How Will Tariffs Affect Multifamily Development?

In a post on the BMO Harris Bank site, Managing Director and Head of US Commercial Real Estate Kim Liautaud looks at how tariffs could impact multifamily development:

In the multifamily market, project underwriting has tightened across the board because capital providers are concerned that the sector is late in the cycle, according to Chris McKee, head of development at CRG, the real estate development arm of Clayco. McKee explains that while trended rents used to attract equity providers, there’s now a reluctance to underwrite projects unless they’re at flat rents. Tariffs have only exacerbated that effect.

“We’re seeing contractors start to plan for increased costs,” McKee says. “Steel and aluminum companies know the tariff increases are coming, and they’re passing the costs along to general contractors. With flat rents and construction costs on the rise, spreads have been squeezed and multifamily projects became more difficult to underwrite. Tariffs have only added to that, and that trend will likely continue for the foreseeable future.”

McKee notes that trended rents still drive multifamily developments in certain markets where availability is tight, such as Seattle, Lehigh Valley in Pennsylvania and Inland Empire in Southern California. Less constricted markets, however, require more caution. “You may get squeezed a little bit by those cost increases because you may not have the rent increases that you would get in some of the tighter submarkets,” McKee says…

When it comes to managing multifamily projects, McKee stresses focusing on fundamentals and relationships. “Look for the right opportunity in the right location,” he says. “If you have a long-standing relationship with an equity or debt provider, you can make a case for rent increases specific to a high-growth micro-market, such as Tampa or Fort Worth. It’s an advantage to have pre-existing relationships with equity lenders who trust and believe in you. So when you go to show them something, they know you’ll deliver.”

Judge Tosses HUD “Disparate Impact” Rule

Judge Richard Leon of the D.C. District Court issued a ruling on Monday that will be of particular interest to housing providers. From the article in The Hill:

Judge Richard Leon of the D.C. Circuit Court ruled Monday that the Department of Housing and Urban Development’s “disparate impact” rules were not justified by existing law, and ordered the rules vacated.

The ruling marks the latest in an ongoing debate about the controversial regulatory principle, which is used to build discrimination cases based on statistical models, rather than overt examples of unequal treatment…

Civil rights groups have hailed the initiative, saying it will help expose and punish institutional discrimination that may not be easily observed.

But many industry groups have cried foul at its use, arguing that the law does not permit the government to charge discrimination when there are no clear examples of it, but rather just data that shows some groups may be treated differently.

The judge dismissed the government’s argument that existing laws permitted the government to apply the method to fair housing laws by calling it “wishful thinking on steroids.”

Rather, Leon wrote in his decision that the language of the Fair Housing Act, which provides the legal basis for challenges in housing discrimination, only permits claims based on intentional discrimination.

Closing the Affordable Housing Gap Could Cost $11 Trillion Worldwide

This Bloomberg story highlights some preliminary results from an McKinsey & Co. study that explores the affordable housing challenges faced by governments around the world:

Replacing the world’s substandard housing and building affordable alternatives to meet future global demand would cost as much as $11 trillion, according to initial findings in a McKinsey & Co. report…

About 330 million households — about 1.2 billion people — now struggle with substandard housing, a number that may increase to 440 million in 11 years, McKinsey forecasts. Acceptable housing is within an hour’s commute of work and has basic services including flush toilets and running water, the report says…

The deficit presents an opportunity for construction companies — with some of largest markets in emerging economies such as China, India, Brazil and Russia. Mortgage lenders also stand to benefit; by 2025, the market for affordable-home loans could be worth as much as $400 billion a year, the report said.

Still, the biggest challenge facing policy makers is the cost and availability of land.

“Where land is available at a lower prices, on the fringes of the city, housing projects may fail due to lack of infrastucture” such as school, hospitals and access to buses and trains, the report said.

Renters in Winston-Salem Get Say in On-Street Parking Decisions

Winston-Salem’s tightening its procedures for citizens to request bans for on-street parking and renters will be allowed to weigh in. From the Winston-Salem Journal:

Under the old rules, adjacent property owners could request that on-street parking be banned on their streets. If fire, police and city transportation officials agreed, the signs could go up and the on-street parking would end…

At the Sept. 9 committee meeting, Council Member James Taylor proposed that for rental properties the tenant and owner each get one vote. For properties occupied by the homeowners, the owner would get two votes. That motion passed, with Taylor and Council Member Dan Besse in favor, Council Member Robert Clark opposed and Council Member Derwin Montgomery abstaining…

When the issue came before the council Sept. 15, Clark proposed a substitute motion to leave the decision with only property owners…

Clark’s substitute motion failed on a 4-3 vote, with Montgomery and Council Member Jeff MacIntosh supporting Clark’s motion.

