Get Ready For Another Shock to Housing Affordability

Episode Summary

Executive Summary: The episode examines how higher rates, tight financing, insurance costs, labor shortages, and policy uncertainty are reshaping U.S. multifamily housing. Guest Lee Everett argues the sector is shifting from a renter-friendly supply boom to a landlord-friendly environment as new construction slows, smaller operators struggle, and demand stays strong—especially in well-located markets.

Main Topics: Interest rates and financing pressure (Priority: 5/5): Higher long-term rates have raised the cost of capital for developers and owners, limiting new starts and making refinancing harder, especially for smaller or more leveraged players. Multifamily supply slowdown (Priority: 5/5): Apartment construction surged in 2021-22 but has fallen sharply since, and the guest expects peak supply to pass soon before new deliveries drop below prior-cycle levels. Market bifurcation: large operators vs. smaller syndicators (Priority: 5/5): Well-capitalized owners can extend, refinance, or negotiate, while newer entrants and aggressive syndicators are facing delinquencies, lawsuits, and forced exits. Rent growth, affordability, and tenant quality (Priority: 4/5): Despite past rent gains, rent-to-income ratios are still manageable for many operators because tenant incomes have risen; demand remains strong among higher-earning renters. Policy and regulation risk (Priority: 4/5): Potential freezes in federal spending, Section 8, HUD support, and affordable-housing incentives could worsen already tight supply, while federal permitting reform is seen as limited in effect. Labor, insurance, and disaster-related cost pressures (Priority: 4/5): Construction labor shortages, deportation risks, wildfire rebuilding demand, and rising insurance premiums are all increasing the cost to build and operate housing. Longer-term housing geography and consolidation (Priority: 3/5): Desirable urban/suburban areas remain underbuilt, pushing development outward and likely accelerating consolidation among multifamily operators and developers.

Key Arguments: Higher rates have reduced multifamily starts and made financing harder; even after Fed cuts began, the 10-year yield stayed elevated, keeping borrowing costs high. The sector is experiencing stress on both demand and supply: demand is strong because buying housing is unaffordable, while supply is constrained by financing and construction costs. Established owners can rely on relationships with Fannie/Freddie and balance-sheet lenders, but syndicators and newer players are reaching the end of their runway. There is a "thinning of the herd" underway in multifamily, with banks and debt funds unwilling to keep toxic or underperforming assets on their books forever. Rent growth is likely to re-accelerate in desirable markets once the current supply wave fades, shifting the market back toward landlords over the next 2-3 years. Policy cuts to HUD, LIHTC-like support, or Section 8 would reduce both affordable-housing construction and tenant demand support, worsening shortages at the lower end. Construction labor is a major constraint; undocumented labor is estimated at a large share of the workforce, and wildfire rebuilding will compete for the same labor pool. Insurance has become a major operating expense, especially for small owners in high-risk states, reinforcing the advantage of scaled operators with diversified portfolios.

Data Points: 10-year Treasury yield: ~4.55% to 4.6% - Discussed as the financing benchmark still above levels when the Fed started cutting rates. 10-year Treasury yield at Powell's 50 bps cut: ~3.6% - Reference point from September when the Fed began easing. Portfolio size at Cortland: ~80,000 units nationwide - Lee Everett's firm was described as a large multifamily owner-operator. Valuation hit on existing portfolios: 20% to 30% - Estimated decline in values for established owners depending on portfolio composition. Spread compression from peak: ~100 basis points - Debt financing spreads have improved somewhat from the worst levels. Rate sensitivity of multifamily debt: 1% tenor vs. 4-5% long-term rates - Illustrated the gap between old financing conditions and today’s market. Peak supply: Next 6 months - Guest said the current apartment supply wave is near its apex. Units coming to market in 2024-2025: Over 1 million - Projected multifamily deliveries across the next two years. Supply relative to prior cycle: Below 2017-2019 average by end of 2026 - Guest expects every major market to fall under last cycle supply quickly. 2024 rental demand ranking: 1st or 3rd highest year ever - Depending on the data provider, 2024 is expected to be near-record for rental demand. Rent-to-income ratio change: 30 basis points lower than 2018 - Cortland's internal measure suggests apartments are more affordable relative to income despite higher rents. Post-COVID new renter income growth: 34% increase - Explains why higher rents can still be supported by tenants. Average income per unit: Almost $100,000 - Cortland portfolio’s current tenant income profile. Average credit score: Around 700 - Indicates a strong renter cohort in the portfolio. Average renter age: Low 30s - Describes the demographic profile of current tenants. Construction workers estimated undocumented: 20% - Used to illustrate labor vulnerability in the construction sector. Insurance cost in Florida at one point: $300 per unit - Example of the severe insurance burden on some apartment buildings.

Pivotal Quotes: "extend and pretend, which you're referring to in the always popular looming maturity wall discussion" — Lee Everett: On how established owners are managing debt maturities despite higher rates. "we're about to transition from what has been a very renter-friendly market to, again, a landlord-friendly market" — Lee Everett: On the outlook as the supply wave peaks and then fades. "you could be looking at a massive deficit in labor within the construction space" — Lee Everett: On the effect of deportations and wildfire rebuilding demand on housing construction costs.

Implications: Expect fewer new apartments, more consolidation, and stronger rent growth in well-located markets as the current supply wave fades. Smaller operators and affordable-housing projects face the most strain from rates, labor, insurance, and policy uncertainty.