On this episode of the Multifamily Minute, Michele Kauffman, Chief Growth Officer for Cushman & Wakefield's Valuation and Advisory team, speaks with Zach Bowyer. Zach is the head of C&W's Living Sectors for Valuations and Advisory, covering conventional multifamily, affordable housing, student accommodations, build-to-rent and senior living. Zach and Michele discuss the latest trends in multifamily valuations and where they think the market is headed, including a discussion on alternatives within the multifamily commercial real estate sector.
Creators & Guests
Guest
Zach Bowyer
As head of living sectors for Cushman & Wakefield's Valuation & Advisory business, Zach Bowyer, MAI, MRICS supports a team of over 130 professionals located throughout the U.S. His primary focus is driving growth initiatives through the advancement of client care, data analytics, product development and talent recruitment. Property types covered include apartments, BTR, affordable, manufactured housing, self-storage, co-living/student housing and senior living.
What is Multifamily Minute?
Experts from Cushman & Wakefield dive deep into the dynamic world of multifamily commercial real estate. These quick episodes cover the gambit of multifamily ownership; from why investing in multifamily is a savvy move, to management tactics and tips, to exploring alternative and niche multifamily assets, to debt and funding multifamily investments. Whether you're a seasoned investor, a budding entrepreneur, or just curious about the multifamily market, there’s something that will spark bigger, better and bolder ideas in the Multifamily Minute.
Ruth: Coming up! on Multifamily Minute!
Zach Bowyer: We're seeing a softening and occupancy is softening and rent growth. But we seem to think that in most markets that recovery is going to be a little bit quicker than a lot of people expect.
The data that we're seeing for the most part would suggest that the rate of supply delivery has peaked and should start to decline as we move into 2025.
Zach Bowyer: Investors are starting to reallocate more of their funds to alternative or, specialized asset class, I still think the market drastically underestimates the level of demand
Ruth: All that and more on Multifamily Minute by Cushman & Wakefield
Michele Kauffman: Welcome to the Multifamily Minute hosted by Cushman Wakefield. I'm your host, Michelle Kaufman, Chief Growth Officer for Valuation Advisory. Today's podcast will focus on how investors, operators, and lenders are approaching market valuations in today's commercial real estate environment. I'm joined today by Zach Boyer, our Head of Living Sectors in Valuation Advisory. As the lead of living sectors, Zach and his team cover conventional, multifamily, affordable housing, student housing, senior living, and build to rent markets in the U. S. Welcome Zach.
Zach Bowyer: Yeah. Thank you, Michelle. And hello, everyone. Thank you for joining our podcast here today. As Michelle mentioned, my name is Zach Boyer. I'm based in Boston, and I've worked in valuation and advisory for almost 20 years covering the United States. My role at Cushman is, as Michelle mentioned, I support our living sectors business. Which is comprised of about 130 professionals located throughout the U. S. Just to give you an idea on an annual basis, we'll do anywhere from 9, 000 to 10, 000 valuation assignments. Don't want to belabor that and ready to dig in when you are, Michelle.
Michele Kauffman: Super. Thanks Zach. We have a lot to cover. So let's dig in. Our multifamily valuation business experienced a very successful 2024, despite a somewhat choppy market. So can you talk to us about what your business entails and what's behind it? Success.
Zach Bowyer: Without being super cheesy on this, I would say number one, it's our people. We have the most knowledgeable, most collaborative, and most service oriented team I think, in the business. I think everything from a valuation standpoint starts with those three pillars and then You know, within this business, we've really been leaning into find opportunities for growth.
It's been a somewhat choppy market, but as we identify those opportunities, leaning into those where appropriate, developing our technology, our data, and, really making sure that we're positioning our business to best serve the needs of our clients.
Michele Kauffman: From my perspective, and I'm guessing yours, we've seen a lot of dichotomy in opinions of value or perspectives on market value right now. Can you talk to us about, at a very high level, what you're seeing in valuations in the living sectors right now?
Zach Bowyer: Yeah I mean it's, there's certainly a lot of various narratives out there around where valuations are currently at, where they're going, and that certainly varies by market to market as well. As as an appraiser, we have the luxury of being somewhat agnostic. Toe the various narratives.
