Commercial/Multifamily Industry Faces ‘Disrupters’

SAN DIEGO–Change is coming to commercial real estate from several dimensions: political, demographic and technological, two real estate executives said.

The first big change for CRE could be government-sponsored enterprise reform, said Brian Stoffers, CMB, Global President of Debt Structured Finance with CBRE Capital Markets, Los Angeles, and Michael Berman, Principal with Michael Berman Consulting LLC, Miami Beach, Fla.

Former MBA Chairman Berman, speaking here at the MBA Commercial Real Estate Finance/Multifamily Housing Convention & Expo, noted that both President Trump and Treasury Secretary Steven Mnuchin want Fannie Mae and Freddie Mac out of conservatorship. “They’ve called it a priority-one thing,” he said. “I think there is a high likelihood that some serious work will get done and attention will be paid to this.”

Berman said Senate Banking Committee Chairman Mike Crapo, R-Idaho, is the key legislator. “I think by the end of 2017 there will be some serious legislative efforts,” he said. “It would not surprise me if we see legislation in 2018. I expect there would be a five-to seven-year transition.”

Stoffers agreed on the likely timing of GSE reform and noted that he thinks any potential surprise will be on the upside. “We may have more success and it may happen quicker than we would have thought,” he said. “The fact that we have a Congress aligned with the president makes a big difference.”

Berman and Stoffers agreed on there is a 75 percent chance that Fannie Mae and Freddie Mac will exit conservatorship before the next presidential election.

The new Trump Administration will also reduce regulation on banks, Berman said. He noted that private equity funds and debt funds have grown “exponentially” as regulation on banks has grown post-financial crisis and said that capital formation and innovation in capital from outside of the banking sector will “absolutely” continue.

“Funds will definitely become bigger players as banks pull back from construction lending,” Stoffers said.

In addition, demographics will continue to change CRE dramatically. “Look at household formation,” Berman said. “Over the next 10 years there will be between 1.2 million and 1.6 million new households created per year. The Urban Institute says that 70-plus percent of these new households will be renter households. That means there could be 700,000 to 750,000 or more new renter households on average over the next 10 years.”

Berman noted that multifamily construction has grown recently to more than 400,000 new rental units delivered per year. “But we also lose up to 100,000 units a year due to obsolescence,” he said. “So in a basic scenario we net 300,000 new rental units a year against a projected 700,000 new renter households a year. The supply-demand dynamics are out of whack.”

Many renters choose to rent single-family houses or duplexes rather than a unit in a larger professionally managed multifamily community, Berman noted. “The problem there is that given the costs of single-family construction it’s virtually impossible to build single-family houses for the purpose of rental housing,” he said. “The other piece of the puzzle is that a great majority of new multifamily deliveries have been at the upper end [of the price spectrum]. So you also have an imbalance there. Due to land acquisition cost and construction cost, I see it as a pretty severe crisis coming up.”

The retail sector is also undergoing a shake-up, Berman said. “Within a two-week period, Macy’s announced that it would close 100 stores, Sears/K-Mart said it would close 150 stores and The Limited announced it would close all its stores,” he said. “Retail is in the midst of revolutionary changes. It’s already happening.”

Berman said traditional bricks-and-mortar retail stores are under attack. “There will be winners and losers for sure,” he said. “There are more and more online sales every year. This may have a positive impact on the industrial sector but on the retail side, mall developers are saying that shopping malls must be a ‘life experience.’ People are going out to have a social experience rather than just to shop.”