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Multifamily News Roundup – July 2019
Numbers released in July by the U.S. Census Bureau and the Department of Housing and Urban Development indicated that new home construction dropped in June. The number of apartments built, traditionally a volatile number, fell enough to outweigh a slight uptick in the construction of single-family homes. The overall decline of 0.9% was greater than economists predicted. This dip comes despite relatively low mortgage rates. The Census Bureau and HUD may revise these numbers, as initial reports come with a wide margin of error, but the apparent lack of consumer interest in new homes and new apartments is a cause for concern for investors and developers.
Jerome Powell, chair of the Federal Reserve, announced the lowering of interest rates on July 31. Powell’s announcement marks the first rate reduction since the Great Recession in 2008. The news should hearten potential borrowers, but Wall Street reacted negatively to the move, with the S&P 500, the Nasdaq, and the Dow Jones Industrial average falling roughly 1% apiece after the Fed broadcast its decision. The cut reduced rates by 25 basis points, from between 2.25% and 2.5% down to a range between 2% and 2.25%.
The lower cost of capital may also incentivize larger-scale developers to continue borrowing to build apartment projects, providing new relief in markets starved for market-rate housing. In the single-family market, cheaper financing might seem like a blessing, but given rates are already at historic lows, a dramatic uptick in sales will not come any time soon.
Not a month goes by without a major acquisition or merger in the real estate space. In July, Georgia-based Cortland Partners announced their impending acquisition of Vancouver-based REIT Pure Multifamily. Cortland operates apartment complexes throughout the United States, while Pure focuses on the American southwest. The acquisition represents a significant expansion of Cortland’s geographical footprint. Cortland beat rival multifamily giant American Landmark to acquire Pure. The two American companies were among 90 potential acquirers identified by Scotiabank during a strategic review process initiated by Pure during Q2 2018. Cortland should complete the acquisition by the end of this year.
During a period of uncertainty for multifamily owners and developers in New York State due to new housing regulations, a judge has announced that a set of high-rise towers destined for lower Manhattan must face further review before construction can proceed. The set of buildings, independent projects proposed by several different developers, bypassed the Uniform Land Use Review Process (ULURP) employed by the city.
Advocates who believe that the construction should proceed have pointed out that the buildings would provide new housing, including a considerable affordable component, all within the confines of what local zoning permits. Opponents object based on aesthetic grounds—the buildings are considerably taller than others in the area—and over concerns that developers had autonomy to build without community input to the detriment of the neighborhood. The group of developers working on these projects includes JDS, L+M, and Starrett Development, all based in New York, and CIM Group, a California company with other holdings in New York. The companies have indicated they will appeal the judge’s decision. For other developers and owners in the city, this news and the recent decisions from Albany indicate the state has become less friendly to real estate companies and professionals. Diversification into other areas of New York State and in other states can help balance the new potential risk associated with investing in the city.