Finance Midwest

Berkadia's Ernie Katai: Multifamily still drawing financing requests

Berkadia's Ernie Katai: Multifamily still drawing financing requests,ph01
The multifamily sector continues to draw a steady stream of financing requests.

How strong is the multifamily market today? Just ask Ernie Katai, head of production and executive vice president with the Detroit and Chicago offices of Berkadia. He’s seeing a steady stream of financing requests for multifamily purchases and developments. The best news? Katai doesn’t see a slowdown coming in this sector anytime soon.

Midwest Real Estate News recently spoke to Katai about the commercial financing business today. Here’s what he had to say.

Still robust: We just attended a conference a few weeks ago where we met with so many people in the business. The one thing they all agreed is not changing is the amount of capital flow that continues to go into real estate. Nobody is decreasing their appetite or allocation in 2019. If the capital is flowing, that is the key to this business.

Competition: They are a little concerned that it will be more competitive when it comes to winning the deals. It might be a little tougher this year to win those deals because so many people are competing for that business. Everyone has such big numbers for their targets for the year. But aside from that, everyone remains confident in the market. We did $26 billion in debt last year. Our pipeline is full.

A resilient industry: You had four interest-rate increases last year. We will possibly have two in 2019. Because of that, people are probably going to move and do something with their investments. They’ll either sell them or refinance them. There was such a long period when rates did nothing but go down. People became very comfortable with the fact that they never thought rates were going to go up. Last year, all of a sudden, the bell rang and we had four increases. But the testament to the resiliency of this business is that it has not slowed down, even with those rate increases.

We came back from another conference, a big multifamily conference, just a few weeks ago, too. The people at that conference said that they understand they won’t be getting the same level of returns as they had in the past. But they were willing to accept that. This business is all about the math. If rates are going up, the prices of buildings are going to do down or people are going to have to be willing to accept lower returns. What we heard during that conference was that people are willing to accept those lower returns. But they are still going to be very active. It’s good news on all fronts.

Investors love commercial real estate: Since the economic downturn, we have seen a nine-year run of rent growths and high occupancy levels. The fundamentals for commercial real estate are strong. We always keep our eye on the economy and the fundamentals of real estate. Are we seeing weaknesses in rent growth? We haven’t seen it yet. The people who are out there day to day doing deals, their optimism is very strong. Just look at last year. The sector blew right through four rate increases. The fundamentals with economic growth, rent growth and occupancy rates are strong. It’s hard not to like commercial real estate with the performance it has had.

No multifamily slowdown: Look at the multifamily sector. People believe that the housing stock is not exactly where it needs to be. There is continued demand for affordable housing and for new housing. There has been a decrease in homeownership. Is that a function of Millennials or is it a new dynamic? Empty nesters, too, are curious about urban living and are liking it. That is not something we have ever seen in the past. The drivers pushing multifamily, then, are coming from a lot of directions. Look at the younger generation. That is a generation that is not hesitant to move. Multifamily is strong both in urban and suburban areas.

These properties are leasing up. If we start to see a hesitation in lease-up, people will ponder whether multifamily is ready for a slowdown. But until we see that, people are optimistic about this sector.

Lessons learned: When it comes to financing requests, everyone is disciplined these days. No one is going crazy with high loan-to-values. We learned a lot from the last downturn. There is much better discipline in this industry than we’ve seen in the past.

Industrial remains strong: Industrial continues to be one of the top-performing asset classes. There continues to be a need for more industrial space. I don’t think we will see that slow down anytime soon. We are impressed at the level of pricing that we are seeing in the industrial market. This will continue to be a very strong asset class.

Bullish: I always try to be cautious when looking to the future. But right now, unless there is a black swan event that changes things, I am very bullish on where we stand. This market is strong.