Rents Likely To Rise Again

In the United States today, housing, whether ownership or rental, is financed either by investors or by the government. Ownership through mortgages is backed by government sponsored entities (GSEs) like the Federal Home Loan Mortgage Corporation, known colloquially as Freddie Mac. Rental housing is a commodity and investors range from a single person buying a duplex to Real Estate Investment Trusts (REITs) that aggregate capital through securitization, allowing buyers a liquid investment in appreciating real estate. Then there is the Low Income Housing Tax Credit (LIHTC) that supports the construction of many expensive subsidized apartments. There is a serious need for other options. I had an exchange with Jamison Manwaring, co-founder and CEO of Neighborhood Ventures, a real estate investment platform that is offering path for investors in multifamily housing.

Neighborhood Ventures is essentially a REIT, a method of aggregating capital from an array of investors and buying multifamily real estate in different markets. This drives some people crazy, so crazy there are efforts at the federal and local level to stop “out of state” investors. This is wrong headed. I’ll say this again here, investors in housing are the cause of higher prices, increasing demand and inadequate supply is. Many things about what Neighborhood Ventures says about itself in its “about us” would set off those alarms especially that it is “raising capital to acquire and retain cash flowing Multifamily properties for long-term investment” in various markets across the sunbelt.

But it is important to understand the investor perspective. Most people can’t buy land and real estate, but many could afford to put in a few thousand dollars. A REIT like Neighborhood Ventures enables investors to earn income on their investment “as the REIT’s property assets appreciate.” Investing in different markets, hardly something a single investor could do, allows for diversification “minimizing the impact of individual asset underperformance.”

Taxes on REIT income are also easier than dealing with the tax consequences of purchase and sale of real estate. There is nothing wrong with investing this way. Again, if local prices go up, it isn’t because of “out of state” investors, but the fault of land use policy that makes housing scarce causing inflation that creates the appreciation investors want. The best way to foil out of state investors (if that’s something you want to do) is allow enough housing that investor money goes somewhere else. Neighborhood Ventures also uses regulated crowdfunding, a method of investing like REITs regulated by the Securities and Exchange Commission.

I asked Manwaring to describe how Neighborhood Ventures works. He said that the platform has over 10,000 investors and that the REIT invests “in cash flowing, low levered properties,” meaning properties without a lot of debt. He said that the company also started a fund of $75mn “targeting distressed multifamily properties in Arizona” and that “It has also raised capital for 16 individual projects using crowdfunding laws, with a minimum investment of $1,000. These projects typically have 200+ investors.” Many want to ward away investors from “distressed properties,” often properties with lower rents subsidized by deferred maintenance. There are ways to do this, especially with low interest loans that could help properties make improvements without passing on the costs.

I asked Manwaring about my growing interest in cooperative housing, especially publicly financed cooperatives on community trust land. As I’ve pointed out before, buying a home requires a huge amount of debt up front. Would investors be interested in cooperatives? Manwaring said, “these could be good options, but it is important that investors are getting low risk, solid returns in order to make this feasible.” The low risk part of this equation is the involvement of the government. Local governments could back investment in cooperatives as they would with bonds, but perhaps more directly by selling shares. We already do this with mortgages and bonds, why not with investor capital?

A recent article on homeowners reported on the fact that almost half of new homeowners are struggling to make housing payments. As interest rates climb, are we going to see this become a greater problem? Will it lead to issues like the ones we had in 2008 and 2009? Manwaring said, “it depends on how long interest rates remain restrictive. If they stay at their current levels (or higher) for multiple years, then we will likely see some defaults.” I’m not sure. My growing skepticism about the mortgage as tool for homeownership makes me think whether there are defaults or not, we need to be exploring other options not just for consumers but for the wider economy.

I asked Manwaring if he had any general thoughts about where the housing market might be headed in the next 18 months. He pointed out that most people are still renters and because of new construction, rents have stayed flat – and that’s true even though I always remind people that the media reports quarter over quarter changes in rent as if they were Peral Harbor. Manwaring had a warning about rents and new units in the pipeline for the years ahead.

“These construction projects were planned 2-3 years ago when interest rates were 3.5%. The pipeline of new units is about to go off a cliff as new construction projects have been shelved. This means rents will likely be increasing over the next 1-4 years.”

Rents change, going up and down. But what they respond to is supply and demand. If Manwaring is right, then what is needed is a smarter assessment from regulators about what the demand profile in their community might be in those years ahead, and incentivize more housing development. Some things haven’t changed. Most governments don’t look ahead at what supply and demand might be, but instead looking back at old Census numbers. Better planning and preparation could reduce the pain of housing scarcity in the future.