It’s not because he is a glass-half-full kind of a guy or someone who always looks for the silver lining. It’s because analysis from Washington, D.C.-based NMHC, a national association representing the interests of the larger and most prominent apartment firms in the U.S., points to strong long-term prospects for the apartment sector, despite today’s challenges.
True, job losses over the past four months, coupled with the credit market freeze, have eroded demand for apartments in some markets, slowed sales volume and caused many companies to rethink development, but the huge echo boom cohort between the ages of 20 and 34 years is growing and, as they enter the market, demand will rise accordingly, says NMHC’s Chief Economist Mark Obrinsky. And, the fact that the apartment industry did not overbuild is another reason for optimism.
Arbury, whose job is to implement strategy for all legislative and regulatory issues of interest to the apartment industry, has seen the rental housing sector through previous market cycles, both up and down. Prior to his current position, he was the Council’s Vice President of Tax and Telecommunications for ten years, with principal responsibility for federal tax issues and federal and state telecommunications regulation. And, before joining NMHC, he spent 13 years on Capitol Hill, working for U.S. Senator Donald W. Riegle, Jr., the former Chairman of the Senate Committee on Banking, Housing and Urban Affairs and a member of the Senate Finance Committee. Arbury served as Riegle’s chief of staff and senior policy advisor with special emphasis on tax issues.
Arbury’s optimism about the future of rental housing extends to the administration of President Barack Obama, “as long as they don’t come out with too many mandates that create more problems then they solve.” He is encouraged by Obama’s appointment of New York City’s housing commissioner Shaun Donovan as secretary of the Department of Housing and Urban Development (HUD).
Donovan is a Harvard-educated architect and former HUD official who has worked in both the business and non-profit sectors, and has a national reputation for working to stem the tide of low-income housing foreclosures. Over the past four years, he worked beside New York City Mayor Michael Bloomberg to launch a $7.5 billion affordable housing program.
During his confirmation hearing on January 13, Donovan indicated foreclosure prevention will top his priority list. In that hearing, U.S. Senator Bob Casey (D-Pa.) suggested that HUD also should have a role in distributing the remaining $350 billion of Troubled Asset Relief Program (TARP) money. Other issues Donovan likely will focus on include preserving the financial viability of the Federal Housing Authority (FHA). He also reiterated his support for a balanced housing policy and acknowledged that rental housing will play a critical role in the overall national housing scheme.
“We are very supportive of Donovan as HUD secretary,” said Arbury, “It’s good to know there is someone in charge over there who understands multifamily, knows the important role we play, and who will stand up for a balanced housing policy.”
Arbury also applauds the appointment of Valerie Jarrett, an attorney and CEO of Chicago-based The Habitat Company, a real estate development and management firm that is one of the Windy City’s largest affordable property managers, as a key senior advisor for President Obama. “Now we have two senior people who truly understand multifamily. I don’t think we have ever had that kind of combination in any administration,” Arbury said.
Last year, rumors flew that Jarrett was on the short-list for the HUD secretary post, but she will serve instead in the White House as President Obama’s public liaison and senior advisor and assistant for intergovernmental relations.
The appointments indicate that HUD, not exactly a top priority during the Bush administration, will take a much greater role in deciding U.S. housing policy and initiating housing reforms under President Obama, who confirmed that assessment when he told the American people, “We need every part of our government working together–from the Treasury Department to the Federal Deposit Insurance Corp., the agency that protects the money you’ve put in the bank. And few will be more essential to this effort than the Department of Housing and Urban Development.”
Promoting a lending thaw
The Federal Reserve and the Treasury have come under fire from critics for changing their focus on how best to utilize the $700 billion of TARP funds, which originally gave the government authorization to purchase troubled assets, notably mortgage-backed securities, from banks and other financial institutions, hoping to encourage them to resume both inter-bank and consumer lending. After that failed to promote lending, the idea was abandoned in favor of making direct investments in the banks.
But Arbury is not a critic of either the Fed or the Treasury Department. “I think they have been faced with a huge problem that went way beyond what anybody could have imagined, so I give them credit for being nimble, because who knows what dire straits banks and other financial institutions are in and what makes the most sense to keep them from collapsing,” he said.
