INDUSTRY VOICES
By Nicholas Leider
MULTIFAMILY MATTERS
Considering the complexities inherent in the economics of commercial real estate , it ’ s refreshing when a concept can be approached from the basics of supply and demand . When it comes to housing — specifically affordable housing — such fundamental market forces help frame the discussion . The United States is 5.24 million homes short of what is currently needed , meaning supply is well short of demand . As a
Joshua Patinkin result , the multifamily market has seen growing interest , leading up to and during the COVID-19 pandemic .
“ Many of the trends that existed before COVID-19 only accelerated in its wake ,” says Joshua Patinkin , managing director of real estate with Leste Group , a global independent alternative investment manager . “ Places like Dallas , Houston , Atlanta , and Nashville , Tenn ., have been huge positive migration cities . … [ These locations ] are encouraging new supply — places like South Carolina , Georgia , Texas , and Florida are generally supportive of new development .”
While developers scramble to provide as much new inventory as possible , demand will continue to grow . According to U . S . Census data , 12.3 million American households were formed from January 2012 through June 2021 . During this same period , only 7 million new single-family homes were built .
An added complication is just whom the new supply is targeted at . According to a Realtor . com study , homes considered to be relatively affordable , meaning those valued at $ 300,000 or below , represent just 32 percent of builder sales in 2Q2021 , down from 43 percent during the same period in 2018 .
“ What I would characterize as a force against new development is just a misunderstanding of gentrification ,” Patinkin says . “ It gets back to policy — if you ’ re able to create a dynamic where you can require developers to provide affordable housing in a way that ’ s [ economically viable ] for them — where they can still make money and seek financing from the investment community — then that ’ s a win-win . And a lot of the local people are able to stay in the neighborhood and live in affordable homes .
“ You ’ re providing more supply , more homes . Again , this is just Economics 101 with supply and demand . The more homes we have , the cheaper the rents will be .”
If two-thirds of new housing is targeted toward the upper middle class and upper class , the why isn ’ t much of a mystery . Considering the across-the-board demand , these sectors offer investors and developers greater profit potential . If a project in a major metropolitan area where housing is expensive is limited to a specific number of units , it ’ s only logical from the developer ’ s perspective to target higherincome demographics .
Patinkin points to some areas of Washington , D . C ., as a cautionary tale . Huge investment in previously ignored areas of the metro area has replaced longstanding affordable communities with Class A apartments that attract high-earning individuals . Rather than rapid neighborhood turnover , Patinkin emphasizes a need for coordinated , intentional development that incorporates all interested parties .
“ There needs to be a clear path to get input from developers , the local community , the city — all the stakeholders ,” he says . “ And that is possible . San Diego , for example , has done a good job with some of its zoning ordinances , which are leading to new affordable housing . They have to build 10 or 15 percent affordable — which is significant , since the city , like most of California , is extremely undersupplied .”
The friction between supply and demand in the U . S . housing market , and specifically the multifamily sector , appears to be a topic of discussion in 2022 and beyond . But looking at other possible speed bumps in commercial real estate , Patinkin needs answers to immediate economic issues like inflation and supply-chain disruptions — from a perspective that extends beyond the next month or the next quarter .
“ We ’ ve seen a complete price reset on almost everything , right ?” he says . “ Whether it ’ s milk from the grocery store or the cost of your apartment , everything ’ s gone up . When that stops , which asset classes are most affected ? Which goods and services increase more ? And where will they increase more ? These are the real questions .
“ How you can play those relative values from an investment standpoint is on the top of everybody ’ s mind . We ’ re focused more on fundamentals and the long term — longterm capital flows , long-term real estate fundamentals . I always say that good things happen to good assets in good locations , and that ’ s what we have to focus on .”
Nicholas Leider
Senior content editor of Commercial Investment Real Estate Contact him at nleider @ ccim . com .
Editor ’ s note :
This article is an adapted excerpt from a fulllength Commercial Investment Real Estate podcast . To listen to the full episode , head to SoundCloud , iTunes , Spotify , or wherever you listen to your favorite podcasts .
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COMMERCIAL INVESTMENT REAL ESTATE MAGAZINE WINTER 2022