Our House: The Evolution of Single-Family and Multifamily Development

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Spencer Levy
Welcome home, folks. Or, I should say, welcome to an episode about residential real estate. With the expertise of two experienced executives -- an investor and an advisor -- we'll unlock the many variables that are influencing this diverse sector, from the global economy to a shortage of housing here in the U.S. and more.

Ziv Cohen
You know, Spencer, residential development is very nuanced.

Spencer Levy
That's Ziv Cohen, Chief Investment Officer of the Resmark Companies, a residential development specialist that provides capital for single and multifamily projects. Ziv got into the residential sector more than 30 years ago and has been involved in the financing and development of more than 15,000 residential units in the U.S. and in his native Israel as well.

Roland Merchant
Pick your crisis, from wars to inflation to the general, kind of, macroeconomic factors. I would say now everyone's trying to figure out what's going on.

Spencer Levy
And that's Roland Merchant, Senior Managing Director and Head of Institutional Advisory for CBRE Capital Advisors. In his 20 plus year career, Roland has worked on transactions totaling more than $20 billion. He's also an active member of numerous real estate organizations, including the National Multifamily Housing Council. Coming up: there's no place like home -- a conversation on all things residential. I'm Spencer Levy, and that's right now on The Weekly Take.

Spencer Levy
Welcome to The Weekly Take, and to help us with today's conversation, we have two great experts in the sector, starting with Ziv Cohen, the CIO of the Resmark Companies. Ziv, thank you for joining us.

Ziv Cohen
Pleasure to be with you, Spencer.

Spencer Levy
Great to have you here. And then we have our friend and colleague, Roland Merchant, Senior Managing Director at CBRE Capital Advisors. Roland, thanks for joining the show.
Roland Merchant
Thank you for having me, and a pleasure to ride shotgun with you, Spencer.

Spencer Levy
Well, thank you, Roland. How are the capital markets right now, Roland, and how are they impacting the multifamily sector?

Roland Merchant
Well, it goes without saying, extremely choppy. Again, I think this time of year, usually you have what some have come to call it the summer slowdown. I think that's been exacerbated really from March on. Pick your crisis, from wars to inflation to the general kind of macroeconomic factors. I would say now everyone's trying to figure out what's going on in the debt markets, particularly with construction. And I think inflation is at the key and we can get into that a little bit later. But I think it is important when we're talking about multifamily or single purpose housing, which we'll talk about with respect to Resmark, if you're taking the long term view, I think there are going to be clear winners and losers. And I think that the folks that are able to kind of see their way through in the next 3 to 6 months heading into 2023, are going to be well positioned.

Spencer Levy
Ziv, big picture, how is the market right now treating you, Ziv?

Ziv Cohen
It's a very interesting situation, Spencer, because I think you can actually look at the market from a variety of vantage points. The most obvious one is the demographic side of the equation, plus/minus 140 million Americans are in their peak consumption years for residential, and we have not been providing enough housing in the market. We're undersupplied by calculation, depending on the source that you use, anywhere from 1 million to 5 million units, right. All as a result of not producing during the global financial crisis. So that's one vantage point that actually is very hopeful. The other vantage point is for sale housing, given the fact that interest rates and mortgage rates have moved about 200 basis points from 300 to 550 and now more like 500, what we're seeing in the market is a softness in demand on the buyer side, and that softness is a combination of affordability. And on the second side of it, which I think is more influential right now, is the psychology. It's not urgent anymore to go and buy houses. The mortgage availability is there, the liquidity is there. But I think that there's softness on the demand side, on the for sale. It actually translates pretty well into multifamily on the operational side because we're seeing rent growth being very robust and not easing anytime soon. It will at some point- time catch up when we get a degree of affordability. But we have people with great incomes that are capable of renting. These are renters of choice that are coming in. They're renting units both at our single-family rental and our class-A multifamily communities.

Spencer Levy
So Ziv, most of our listeners on this show that are in the residential sector are most familiar with multifamily. And you spoke quite a bit, not just about multi, but you also spoke about purpose built, single family rental and also single family for sale. And as a developer, you've got lots of choices. Tell us about the similarities and differences between those sectors and how you choose the product mix.