A major issue is how the second $350 billion of TARP money will be allocated under the Obama administration. A letter to lawmakers from Lawrence Summers, the head of the White House’s National Economic Council, stated that President Obama’s focus for TARP fund spending will be towards reducing the oversupply of single-family homes; reforming and increasing TARP oversight and establishing more stringent conditions for bailout money recipients; strengthening financial institutions so they will resume lending for small business, auto purchases and municipalities, and attracting private capital to help recapitalize financial institutions that are struggling with toxic debt instruments on their books.
The NMHC, along with commercial real estate lobbyists, would like to see a portion of the remaining TARP funds used to support the creation of a loan facility for commercial properties, including apartment communities, to ensure that capital flows to the rental housing sector.
Under the program, the Federal Reserve Bank of New York would set up a credit facility of up to $200 billion, backed by $20 billion in protection credit from TARP funds and would accept newly originated, high-quality AAA-rated secured and unsecured commercial real estate debt as collateral. NMHC believes this action is critical to the apartment industry because of the enormous amount of commercial real estate debt that will mature this year and in 2010.
“There are a number of industries — multifamily included — that have been hurt by the huge over stimulation that happened in the single-family housing sector. The meltdown and the credit crisis spilled over into just about every other industry in terms of obtaining credit. So, while the apartment industry is not experiencing the economic problems we did in the late 1980s and early 1990s when there was overbuilding and overleveraging, there are properties that are due to be refinanced this year, just because that’s when their refinancing comes up. Although they are good, profitable properties, there may not be any credit available to refinance. That’s why we say credit needs to be freed up for those types of financing deals so that the owners can keep their properties going,” said Arbury.
The NMHC is urging policymakers to address the looming capital shortage for rental housing, especially since regulators are requiring Fannie Mae and Freddie Mac to start reducing their portfolios beginning next year. The two government-sponsored entities, now operating under government conservator-ship, have been the major source of acquisition and construction financing for the apartment rental sector.
In making its case to the Obama Administration and lawmakers on Capital Hill, the NMHC will rely on a paper provided by Harvard University’s Joint Center for Housing Studies, “Meeting Multifamily Housing Financing Needs During and After the Credit Crisis,” and the policy framework it recommends.
The Harvard paper, commissioned by NMHC, concludes that in order to ensure an adequate supply of capital to the multifamily sector during and after the economic crisis, lawmakers must recognize the important differences between single-family, multifamily and commercial financing.
NMHC has been a long-time and vocal proponent of balancing the U.S. housing policy, which the organization believes has been skewed in favor of single-family housing for decades. “But things are changing now, especially over the past nine to 12 months. A number of key people finally understand that there needs to be balance,” Arbury said.
NMHC fully supports measures that help people facing foreclosures stay in their homes and that will assist communities tackle the burden of large numbers of foreclosed properties, but anything beyond that would just rekindle the problems we are dealing with today, Arbury said.
To that end, the Council is trying to counter some of the more offensive efforts being put forth by the home builders and the realtors to try and re-stimulate single-family housing, he said.
The home building industry is pushing for new and expanded homeowner incentives, such as a proposed $7,500 tax credit for home-buyers’ primary residences and seller-financed “charity” down-payment programs.
NMHC says these down-payment assistance programs, which Congress banned last year, perpetuate the failed zero-down mortgages that fueled the housing crisis, noting they are three times as likely to fail as other mortgages and thus endanger the FHA mortgage program. According to a recent HUD auditors report, the FHA’s once fairly robust reserves already have dropped 40 percent and will fall further as default rates continue to increase. NMHC believes the return of zero-down loans only will exacerbate this decline.
Home-buying incentives simply are bailouts for the single-family housing market that created the housing bubble and its ensuing problems and will do nothing to stimulate the economy or to stop house prices from falling further, notes Arbury.