And we really try to focus on, the market data. What are transactions telling us? And, again, that varies quite a bit by market. I think to really answer that question, though, it's important to look at where the multifamily sector has been over the past, call it 2 to 3 years. Primarily coming out of the pandemic. Multifamily was certainly the belle of the ball. The property market fundamentals were extremely strong from, record level vacancy to rent growth, sometimes even double digits, and a lot of time, looking at the data at that point, it was all very sensible underwriting, so valuations reached an all time high, investment dollars reached an all time high, and, and then the market shifted, interest rates started to move up migration patterns changed a little bit. Property markets soften a tad. We went from, peak to trough pretty quickly over about a year. We saw, from 2022 to 2023, lending volume dropped, around 45, 50%. Transaction volume also dropped around, that same level. More pointed to your question and looking at the dichotomy in today's market it is just much more important than ever I feel like to, really understand the dynamics of the specific note or market that your property is located in, how that property fits in that market. And then also just, where the capital market. Cap rates and discount rates, et cetera, how all those play in. And, depending on that, I think you can still get a pretty right wide range and your valuations in today's market.
Michele Kauffman: You started to touch on this but what metrics in particular are making you maybe nervous about the market's future?
Zach Bowyer: I'd say one data point that we're looking at really closely is loan majorities. Again, for me, I like to break down valuations between capital markets and property markets, and we can certainly dig into, to property markets. But sticking with capital markets, looking at loan maturities, right now, Cushman Wakefield, our research team, is tracking around 3.3 trillion in loan maturities that are expected between now and 20 2033. And that's for all commercial real estate. However, about 43 percent of that reflects multifamily and a big tranche of these multifamily loan maturities are taking place over the next three years. I think last year there were a lot of investors, a lot of funds were being raised that were looking. At that data and expecting a lot of blood, you know in the streets to really be more opportunistic with their investors the reality is so far anyways that You know that hasn't really materialized. It didn't materialize much last year and you know right now delinquencies, I would say are probably up about what we can say You know two acts over where they were at last year, but still, that's only around 4 percent of the outstanding debt. I think it's something we want to continue to keep an eye on going forward. We track the number of valuations that we're doing where there is some sort of distress in the capital stack. And we're very, we're seeing very similar data.
A lot of markets still very little, under 1%. I would say some of the higher markets upwards of 10%, but most of that is in your 3, 4, 4, 5 percent range. In terms of what, what's more concerning to us right now, what we're really paying attention to, I would say number one, just, capital markets, but more specifically looking at debt maturities.
Michele Kauffman: Zach, that was Great from a really macro level perspective. And I think we've all been watching the trends in loan maturities for the past few years. Let's transition now to more of an asset level. Can you describe some of the factors or perhaps there's an overrated factor from your perspective in valuations that investors are obsessing over right now?
Zach Bowyer: Yeah. That, that's a really great question. And, I don't want to say that it's overrated, but I think back even to, some of these broader narratives that are out there around the multifamily sector I would say it's supply, or concern around oversupply. We did touch a little bit on, on the capital market side. I would say this is a great. What we're seeing and are watching on the property market side. In terms of, construction deliveries or supply deliveries, we had record setting deliveries and, 2022 and then, continuing into 2023 and in a lot of the markets where construction levels were the highest or, developers, investors, they were really following a lot of those migration patterns primarily, to the Sunbelt, Florida et cetera. There, again, there was a lot of development. Investment activity taking place and in those markets. So as that supply is coming online. It's certainly creating a softening or resulting in a softening of, occupancy, rent growth, etc. Also stressing valuations, right? That not only impacts your NOI current and projected, but also, when you start going back onto, the debt side it starts to impact some of those ratios and just, the health of that capital stack. What we're seeing and we also track this very closely by market through the appraisals , that we're completing is absolutely, I would agree that we're seeing a softening and occupancy is softening and rent growth. But we seem to think that in most markets that recovery is going to be a little bit quicker than a lot of people expect. So looking at supply growth, our research team and, the data that we're seeing even at a market level for the most part would suggest that the rate of supply delivery has peaked and should start to decline as we move into 2025, even more so behind that, just being where construction financing is, construction, debt liquidity, cost of construction, et cetera, starts are actually at an all time low.
So take, take Austin, Texas, for example, it was one of the hottest markets coming out of COVID. A lot of construction started to take place there, outpacing your demand growth. So it's one of the markets that went from super hot to super cold pretty quickly. And I hate to pick on Austin, but the other side of that is, is, the economic fundamentals, the job growth, et cetera, within Austin are still very strong. You're still having people move to Austin and Those people are going to want to rent property. So Austin, it might take a little bit longer to play out there. So I just wanted to use that as, a more, I don't know, extreme example, but I think there's a lot of other markets where we are going to see a shift from, softening and your property market fundamentals back to really strong occupancy and rent growth call it even within the next 12, 24 months.
Michele Kauffman: Great example. Thank you. So how, if at all, has that softening impacted cap rates? I don't need to tell you that when we were discussing market values, everyone's first question is, what is the cap rate? So can you speak to how and maybe to what extent these current market fundamentals are translating into any change in cap rates?
