-level financials. It may seem odd to still be talking about the hangover from the pandemic in the second quarter of 2024, but we certainly have seen its harmful effects even as recently as the first quarter of this year. We have largely moved past that now. We’re now seeing demographic and migration patterns driving demand in markets where rents had been a little softer. These factors have contributed to a rebalancing of cap rates. Still, I believe there is more normalization to come, especially in overbought and/or overbuilt markets.
HW: How do you anticipate upcoming Federal Reserve rate cuts will impact the multifamily housing market in the short and long term?
JLP: As with all things Federal Reserve-related, it’s not just about the cuts; it’s about the market’s belief. We are undoubtedly in a better environment today than just a year ago. Unless the economy softens significantly, I am in the camp that believes Treasury yields are already in the range where they will be trading for the foreseeable future.
The longer-term impact could be clearer. On one hand, more attractive rates will get some off the sidelines. On the other, rate relief could increase the chance of another bout of cap compression that will make those deals less attractive and riskier. In the short and medium term, we will see an increase in refinancing of the shorter-term, open prepay debt taken out over the last 12-18 months, relieving pressure from operators at a time when many have started to see rent growth slow or even flatline.
HW: Can you elaborate on the current supply and demand imbalance in the multifamily sector and its challenges for investors and developers?
JLP: With the rapid rise in rates, many investors have pulled away, or entirely out of, acquiring and/or injecting capex into existing and aging multifamily stock. These days, owners are not interested in the headaches of housing stock older than 20-30 years. The result is that what could be decent, safe, and affordable multifamily is falling into disrepair and exacerbating the shortage of quality affordable housing nationwide. To compound the problem, many lenders are also being far more selective in the vintages they choose to finance.
HW: How is the aging rental housing stock affecting the multifamily market, and what strategies can be used to address the degradation of existing units?
JLP: When rates were low, and the bridge lending space was active, many operators seized the opportunity to buy and reinvest in aging stock. It wasn’t enough to significantly dent the supply problem, but the pullback in that type of investing activity has only made things worse. Additionally, the costs of rehabbing aging stock are too high, and the only quick way to refocus investors on this vital part of the multifamily sector is through financial incentives. The lending agencies can play a role with programs explicitly aimed at this sector. But, the better (and quicker) option is offering meaningful incentives, such as tax abatements, to those willing to invest in aging housing stock.
HW: Given the projected population growth and increasing demand for rental housing, what are the multifamily sector’s key long-term opportunities and challenges?
JLP: Housing migrant populations from Latin American countries and other under-developed nations will be a monumental challenge, but it will also present an opportunity for those willing to invest the time, effort, and resources to supply affordable housing outside major metro markets.
It’s a matter of building (or rehabbing) the right stock in the right place. The pandemic created interesting internal migration patterns in places like the Sun Belt. While the patterns have slowed (and even reversed), developers took note and built a lot of Class A housing in these markets. The result is that some markets, such as Phoenix or Jacksonville, have an oversupply of multifamily housing that is depressing rents and leading to significant concessions. It will take time, and there will be some pain, but there will also be, almost certainly, a rebalancing of investment towards older, slower growth but more stable markets.
Jean-Laurent Pouliot is the Managing Director and Senior Production Officer at Arbor Realty Trust.