Ziv Cohen
You know, Spencer, residential development is very nuanced as you move between and among those various product types. When we're looking at a for sale project, for sale residential project, we’re typically looking at a project that will be built over a period of time in very, very small phases. Anywhere between, you know, 5 to 6 units on the small side to 20 units on the larger side, that have to be sold to an end user buyer prior to you being able to continuously build through the project. So it's really a just-in-time type operation. The good news about that on the for sale side is that that allows you to have more limited equity committed to each of those phases. So your peak equity deployed in the residential for sale project is more limited. At the same time, you do not gain the production efficiencies of being able to start 200 units day one and actually go forward without any interruption based on demand, typically in the multifamily space. The for sale side and the multifamily side are very different with respect to that function. And right there in the middle, the purpose built single family rental. You're not going to build them in one phase, but you're going to build them in larger phases and therefore being able to generate a more efficient production. So it's very, very nuanced. And while the for sale side is probably built with more limited equity then the for rent and purpose built single family rental, you have to clear the market. Once you build the product, if you can't sell it for the price that you intended, you have to clear the market because the product becomes stale very, very quickly. So when you’re looking at the two, there's a bigger market risk associated with the for sale side of the equation. It's much more cyclical. The for sale side of it behaves with a much higher degree of volatility versus the rental side of the business. But at the same time, if you are looking at a for sale project and you built 20 units and the market is not there for you, you're just going to stop. You're going to stop the development and you're going to basically mothball or freeze the project until the market comes back. This is something that you cannot do in either for rent, multifamily or for rent purpose built.

Spencer Levy
Roland, obviously a pandemic changed so many things, work from home in particular, hybrid work. But are investors now more keen on different forms of housing, and if so, what types?

Roland Merchant
The short answer is yes. So even from a multifamily with the hybrid up model, folks are looking for a little bit more space. And also folks are, when we talked earlier about suburban with respect to urban, folks with that space typically are going to have to move a little farther out because it becomes a little bit more cost prohibitive as well. And then when we're talking about build to rent, again, the appeal there is whether you've got a home office or you've got multiple folks that are using the wi-fi, you're going to need a little bit more space and you are spending a little bit more time at home during the work hours. So folks are definitely going to make that investment.

Spencer Levy
So Ziv, getting a little bit more on the field level for this. Did you change the size of your units, the configuration of your units, because of the pandemic?

Ziv Cohen
So I think that, Spencer, from our perspective, the development community is responding to an assumption or the hypothesis that the work from home or remote work, however you want to call it, is here to stay, it's indefinite, and in some form of a hybrid combination. So for example, at Resmark we’re basically spending three days at the office and two days at home, in general. And I think a lot of companies are looking at that viewpoint and us as developers and us as capital providers in the space are looking at that and saying, okay, is it legitimate that somebody is going to work out of their bedroom because they don't have a good space to utilize as an office? Or is it okay for somebody to be working from a closet, right? And that goes into our design concept. If you look at product that's been designed recently, you're going to see a lot more common area that is being used as potential for privatized office space. So in a sense, a lot more nooks that give people privacy, the incorporation of dens into the either for sale or for rent unit design, creating the opportunity for mom, dad and the kids to be working and learning from home at the same time. And I think there's a lot of that that is ahead of us, because I think that most corporations are viewing this as a situation that's going to be here for a while and maybe permanently, and designing that way accordingly.

Spencer Levy
So maybe there may be a counterintuitive change here in that you might potentially see smaller individual units, but bigger common areas within these same buildings that have these, as you put it, I think individualized nooks where you can work in a quiet space. Is that a fair way to put it, Ziv?

Ziv Cohen
That is a fair way to put it on the multi side, multifamily side. When you look at the for sale side and some of our build to rent product, we're actually trying to amenitize the home inside of it and create more of those spaces. So where in a kitchen, maybe generating an additional desk in the kitchen. In the bedroom, creating a nook within the bedroom that somebody can be working in instead of getting into their closet in order to create some degree of privacy. So in the multifamily space, we're seeing it mainly in the common area, in the for sale space, really, we are tweaking the house design to accommodate more privacy within the confined space of the house.

Spencer Levy
So Ziv, you cover a wide swath of different residential options, including multifamily, for sale residential and then single family rental. It's obviously very difficult to pivot on a dime in any form of real estate because of the long lead it takes for all of these projects. That said, given the changes in market conditions in the last six months, have you pivoted?