Taylor then brought back up the idea of giving renters a say, and that motion passed 6-2, with Clark and MacIntosh opposed.

What About Fannie and Freddie?

This week members of PTAA were in Washington for the National Apartment Association’s Capitol Conference and on our last day there we were urged to meet with our members of Congress to discuss several issues, including housing finance reform. For the last few years NAA has urged its members to urge their members of Congress to not throw the multifamily baby out with the mortgage bathwater. Since the government had bailed out the mortgage industry when its near-collapse helped plunge the country into the Great Recession, Congress has been trying to figure out what to do with the Government-Sponsored Enterprises (Fannie Mae and Freddie Mac) and the smart people at NAA and the National Multifamily Housing Council (NMHC) had been pointing out that while housing finance reform is necessary, the multifamily sector had not had the problems that the residential home mortgage had. From the briefing papers provided at Cap Con:

The bursting of the housing bubble exposed serious flaws in our nation’s housing finance system. Yet, those shortcomings were confined to the residential home mortgage sector. The Government-Sponsored Enterprises’ (GSEs) (i.e., Fannie Mae and Freddie Mac) very successful multifamily programs were not part of the meltdown and have actually generated over $14 billion in net profits to the government since the two firms were placed into conservatorship.

More than just performing well, the GSEs’ multifamily programs serve a critical public policy role. Unfortunately, even during normal economic times, private capital cannot fully meet the industry’s financing demands. The GSEs ensure that multifamily capital is available in all markets at all times, so the apartment industry can address the broad range of America’s housing needs from coast to coast and everywhere in between. 

NMHC/NAA urge lawmakers to recognize the unique needs of the multifamily industry. We believe the goals of a reformed housing finance system should be to:

  1. Maintain an explicit federal guarantee for multifamily-backed mortgage securities available in all markets at all times;
  2. Ensure that the multifamily sector is treated in a way that recognizes the inherent differences of the multifamily business; and
  3. Retain the successful components of the existing multifamily programs in whatever succeeds them.

Relevant to those points made during the briefing session provided by NAA/NMHC staff members before we headed to the Hill they mentioned that leaders in the Senate Banking Committee had just announced a plan that the apartment industry could get behind, but let’s just say it was a little difficult for us in the audience to grasp. Too bad we didn’t have a chance to read this Wall Street Journal article that laid out the issue pretty well:

The plan, by Senate Banking Committee leaders Tim Johnson (D., S.D) and Mike Crapo (R., Idaho), calls for replacing Fannie and Freddie with a new system of federally insured mortgage securities in which private insurers would be required to take initial losses before any government guarantee would be triggered.

The agreement, which faces a long road to approval, represents the most concrete step so far to resolve the last major piece of unfinished business from the 2008 financial collapse.

“It would be a huge step forward,” said Phillip Swagel, who was an assistant secretary for economic policy under Treasury Secretary Henry Paulson, who oversaw the government’s seizure of the firms in 2008.

Yes, this is a complicated issue but at its core it’s pretty simple:

  1. There’s a lot of demand for apartments right now and not nearly enough are being constructed to keep up with it.
  2. Without adequate financing there isn’t going to be enough construction to catch up with that demand, and with low inventory comes high rent.
  3. It’s imperative that Congress not further constrict the housing market by instituting housing finance reform that cripples a sector, multifamily housing, that didn’t contribute to the economic problems caused by the residential housing finance sector.
  4. The early signs are that the Senate Banking Committee is moving in the right direction, but there’s a LONG way to go before they get committee approval, not to mention the full Senate and then the House.

In other words we have a pretty good idea what we’ll be talking about to our members of Congress when they’re back home in their districts and this time next year when we return to the Capitol.

Looming Changes in Government Housing Benefits

From an article in the Wall Street Journal on changes being considered to government housing benefits:

Currently, government housing benefits are generally open ended. Unlike welfare—which has a five-year limit—federal housing programs allow low-income Americans to receive rent vouchers or live in government complexes for decades.

The result is that people endure long waits to qualify for the program and sometimes celebrate almost like lottery winners when they get the word. In New York City, the average person stays in public housing for 20.7 years.

