Soaring building costs and Ukraine conflict fail to dampen positive outlook
Few would argue that the flipside of the tragic COVID pandemic was an unexpected boost for the housing sector. Although the toll on human life and the impact on the economy were dreadful, the mortgage industry undeniably benefited, largely thanks to the refinance boom, spurred on by record low interest rates.
It was a pattern that more or less continued throughout last year, and, for some like Miami-based Leste Group, 2021 proved to be a high point. The investment and commercial real estate firm completed $500 million in transactions that included two Class A multifamily deals in Florida and North Carolina - a “milestone”, according to the company’s managing director, Josh Patinkin (pictured).
“The execution of the development went well and we’re able to really come out of COVID strong in these markets,” he told MPA.
Specializing in multifamily housing developments and single build-to-rent properties, Leste Real Estate is aiming higher in 2022, even if the fear of COVID has now been replaced by another major earthquake of global proportions – the Russian-Ukrainian conflict.
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“We may have some declining demand because of war in Europe, so that’s a concern,” he admitted, while stressing that the “solid underlying fundamentals” of the business were still there.
“The reason we like multifamily real estate in particular in an inflationary environment like this, is there’s annual resets on rents. We have the view that rental rates are going to outperform or just exceed inflation broadly, especially in the markets that we’re investing in.”
Those Leste markets where rental rates are well ahead of broad-based inflation are Texas and the southeast – Florida in particular.
Inevitably, if you mention ‘real estate’ and ‘Florida’ in the same sentence, the issue of Russian money comes up. With so many wealthy Russians having either bought properties or settled in the state – Sunny Isles Beach in South Florida is known as ‘Little Moscow’ for a reason - and with President Biden now vowing to seize Russian assets in the US, including luxury apartments, Patinkin was asked whether this would have a detrimental effect on business.
“I don’t think that’s going to have a huge impact on us,” he replied, happy to discuss the conflict and its wider ramifications.
He was decidedly upbeat about the firm’s “three major food groups” as he described them - multifamily and condo development, industrial and healthcare. “That’s where we will be positioning capital,” he said.
With multifamily housing space enjoying federal backing he was asked about the sort of properties that should be built to address the home shortage crisis in the US, knowing that there’s an overwhelmingly preference for single family over any other type of home in the country – the figures say as much. According to Statista, there are more than 208 million single-family dwelling units in the US, compared to only 37.8 million multifamily units. Not only that, but the size of single-family housing units has steadily risen since the start of the 21st century.
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Patinkin’s response to the problem was nothing if not thorough. “The most populated age group within the millennial generation is 31-32 years old right now, and it’s a huge generation.
“As they come of age into their mid and late 30s, that group of people is what will drive the US economy, in our opinion. So how are those people going to consume? Are they going to move to single family homes like the baby boomer generation did? That’s what I think a lot of people expect to see happen, but I’m not totally convinced that will be the case.
With home prices rising by more than 19% year on year in January, he argued that most young borrowers in their early 30s would find it beyond their reach to buy a single-family home.
“They might be forced into long-term renting, especially when you think about the cost of a 30-year mortgage, with rates over 4% now, and it’s going to go higher. So I’m not totally convinced that homeownership is going to dominate the next 10 years like it did with the baby boomer generation. Building single family for rent or purchasing homes and renting them might be a way to position yourself - and we’re doing that.”
Leste will focus on the luxury condo sector, where the profit margins are higher - a critical consideration for the construction industry, which is facing mounting manufacturing costs.
“There’s pressure on all sides of the cost equation right now,” he explained. “China’s a pretty big net exporter of lumber, so there’s going to continue to be supply shocks there. And we’re thinking OK, well, we might have to shift to steel, right? But steel is expensive right now.
“There’s wage pressure, too. About 30% to 40% of the cost in any deal that we’re building is going to be wages. That’s the biggest single line item if you want to think about it that way, which is a good thing for people and for the economy, but it’s tough for builders, because it’s expensive to build.”