Ziv Cohen
So the way that we're looking at the world typically is as you underwrite each segment and each project with discipline, you're always going to be very selective in the opportunities that you pursue. So on the for sale housing today, the degree of conservatism and the margin of error has increased over the past six months. No doubt about that. On multifamily, I believe that from Resmark’s perspective, we're underwriting an expanded cap rate going in and very, I think, dynamic rent growth on a go forward basis. Now we're looking at the rent growth and saying, we're going to look at historical values, 2 to 3% on the revenue growth and 2 to 3% on the expense growth up. But I believe that we are witnessing an expansion in cap rates due to, you know, cost of debt and things of that nature that have not trickled down completely to the development side of the equation. So while we're very active on the multifamily side of the business, I think we're seeing fewer and fewer excellent opportunities. But I think that's going to change for the first time in a long time. I think we're entering a buyer's market opportunity in both for sale and for rent. Single family built for rent. The business is so robust right now due to the demographic trends that I've talked about before and the fact that there is an enormous amount of capital that is interested in the space. We're seeing great stability in the capital markets and great fundamentals on the operational side of the business. So we're happy right now, built for rent.

Roland Merchant
I think it really comes down to capital, and the availability. So part of serving the clients like Ziv and Resmark, where traditionally they might have had 1 to 3 service providers or capital providers that were probably more household names. Now we're looking to expand that one just from more of a belt and suspenders, as we're looking to expand and grow, but also moving more from traditional multifamily to what we would call purpose built. So when we talk about, you know, single family rental, I think that's more of a catch all. But within that, I think everyone has a different, I guess, lens as far as how they really are approaching that particular business. But I'd say the biggest pivot is probably from a long term capital perspective, is making sure that you're well capitalized for future growth.

Ziv Cohen
And Roland, suburban investment, it is undergoing a change in investor’s mindsets, at least as we see it. It used to be all about urban with the millennials. And I think since 2015, we've been seeing strength in performance from suburban markets and COVID just completely elevated that. So when we're looking at the market and we've been active in suburban markets for 27 years because of our single family for sale concentration, we've been in the suburbs for 27 years. We understand them. And it has this common theme today that investors are much more interested in moving into the suburbs. The thesis goes hand in hand with the remote work opportunity that got exposed during COVID.

Spencer Levy
So let's just go to this very point here. Suburban, I think it's fair to say – Roland, maybe you'll agree with this – that in our business, in the investment banking business suburban was, always had a negative connotation. Has that changed?

Roland Merchant
It definitely has changed. I think we saw that probably out of the pandemic. You know, call it, you know, pre-pandemic. You wanted urban, you wanted high rise with respect to multifamily and you wanted class-A. As far as performance, I think we saw that probably the quickest drop from occupancy was probably your uber class-A, where we found that your, call it A-minus/B, more affordable they probably went from 95, 96% occupancy to 98, 99 and held steady. And then same held true kind of right outside both suburban and sub- urban. So I think that is something where whether you're a portfolio manager or CIO, folks were definitely paying attention and what that means on a go forward basis.

Spencer Levy
So Ziv, going back to the product mix – and you mentioned you do everything single family, rental single family, for sale, multifamily – and one of the things you said about suburban really struck me which is, sometimes it's really hard to build in the suburbs, much harder then you might think in an urban environment. It's funny because if we had on this show urban developers, they would say, oh, it's so hard to build a New York or San Francisco. Tell us a little bit more about some of the complicating factors of building in a suburban environment.

Ziv Cohen
Right. So the benefit of the suburb, I'll start with the benefit, is that land is more available. So it's not a function of land availability. It's a function of dealing with additional uses or varying uses around you, and dealing with NIMBYism and dealing with the fact that the municipalities have specific agendas that are not necessarily aligned with what it is that you're trying to produce. If you're producing in the urban market, and I'm not saying it's easy to produce in urban markets, far from it, but I'm saying it's a different skill set. In some municipalities where probably the municipalities that you want to build the most, it is extremely difficult to change uses from either idle uses or uses that are not generating the highest and best use, just because of the conflicting interest within that municipality. I'll give you a perfect example for that. Retail in suburban markets. Retail in suburban markets is hurting. It has been hurting for a long time, right. So you're going into those older, more dilapidated retail strips and you want to change use to residential where we have shortage of housing. This is probably the hardest entitlement task that is in front of any of us to generate that. In the urban market, there is more, I guess, progressive thinking, a less conservative thinking about land use and what makes the most sense. And I think that's the areas where suburban developers are finding challenges going in and out of those type of situations. It does require a different skill set to go into those suburban markets and generate what you want to generate from a business perspective.

Spencer Levy
Roland, I may know too little and too much about the development business of single family because my father in law is in this business. So I've seen the roller coaster up close and personal. But I think that what's unique about the land development business in suburban environments is that you are literally starting with, could be farmland, and then you've got to take it through entitlements and then once you get the entitlements, then you need to build the infrastructure and then you're ready to actually put something on top of the land. And so, Roland, I think I speak for every land developer out there, and they would say, I want Roland to get me capital when it's farm land and you're going to come back and say, I want to give you the money once you've done everything from entitlements to the infrastructure. So, Roland, do you agree with that, and what do you say to those land developers?