Zach Bowyer: Yeah so cap rates have certainly gone up. I think I mentioned, just on the valuation metrics that we track peak to trough, we saw an overall change of around 20 percent in market valuations and that was driven both by the softening property markets and then also the capital markets environments with rising interest rates. I look at late 2023 2024. And I think during that time period. It even goes beyond cap rates. I think there was just a lot of pricing discovery taking place where You know just a really big spread between buyer and seller Expectations, I don't think it was necessarily a function of people not believing in the long term health of the multifamily sector It was just more not only a disconnect, but just really an uncertainty with where pricing should fall You know, I would say as it relates to cap rates In this environment not only the shift and uncertainty and our capital markets where interest rates going, et cetera, what's happening on the property market side. I think that cap rates right now are necessarily as straightforward as they are in more, stabilized markets. Just as an example, we do a lot of national portfolios for, various funds. And, typically you'll see a, let's call it a 1990s vintage property or two properties call it same vintage. Very similar in terms of how they're amenitized. Very similar market type metrics in terms of income levels, et cetera. Other economic factors and we can easily see a 75 basis point spread in the cap rate With really not a whole ton of explanation on why it's different other than just people are pricing deals a little bit differently right now Again just has that pricing discovery takes place. So absolutely. Cap rates We want to extract another thing that we really need to pay attention to in this market is, from take a market where there is a lot of debt liquidity, financing is pretty stable, a lot of certainty with where the market's going cap rates are pretty straightforward, right? You're, you've got your market financing, you've got a stabilized NOI, and now fast forward a little bit to today's market environment. Where, there might be some sort of debt assumption that's playing into the transaction or, we had a really run up in operating expenses and where a more national investor operator has some, scale to be able to bring those down a little bit, as opposed to your more regional focused operator, maybe, there's not as much flexibility for them to, manage or adjust those expenses. Yeah, cap rates we first and foremost still start with that, but I think, it's just critically important to dig a little bit deeper behind what's driving the cap rate. But overall, I would say not only from our institutional clients, but even in just some of our more conventional valuations, we are starting to pull in a discounted cash flow analysis a little bit more often to help us, either somewhat of a checks and balances or better reflect the more volatile cash flows in our valuations.
Michele Kauffman: That's super helpful. Zach. Yeah. I always said cap rates are in the eye of the beholder and you just explained why. So I appreciate that.
Zach Bowyer: Let's shift slightly. You had given us a good example in a previous comment about the Austin scenario and urban market. Subsequent to the pandemic, the suburban apartment market just exploded. Are you seeing or have there been metrics that suggest the suburban apartment market is peaked or does it still have legs? How is that playing out in your valuations? Another just great question. Getting back to the different narratives that are out there that the shifts in the narratives, investors focus on the Sunbelt and the Sunbelt is still, very attractive market for a lot of investors.
Zach Bowyer: But not too long ago, I think a lot of people, like the Midwest Columbus, Ohio, other markets, secondary locations weren't really a hot topic or even a focus area, I think for investment activity and, two things that have come out of that is number one, there wasn't a lot of construction focused in those markets.
So they're now not necessarily experiencing a lot of that overbuilding or, influx of new supply coming online that some of these other more attractive, hotter markets are experiencing and having to. Rent growth is still relatively favorable, occupancies remaining strong in, in those markets. So there has been a little bit more of a resurgence on, call it mid high rise verse garden style valuations or cap rates in your primary or secondary market locations. For investment class A, I would say there's a very little spread in pricing right now in terms of what we're seeing. That spread opens up a little bit more when you're, going into your, investment class B and C properties. The other side of that, why I think there's, still a market and will continue to be a market for the more suburban apartments is affordability. Affordability is a really focus area, I think, from, from our government, federal, state and then even, from a investor standpoint, really making sure that whether it's a new development, reposition, existing acquisition is making for sure that affordability is there in the market and, your suburban suburban apartment should continue to meet that demand.
Michele Kauffman: I'm glad you brought up the issue of affordability. Yes. It's certainly got a lot of attention during the political season in particular, the wildfires in California have really drawn considerable attention to the issue of affordability in the rebuild scenario in general. Are you speaking to affordability at a macro level or more specific subsidized affordable housing investments?
How are you looking at the issue of affordability in your practice?
Zach Bowyer: I would say all of the above. More, looking at the subsidized part of our business. It's another area that. I think the discussions around that, the calls that we're getting from clients, we're seeing that increase. It's a part of our business, Michelle, as that we're, we're really leaning into just continue to serve what we see a growing market.
