Multifamily, retail all performing well even amid housing, office softening
Contrary to conventional wisdom, there is no real estate crisis.
The exigencies of the housing market – exacerbated by fluctuating mortgage rates, inflation, supply chain issues, worker shortages, soaring home values, supply price spikes, and other factors – could lead one to think the entire real estate sector is suffering, and investors should retreat. Joseph Rubin (pictured), of EisnerAmper – one of the nation’s largest accounting, tax and business advisory firms – is here to collectively disabuse us of that notion.
The state of the single-family housing sector has been well documented. And while the office sector is also experiencing a bit of a cooling down for the moment given higher interest rates, an array of other properties – multifamily, hotels, and retail – are performing quite well, thank you very much, he said.
Rubin previously explained the effect of rising rates on the office sector: “We are seeing the effect because there’s definitely a slowdown - because we’re in a period of great uncertainty, the lenders are pulling back because they’re not sure what’s going to happen,” Rubin said. “The lenders are tightening their underwriting because they’re focused on the debt coverage that they have – whether the properties’ cash flows will be able to support debt with a higher interest rate – and they’re not so sure what the exit is when the property is ultimately sold, and they’re concerned about the repayment of the debt, the maturity or whether the property is sold. Lenders are cautious, appropriately so, and the equity is appropriately cautious. So that means everything has slowed down, and I’ve seen deals put on hold or cratered altogether because of this.”
Yet this scenario does not apply across the board, he noted: “The good thing is that real estate – the real estate itself – is performing really well,” Rubin told Mortgage Professional America during a recent telephone interview. “The fundamentals are good. There’s lots of demand for all sectors of real estate with the exception perhaps of office, which is a complicated thing unto itself. But if you look at multifamily, if you look at industrial, -- even retail --- it’s doing well. Hotels are doing well. The properties are really performing well, generating cash flow. And so, the issues we’re facing today aren’t real estate issues; they’re exogenous economic issues.”
Call it the economic triumvirate: “The issues are kind of the triple threat: Interest rates, inflation and recession. And I put them in that order because the biggest threat is interest rates, the next is inflation and the next is recession. Real estate doesn’t actually correlate to GDP that much – hotels do, but the rest of real estate doesn’t. Real estate correlates to the job market, and the job market’s amazing. So we’re coming into this with great strength: We have continuing job growth, which is the biggest fuel of real estate. Job growth this year is at three million already, just in 2022, and we have about 11 million jobs open. The unemployment rate is at a record low, back down to 3.5%. So, we have this really robust jobs situation, and that’s going to cushion real estate fundamentally, from a lot of the whirlwinds going on around it.”
Yet investors aren’t inured to pain once the dust settles: “Yes, there’s no question that rising interest rates will impact real estate investment,” Rubin said. “But the pain comes from the transition from this artificially low interest rate environment that we’ve been in, to more of a market rate environment we’re coming out of the chute into. And we don’t really know what that looks like right now, there’s no way to predict.”
Read next: Interest rates storm – what to do
Without such a looking glass, one can look to the past for hints: “If we revert to the typical historic mean, which is a possibility, you’re thinking the 10-year Treasury is going to be maybe 4.5%.” To buttress the point, Rubin noted that while the rate is currently hovering around 2.8%, it went up as high as 3.5% in June. “The pain is going from here to there,” Rubin said. “Once we’re there and everybody adjusts to a new stable environment, then you go, then you keep going.”
It’s what’s ahead investors may have to brace for: “The uncertainty and the pain of having existing yields of low rates that will have to be refinanced at a higher rate or ‘gee, I brought in this group of investors thinking they were going to get this yield but now with higher interest rates they’re going to get something less than that yield,’ – that’s the pain we go through in that transition until we get to that new normal. And now knowing what that new normal is only creates something of a risk-off environment for investors.”
Oh, to have that fabled looking glass. Our kingdom for a looking glass.