Roland Merchant
You know, we are looking for – unfortunately or fortunately for the clients, like Resmark – it really is, capital is really not going to be there in earnest unless you've got the entitlement, unless you have, you know, the friends and family capital where you can buy the land and land bank it, and then work on your entitlements and then go from there. But typically, the institutional capital is going to want one, someone that's done it before and has a track record and knows how to get through not only entitlement but also the master plan and the like. Because all of that's going to be important to how you draw up the docs – whether it's for sale, whether it's bringing in institutional capital once you have C of O, TCO and things like that. So I think that for better or for worse, the capital is not going to be there unless you've got entitled land.

Ziv Cohen
Actually, that answer splits itself into the various products that we're talking about. Let's start with the for sale side of it. Spencer, I think your father in law was in the lot business, right, on the for sale side. You're absolutely right. Institutional capital typically does not go to greenfield and develops, right, from that on or deploys at that level. It requires some baseline of entitlements. And when I say baseline of entitlement, typically the zoning is correct and the entitlement of the project is by right. And then you have to go through a pretty elaborate process depending on the state that you develop in getting your formal approvals through planning commissions and city councils and board of supervisors and so on and so forth. In that business today, given the weakness in demand on the for sale side, we're seeing the biggest opportunity in securing land in various positions, various statuses of entitlement, fully entitled, semi-entitled or fully finished. We're seeing, at least in the past 90 days, the homebuilder has stopped buying. Doesn't mean that they're not going to continue to build. But as we sit here today, they stopped buying. And that creates some friction and potential, some situations of being able to buy land at better valuations. In the next, call it, 12 months, 12 to 18 months, we think that there's a good opportunity there. That actually translates pretty well also to the single family rental or the purpose build single family, because most of those land sellers or land developers, the first line of defense for them right now is going to the single family rental developers and saying, If I got a deal for you, and the reality is for sale builder X dropped the deal and they're coming to you with their land because they don't have an execution, an exit. And I think there's a great opportunity to strike right now with respect to the built for rent business. When it comes to entitlement on the multifamily suburban sites, most sellers in those sites, which are smaller in scale, they're not like 100 or 200 acre or 400 acre type sites. These are more, you know, 10 to 20 acre sites, right. The landowners there have been trained to actually carry the entitlement forward, right, and provide the multifamily developer the ability to take a zoned site by right and carry it all the way through the approval. So it doesn't mean that they're not going to try and get that done. But I've seen more and more on the multifamily suburban side of the business, builders optioning land, right, and letting the land seller actually go through the entitlement.

Spencer Levy
Well, I think one of the things that changed in the single family rental space in the last decade, maybe the last five or six years, is that when the institutions got involved, they were able to operate many of these communities at a similar level of efficiency as they could with multis. What I think what you're saying Ziv is some of these non-institutional buyers maybe caught short because inflation just raised their costs substantially and some of the demand has softened as well. I am confident in the institutional space because they have the ability to operate, they have a stronger capital base to move forward. But there may be some weaker operators out there that are opportunities for people on M&A or otherwise.

Ziv Cohen
Correct. And more importantly and relevant to what Resmark does, in the development space, right, there, it takes more than the ability to identify a site, right. And underwrite what the rents are and what costs are to actually be a developer. And I think that in the space there are many startups that came into being with good experience at the executive level, at the entrepreneur level, but don't have the execution culture as a company, right. And I think in light of changing market conditions, right. I think those weaknesses are going to get exposed. And for us, for Resmark, that is an area of opportunity in the built for rent business.

Spencer Levy
Roland, one of the key issues we're getting from all institutional investors, particularly those coming in from Europe, is how they're looking at the E in ESG, the green side of the equation, and how that changes which deals they want to invest in and not. I know that brownfields, so-called brownfields, used to be a big strategy for many investors and cleaning them up and making them buildable. But maybe that's gotten more challenging today because of the focus on E, and maybe more immediately. But Roland, how have you seen the E change the way you raise capital for folks like Ziv in light of some of the changes we're seeing?

Roland Merchant
Yeah, I would say before, you know, when you're talking to investors, particularly in Europe and the like, it was something that might be, you know, question number ten of ten questions. Where now, that's probably what they're leading with. So I think it's extremely important. And that's something we're addressing not only with, you know, existing clients, but, you know, as we're talking to folks, we want to know how they are addressing the E in ESG and really, you know, ES and G, you know, in its totality, but definitely from an environmental standpoint. That’s usually first and foremost. You know Ziv, I don't know if you want to talk, you know, kind of how you guys think about it in the type of projects as well. I think that would be informative as well, particularly as, you know, your capital sources are thinking about it.

