Apartment industry resiliency in an era of uncertainty
By Bryan Castillo – Director of Debt and Structured Finance, Stoneweg US, LLC
Recent events, related to the global pandemic, have introduced uncertainty about which investments will outperform in the new economy. While the apartment industry has delivered strong investment returns over the past 10 years, below we summarize how the industry is performing in 2020 and highlight key factors for continued, strong, relative performance.
While travel, leisure and hospitality related industries continue recovering, multifamily assets have demonstrated resiliency with 2020 monthly rental collections exceeding 90% through October 2020, according to National Multifamily Housing Council’s Rent Payment Tracker. Separately, Freddie Mac’s latest report indicates a loan default rate of 0.10% as of 2Q 2020, as compared to 9.6% default rate for commercial mortgage-backed securities (CMBS) encompassing all commercial property types.
Beyond strong operating, and loan performance, the apartment investment industry is supported by healthy capital markets anchored by Fannie Mae and Freddie Mac, government-sponsored entities (“GSEs”). The GSEs have a mandate to support the apartment industry by providing credit, and liquidity, especially in times of volatility. While the GSEs are providing record amounts of capital, at attractive interest rates, loan underwriting remains disciplined focused on recent operating performance. New loans also require additional debt service reserves and loan protections. Similarly, acquisition underwriting remains conservative, with limited rent growth forecasted in the near term.
The low interest rate environment serves to stimulate the apartment industry in the form of historically low mortgage interest rates. Borrowing rates for qualified sponsors are in the mid to upper 2% range. Property values are supported by capitalization rates that have generally remained constant in the 5.0% range, thereby providing investors additional spread between the property yield and the borrowing cost. These dynamics support on-going investment, for well-located apartments, leading to strong cash-on-cash returns approaching the 10% range.
Stoneweg, US recently closed on SW Fund I LP, an over-subscribed investment vehicle targeted to acquire approximately $500,000,000 of diversified apartment communities over the next twenty-four months. For calendar year 2020, Stoneweg US is on track to complete nearly $250,000,000 of acquisitions by year-end, and over $100,000,000 of dispositions.
Stoneweg US is an opportunistic real estate investment firm, with a nationwide platform, focused on the acquisition and development of multifamily assets. The firm seeks to deliver attractive, risk-adjusted returns to investors by identifying market opportunities, and optimizing asset performance, all while improving the resident experience. Through our affiliation with Stoneweg SA, a Swiss-based real estate company with $4 Billion of real estate transactions to date, Stoneweg US serves as the exclusive US investment manager of Varia US Properties AG, a Swiss publicly-traded, multifamily real estate fund (SIX Swiss Exchange ticker: VARN). Stoneweg US also partners with US, and international, equity investors to acquire and develop multifamily assets in markets with strong population growth and positive trending economic conditions.
Bryan Castillo serves as the Director of Debt and Structured Finance for Stoneweg US, LLC, and is primarily responsible for securing and negotiating, financing across the portfolio for new acquisitions within the Company’s Varia US Properties Fund and recently launched SW Fund I LP. Bryan manages all key relationships with major lenders, plays an integral role in securing capital for development deals and leads all efforts in refinancing interest rates for existing assets in the Stoneweg US portfolio. Since joining the Company in 2019, Bryan has successfully completed five refinance deals, seven acquisition financings and led the launch of a Fannie Mae Credit Facility. Bryan led financing, and portfolio management responsibilities, for a private equity investment firm focused on value-add multifamily. Bryan began his career at PGIM Real Estate Finance where he was involved in over 40 transactions, with total financings exceeding $1.5B, over the course of his 7-year tenure.