The country’s booming housing demand is impacting the single-family and multifamily markets and their investors like never before. In such a highly competitive environment, multifamily investors are turning to new markets, investment strategies, and financing solutions to meet return requirements. Geri Borger Urgo, head of production at NewPoint Real Estate Capital, shares her perspectives on how these forces are changing the way investors and lenders are conducting business.
MFE: We’ve seen the median price of an American home increase 20% in a year. Can you share your thoughts on what is driving this price appreciation?
Borger Urgo: There are several compounding factors at play here, the first of which centers on historically low interest rates. While we are actively seeing rates shift and trend upward, low rates in the historical sense have changed people’s perception of what is a reasonable price to pay for a home and armed homeowners with more buying power. Even though the average 30-year home mortgage recently surpassed 5%, remember that the high-6% to low-7% range was the norm. And anyone who purchased a home in the ’80s or ’90s would have dreamed about borrowing at today’s levels. So long as the median rate of outstanding home mortgages remains contextually low, the market will be able to support some appreciation.
The other major factor at play here is supply. There simply has not been enough housing built over the past decade— this is true across single-family homes and apartments. Part of this is due to the construction process being full of uncertainty. Recent supply chain issues, labor shortages, and material costs have compounded the issue and generally made everything more expensive.
MFE: Is it a coincidence that we’ve seen rents in major cities increase at a similar clip to home prices?
Borger Urgo: Many of the same factors are at play, though rent increases are also tied to some interesting demographic drivers. There has been a lot of renter turnover as of late. The National Multifamily Housing Council recently reported that 60% of renters moved in the past 18 months. Achievable rents have increased dramatically from 2020 when renters in certain markets were being offered concessions simply to renew leases. Today’s leasing activity is leading to significant increases in net effective rents. There is also a supply-demand imbalance.
Many millennials who would be exiting the rental market are having difficulty transitioning into homeownership due to costs—rising interest rates will only compound the issue. At the same time, the oldest members of Gen Z are turning 25, kicking off their careers and entering the rental market in a big way. Combine this with a general flight back to the urban core as offices reopen, and you see increased demand pressure hitting the market from all sides.
MFE: Austin, Texas; New York; and several markets in Arizona and Florida topped the list for areas with the greatest rent increases over the past year. What is driving the demand in these areas?
Borger Urgo: We’ve seen a lot of migration to tax-friendly states. That covers those markets in Texas, Florida, and, to an extent, Arizona. You’ve also got job growth. Tesla’s Giga Texas plant opened a few weeks ago in Austin and is expected to eventually employ up to 20,000 people. Arizona and Florida are also seeing outsized job growth. In New York, I think it is more of a stalled trajectory returning to regular growth, as the city was seen as the center of the pandemic for so long. Net effective rents dropped for a while because properties were trying to move past vacancies with heavy concessions. If you paced New York’s rent increases from 2019 to 2021, it would look less extreme.
MFE: You mentioned that affordability—be it in homeownership or a rental property—is largely a supply problem. How do we get more housing built?
Borger Urgo: Municipalities usually aim to solve for very low incomes—that is area median income at or below 50%. The Section 8 program already does that well. And you can make luxury development pencil out. But what about that middle-income family that is unable to purchase a $1 million starter home? Or the single mother who is struggling to balance rent and child care? Our teachers, nurses, and firefighters are not seeing income growth keep pace with increasing housing costs. What we really need to solve for is the missing middle. I’d love to find a way to provide more liquidity to the workforce construction market, and even see construction financing open up to the government-sponsored enterprises. Even then, with the supply chain issues and cost to build, you would still likely need some form of subsidies to make rents work at a level affordable to the American workforce. This is quickly becoming a major issue with inflation, and it is imperative that we prioritize finding a solution.
NewPoint’s Geri Borger Urgo weighs in on the impact of supply constraints and shifting demographic trends.
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