Ziv Cohen
Right. So if you look at ESG, especially the E, from our side, you know, we have been working, have been fiduciaries to both CalPERS and CalSTRS for many, many years. And they have definitely elevated their ESG concentration. What we are doing right now is we are benchmarking ourselves against a variety of other operators in the space, including homebuilders. And we're going to have our very first ESG report to be reported on by the end of this fiscal year.

Spencer Levy
You talked quite a bit about the E, Ziv and Roland, but I want to go to the massive, massive housing shortage we have, particularly affordable housing. What's been your experience, Ziv?

Ziv Cohen
Yes, and I think it is a combination of having attainable housing that meets the demand and not just providing housing that is becoming so expensive due to the fees and the regulations that are required in order to produce a brand new unit, right. So there is the concept of develop more units and pricing is going to come down. But the cost of production is not just the cost of materials and labor, it's also the cost of fees. And that's a significant cost, especially in the suburban markets. With respect to the S on the demand side of housing, the way that we've been supporting attainable housing in many of our project, there is an affordable component. It's anywhere between 5% to 20% of the units that have to meet certain affordability and income tests and requirements in many, many of our markets. I would have to say that that is more common on our West Coast project and less common as you move towards the middle of the country, if you will. And I think that that has been an interesting and welcome experience from our perspective. In Seattle, for example, there is a program called the MFTE program, which provides the developer with some density bonus in order to generate more affordable housing and more attainable housing. And those ratios between market rent and below market rents are very acceptable. And I think that we, in Seattle, the development communities have increased the affordable housing element over the past ten years pretty significantly. I think the program is going pretty well and I think it's going to get continued over time. You do also get a tax benefit with respect to that. And then on the for sale side of the equation, it really comes down to housing policy. Everybody knows there's a problem. Everybody, I believe, understand that a solution is needed, but it can't be done specifically and only on the shoulders of the development community.

Roland Merchant
It really does come back to supply, and that's something that needs to be addressed, particularly from an affordable or attainable standpoint. I think with Resmark and Ziv, we’re doing it. One, it's a well known and established operator that's building great product, but more importantly, it's the right type of product. And then we talked about the S in addition to the E as well. And I think that's a much larger problem that needs to be addressed. So it's not just affordable or attainable housing. I think the future is, again and it should be left to the folks that are just building what we call capital A affordable or deeply affordable housing with respect to impact. I think that's something that needs to be addressed more as well. Or it's just not the affordable or attainable housing, but having an impact in the communities where folks are living and where you're building, whether it's, you know, job creation, job training and things like that. Other ways, in addition to just the housing that is creating, also the ability for folks to move upward with respect to social mobility.

Ziv Cohen
We're actually very excited about the future of housing, from our perspective, because at the end of the day we are on the side of the equation that provides for housing in a market that is substantially undersupplied. Now, we talked about all the challenges that come with creating that additional supply, but we believe that we're sitting in a critical spot in that supply chain that would create new housing, right, in a variety of unit mixes based on different strategies that we deploy - for sale, built for rent and multifamily. And through that vantage point, I think that being a value add component in that chain would help us provide our investors outsized returns in a market that does not seem to have a fundamental demand challenge in front of it for the next ten years. We're looking forward and we're seeing an accelerating need for housing based on household formation and not enough houses provided of all kinds, rental or for sale. And we're sitting at that junction on both sides, the rental side and the for sale side. So I think the future for us is very exciting.

Spencer Levy
Well that was a great conversation, gentlemen. And I really want to thank both of you for joining the show, starting with Ziv Cohen, the CIO of the Resmark Companies. Great job, Ziv.

Ziv Cohen
Thank you, Spencer. It was great. Really appreciate it.

Spencer Levy
And then Roland Merchant, Senior Managing Director, CBRE Capital Advisors. Roland, thank you for joining the show.

Roland Merchant
Always a pleasure, Spencer.

Spencer Levy
Thanks again to Ziv and Roland for stopping over at our place to talk residential. And thank you for tuning in, too. For more information on this topic, our guests, and our show, please drop by our Website, CBRE.com/TheWeeklyTake. And if you like the show, feel free to invite others to drop by as well. You can share this episode as well as subscribe, rate and review us wherever you listen. We'll be back next week. I'm Spencer Levy. Be smart. Be safe. Be well.