Multifamily Can Hold Its Own Against Single-Family: Pru Execs
Not so, executives at Prudential Financial's real estate investment management business say.
For one thing, the up-and-coming Millennial generation tends to be boxed out of single-family either because they lack the resources needed to meet down payment requirements for mortgage financing, or because they simply prefer renting.
Millennials "have a much higher propensity to rent, and they like job growth areas like New York, Boston, Miami, and L.A." said Marc Halle, a managing director at Prudential Real Estate Investments, at a presentation in New York Wednesday. "There is still renting vs. buying in those areas, even though it is more expensive to rent in some of those markets. They are choosing to rent because of lifestyle reasons."
More broadly, greater demand for owner-occupied single-family housing drives up prices, meaning homeownership is not necessarily more competitive with renting.
"You've seen increased demand for single-family homes so house prices rising has obviously taken place alongside rents rising," said Peter Hayes, global head of investment research at Prudential Real Estate Investors.
When asked about single-family securitization's effect on the market, he said, "There will be a substitution that takes place. The single-family market will improve obviously." However, "We don't think that's taking a lot away a lot of demand from multifamily. You still need higher employment growth, really."
Also, when it comes to the full range of real estate investments that buyers of these could consider if they wanted to move away from multifamily, investors like Prudential may prefer other sectors to single-family, said Hayes. Prudential as an investor, for example, is "looking more increasingly at the industrial and office markets."
Commercial has done much better than single-family residential when it comes to rebuilding volume in the post-crisis securitization market that exists outside the government agencies. But supply has been waning since the interest rate environment became less favorable for origination and there is concern competition and limited supply are straining underwriting standards, says Melissa Farrell, a managing director at Prudential Mortgage Capital Co.
"We're certainly not at the point that we were in '06-'07," she said. "We're not there yet, when people were underwriting pro forma rents and the numbers just didn't make sense. But the other question is, 'Are we in 2005?' We are getting a little more heated in that marketplace. Everyone's pretty much chasing the same safe assets."
More potential refinancing supply is coming online in upcoming years, though, Farrell said.
Multifamily, while not as strong as it was six months ago-is still a relatively attractive asset class when it comes to its rate of return, said Halle.
"Multifamily is the cleanest dirty shirt on the laundry," he said. Office buildings may match the sector's returns in a couple years and hotels' returns may compete with it sporadically, but unlike hotels, multifamily is a "pretty consistent and predictable market."