August 12, 2022
A Letter from Trez Capital’s Vice-Chairman & Global Head of Origination
Inflation and interest rate hikes have created turbulence in the markets. What we are seeing at Trez Capital, is simply a return to a stable lending market. From our vantage point, we are entering into an environment that reflects 2019 levels. Low-interest rate environments pose certain risks: determining loan-to-values ratios and underwriting processes when lenders are not the rate-setters, but rather the rate takers. As rates increase, stability in the market will also increase.
The general consensus is that higher rate environments are risker, however, the long-term outlook for residential markets is positive, rate hikes are part of the natural cycle and were needed to cool the heated market.
Growth Yields Opportunity
The Sunbelt region in the United States is one of the most sought-after locations, according to migration trends over the last several years. In fact, multi-residential apartments across this region have the lowest vacancy rates in the last 30 years.
Demand continues to build in states such as Texas, Arizona, Florida and Colorado, driven by growth factors such as low taxation, low regulation and more freedom to do business coupled with a higher quality of living, affordability and job growth. This is especially true in Texas. As of June 2022, the state’s multi-family sector has expanded 15% based on Texas Real Estate Research Center, and Austin specifically has outshone the top cities in the “Texas Triangle” with its large influx of migration of people and high-income jobs, placing premium prices on real estate. According to CoStar data, Austin has doubled its construction starts over the past year and is estimated to deliver 15,827 apartments in 2022. In fact, there was a record 25%+ rent growth and strong occupancy rates at the end of 2021. Due to consumer demand, investing in Austin multi-family will continue to be a strong development opportunity, despite changes in the economy.
These trends are being seen across the U.S. and Canada. The unprecedented demand lowers the risk for lenders
Similar to the U.S., in Canada, we’ve seen a chronic housing supply shortage fueled by strong population growth over the last few years. To meet demand, builders are getting projects off the ground as quickly as municipalities will permit. Excess demand and lack of supply of housing units will continue to drive prices higher, despite interest rate increases, placing additional pressure on the already strained rental inventory in Canada.
Planning For a Strong Future
Overall, the demand in the U.S. and Canada will continue to allow developers and borrowers to build while pushing yields for investors higher. We’ve successfully navigated through various interest rate environments, and investors have benefited through all types of economic cycles with Trez Capital due in part to our conservative and stable approach. Our reputation is based on providing innovative financing for properties in major high-growth centers throughout North America – we will continue to source projects that meet our prudent risk management process to best serve investors.
John D. Hutchinson
Vice-Chairman & Global Head of Origination
About Trez Capital
Founded in 1997, Trez Capital is a diversified real estate investment firm and preeminent provider of commercial real estate debt financing solutions in Canada and the United States. Trez Capital offers private and institutional investors strategies to invest in a variety of opportunistic, fully secured, mortgage investment funds, syndication and joint-ventures and provides property developers and owners with quick approvals on flexible short- to mid-term financing.
With offices across North America, Trez Corporate Group has over $4.5* billion CAD in assets under management and has funded over 1,700 transactions totaling more than $16 billion CAD since inception. For more information, visit www.trezcapital.com. (*Trez Corporate Group AUM includes assets held by all Trez related entities as well as $2.9 billion Manager AUM (Trez Capital Fund Management Limited Partnership)).