Absolutely, the subsidized standpoint but then even more I would say, middle market affordability. Is also becoming more of a concern, a lot, I think for these recent developments to pencil, a lot of the developers have been going super high end, highly amenitized, really nice finishes, but to get the return naturally that, they've got to push, they've got to push the rents up on that. And it prices a lot of people who would otherwise be renters out of the market. Even for example, just back to your question on the federal level, HUD, recently announced a new loan offering that creates an option that targets the more middle market households granular into that high level we think that, just through this one program alone. It's gonna, help increase financing options by about 6 to 10 percent. From your lower income, subsidized, and then into your middle market affordability, we think that's just not only a big a big segment of the market that's gonna continue to have strong demand from a consumer based standpoint, it's also, still largely unsolved. And it's really interesting, a lot of developers, investors, et cetera, continue to explore how to better serve that market.
Michele Kauffman: in that vein? I know you absolutely have your finger on. A whole range of product types. I've been reading that certain product types build a rent co live more manufactured housing is really emerging to address some of those issues of unsubsidized affordability. Can you talk to us a little bit about what you're seeing from the standpoint of new construction in these alternative models?
Zach Bowyer: Yeah first I, I have to give a shout out here to Paula Thoreen who leads our institutional business within valuation and advisory. She also chairs the NACREE Valuation Committee. So we get a lot of great data from Paula and her team on fund allocations from the more, institutional investors and, what that data is showing just at a high level is investors are starting to reallocate more of their funds to alternative or, specialized asset class, student housing, manufactured housing, co-living And then, one near and dear to me is senior living. But, all of those. We can call them alternative property types have a unique and very interesting thesis behind them, manufactured housing. That's another sector that has been extremely fascinating. And this started to take place even prior to the recent pandemic where, we were seeing what we call the institutionalization of that sector where more institutional funds were starting to come in to the manufactured housing space and what they were doing or what they are continuing to do is transition from I'm not a fan of the term but you know for lack of a better words We'll call it the trailer parks where you had just you know, the older mobile home type space and in those communities to now they're bringing in still a mobile home concept, but much more progressive in design from an investment standpoint, you underwrite it the same way, but it's targeting that younger professional, maybe hipster, musician, artist and it's just, there's some really cool communities and developments that are coming out of that.
Yeah. again, targeting the younger, more middle market type demographic, but doing it in a way that really is attractive to them and meets a lot of those other needs and wants that are somewhat unique and in demand by those segments. So I really just continue to look forward how that sector expands.
And then senior housing. We've got a really great specialty practice within senior living. And one of the things that we've tracked now for almost a decade. It's this supply and demand balance where, since I started 20 years ago, people have been talking about their baby boomer demographic and, that, that wave of population that is coming into that sector. 20 years later it's finally, that baby boomer demographic the leading edge is finally at the doorstep of these communities. For us, we look at and it's a much smaller segment, right? So it's a lot easier to overbuild, underbuild or whatever. At a high level, Looking at the demand forecast there just to give you context, on average over the past 10 years, that industry has delivered, around 25, 000 plus or minus units per year, naturally that's significantly down, 2024. I think it'll be around 8, 000 units that get delivered to the market. So if you take a capture rate at, call it 92 percent stabilized occupancy, you extract a capture rate from that, apply it to our aging population to meet peak demand levels that are really only 10 years out, right? The industry needs to increase annual supply by 45 to 55, 000 units a year starting today. So the level of unmet demand is just, I still think the market drastically underestimates the level of demand that is literally at the doorstep of the sector. And then even more so getting back to affordability, when you look at, and we're not talking about subsidized or anything like that, just, middle market affordability. When you look at where rents and all of those other care components stack up, over half of our aging population is not going to be able to afford your traditional assisted living. So a lot of interesting, we could talk for a whole nother hour on that, so I'm not getting into it but just, the evolution that sector is. It's going through right now. It's super fascinating and I think there's a lot of opportunity from a lot of perspectives going forward there.
Michele Kauffman: Thanks, Zach. Yes, I don't know where I read it, but I've recently come to see and love the term silver tsunami used to describe the trend in seniors housing. I think you just captured exactly what the industry is facing. So thank you for that.
Zach Bowyer: for sure.
Michele Kauffman: Thank you again for these insights and I'd like to thank the audience for listening in to hear more episodes of the multifamily minute. Please subscribe to our podcast on Spotify, Apple podcasts, or the podcast app of your choice and visit Christman Wakefield dot com slash multifamily minute for our complete archive.
Narrator: There are bigger problems to outthink, greater challenges to outdo. When we never settle for the world that's been built, that's when we drive it forward, towards better outcomes and better futures for our clients and our communities. At Cushman Wakefield, better never settles.