But President Barack Obama‘s fiscal year 2014 budget calls for “substantial expansion” of a 1996 demonstration project that allows select housing authorities to set restrictions on residents, or try other strategies to promote self-sufficiency. Only 39 housing authorities out of 3,200 nationally have this power currently. Congressional approval was required for each one.

This comes at a time when the number of households in need of housing assistance is exploding:

Meanwhile, HUD reported in February that a record 8.5 million low-income households without government housing assistance either paid more than half their monthly income in rent, lived in “severely substandard housing”—or both in 2011. That was up from 7.1 million such families in 2009.

“Nobody is representing those families; they don’t really have an organization looking out for them,” says Dan Nackerman, executive director of San Bernardino’s housing authority, which adopted five-year-time limits last year after finding that people were holding on to vouchers for eight years on average, while 45,000 people sat on the waiting list…

The recession and mortgage crisis swelled the ranks seeking federal rental assistance and led those with benefits to hold on to them longer. Well-publicized instances of fights and mayhem broke out in January near Detroit and New Orleans as people scrambled for scarce vouchers.

While there is agreement the current system is broken, not everyone approves of President Obama’s fix. The National Low Income Housing Coalition, an advocacy group, said the change would force people off housing assistance before they are ready.

“You are just cycling these families back to the end of these waiting lists,” says Linda Couch of the coalition. “The answer is more affordable housing; it’s not moving the deck chairs on the Titanic.”

Others feel differently:

Many who work with low-income families say that current housing policies provide little incentive to move on. Ideally, the government should tell residents, “Your housing is stable. Congrats, take a deep breath. What’s next?” says Sherry Riva, founder of Compass Working Capital, a Massachusetts nonprofit working with the Cambridge Housing Authority to help residents save money and set goals.


Davidson County Creating Centralized Permitting Office

The Lexington Dispatch is reporting that the Davidson County Commissioners have approved funds to create a centralized permitting office. From the article:

The Davidson County Board of Commissioners unanimously approved on Tuesday a new central permitting office, which will be a one-stop shop for the permitting needs for contractors, builders and other county residents.

County staff says it will take three to four months to renovate the former Davidson County Board of Elections office at 912 Greensboro St. in Lexington, for the new use of a central permitting office.

The office would create one location for citizens seeking service from the environmental health, planning and zoning, the building inspection and fire marshal departments. Citizens currently have to go to three separate offices to obtain the appropriate permits.

Certificate of Relief Act Intended to Help Non-Violent Felons Find Work, Housing

A new law that went into effect on December 1, 2011 could have an impact on multifamily property managers.  An excerpt from the story on Fox8’s website:

A new state law is helping non-violent ex-offenders to start over clean.

The Certificate of Relief Act, which went into effect Dec. 1, is geared toward knocking down roadblocks which many previously convicted felons face when applying for jobs, housing and school.

“There are folks, literally, who have been under a curse, is what I call it, for something they did when they were 19, 20-years-old,” said Democratic State Rep. Marcus Brandon of Guilford County, who is one of several other representatives backing the new state law.  “And now they’re 30, 40-years-old and they still have to check that box for ‘Felon.’”

“This is not something that affects a small number of people.  This is something that affects a vast majority of people,” Brandon said…

Under the Certificate Act, if a person is convicted of no more than two misdemeanors, or class G, H, or I felonies, then they’re eligible to petition the court for a certificate of relief.  The law also outlines sanctions that can’t be excused, such as restrictions on registered sex offenders…

The court uses certain requirements to decide on a case-by-case basis whether to issue the certificate.  The requirements include:

– At least 12 months have passed since the person has completed their sentence.
– The person must have or be making an effort to look for a legitimate occupation.
– The person has complied with their sentence.
– The person is not violating the terms of their sentence.
– Granting the petition wouldn’t pose an unreasonable risk to anyone’s safety or welfare.

Pigs, Poultry and Politics

If you’re a member of PTAA (or any other group under the TREBIC umbrella) you should plan on attending TREBIC’s Pigs, Poultry and Politics.  It’s your best chance to meet all of the candidates running for public office (state, county, municipal) in the districts that fall within the Guilford County area.  The Greensboro city council and mayoral races promise to be particularly interesting and many of the candidates will be in attendance.

When: October 13, 2011 – 4:30 to 7:00 pm
Where: Castle McCulloch, Jamestown NC
Purchase tickets here ($30 before the 13th, $35 at the door)