“Is housing the driver of the economy or is it a reflection of what the economy is doing? If all other industries are doing well, people can afford to buy homes. But by putting housing first, you are directing a tremendous amount of resources into housing when some of those resources could be going into infrastructure and basic industry. It’s clear what got us into this problem–the huge over stimulation of single-family houses — so how could that possibly get us out? What will stimulate home-buying is getting the rest of the American economy back into shape so jobs are created and people can afford to buy a house or to rent an apartment,” he said.
Also on NMHC’s radar screen for 2009 is the Employee Free Choice Act (EFCA) — often called the “card check” bill — that could fundamentally change the culture of the American workplace by replacing existing labor organizing rules with rules that would enhance a union’s ability to win support and ultimately increase unionization nationwide. The Council is extremely concerned about how the proposed legislation could impact the apartment industry.
Labor unions have long been dissatisfied with the 1935 National Labor Relations Act (NLRA). They argue that current union election procedures inherently favor the interests of employers. As union membership nationwide has slipped, unions are seeking changes to the current federal rules that would speed up the organizing process and allow greater fines against employers that do not bargain with them in good faith.
If signed into law, the EFCA would amend the NLRA in several meaningful ways. The most well-known provision would require an employer to recognize a union when a majority of employees simply sign union authorization cards (card checks); current law requires a secret ballot election.
“The results of card check votes” says Arbury, “would be known to everyone: employers, employees and union organizers. This renders the process inherently vulnerable to pressure and coercion by union representatives and pro-union workers.”
NMHC is urging Congress to reject the EFCA, arguing that it would tip the balance overwhelmingly in favor of unions, enhance their political strength at considerable cost to business and employees, and render a reasonable collective bargaining process moot.
“In its current form, it would interfere with an employer’s ability to make strategic business decisions, and it would alter the balance between a company’s goals of productivity and profitability and a union’s ambitions to gain power and put in place a collective bargaining agreement,” adds Arbury.
“Employees already enjoy statutorily-guaranteed rights and protections to organize under the NLRA. Moreover, unionized employees can be prevented from earning the recognition and flexibility that they deserve because employers must adhere to collective bargaining agreement provisions.”
Affordable housing is another top priority for the NMHC this year, and the Council calls on lawmakers to stimulate investment into the Low-Income Housing Tax Credit (LIHTC) program, either by allowing the carry-back of LIHTC for up to five years, or by pumping TARP money into state public housing agencies to help LIHTC properties that are under duress at the moment because expenses have risen dramatically as rents have remained flat. “Keeping those properties out of trouble goes right to the heart of affordable housing,” Arbury said.
NMHC is part of a broader coalition calling on the Treasury Department to use some of the remaining TARP funds to purchase mortgage-backed securities guaranteed by Freddie Mac, Fannie Mae and Ginnie Mae that are backed by loans on properties assisted by the LIHTC program. According to this proposal, the Treasury Department would agree to purchase the loans at a 4.5 percent note rate that would effectively reduce debt service costs and allow a number of developments to make financial sense in the face of lower tax credit prices.
Other options NMHC proposes to restore liquidity to the LIHTC program include permanently expanding the offset to rental real estate activities for LIHTC investors from $25,000 to $200,000 and changing the 30 percent present value credit to a fixed four percent.
Other key issues include environmental mandates, which are sure to become a bigger issue under the Obama Administration. Vowing to correct the shortcomings of our national energy policy, Obama has voiced support for including $20 billion to $25 billion of energy-related tax breaks in the anticipated economic stimulus package.
Although the incentives likely will be focused on renewable fuel technology, cleaner running automobiles and smart grid development, tax breaks for building efficiency that could be tied to tighter building codes — in some cases as much as 50 percent — could be included.
“We are all for green,” said Arbury, “but we need to bring some sense to the requirements being imposed by the green-building mandates. We want to ensure that apartments are not lumped together with office and single-family homes when drafting a green mandate. Sometimes lawmakers try to draft some sort of one-size-fits-all policy. But apartments have a much smaller environmental footprint than single-family houses. We house people more efficiently, tend to be closer to public transportation and use recycled and recyclable products in our construction. So, for those and other reasons, apartments are much greener than single-family houses and office buildings,” he concluded.
