08 Feb 2019

Womble Bond Dickinson partners Pam Rothenberg (US), Chris Iavarone (US), Nigel Emmerson (UK) and Tom Willows (UK) attended January's National Multifamily Housing Council's annual meeting in San Diego and here they reflect on a fascinating few days of discussions and making new connections.

Nigel Emmerson (head of housing for Womble Bond Dickinson (UK) LLP):

"Attending the conference is an important step in articulating for our clients and contacts the advantages of connecting with us as a transatlantic law firm close to home. The multifamily market in the US is enormous and mature, having been through multiple cycles. There are patently lessons to be learnt and practices we can adopt in the UK and the week in San Diego has been a valuable part of crystalising our thinking in this respect. "

Chris Iavarone (real estate partner, Washington DC office):

"Staying abreast of key issues facing the multifamily industry helps my colleagues and me know what issues our clients will be facing in the future. Attending the annual meeting was a great way to learn about those issues. The need for more workforce and affordable housing and awareness of climate risk and resilience remain central issues for our nation; the annual meeting provided relevant updates on the issues. It was also a good, central place to meet with our national base of clients in person."

Tom Willows (partner specialising in build to rent, Womble Bond Dickinson (UK) LLP):

"We have been comparing notes with Chris and other US colleagues for quite some time. As ever, the starting point was making sure we understood each other's terminology (for example, what the US call "multifamily" we tend to call "build to rent", albeit build to rent is a more umbrella term and the US have established sub-sets of assets such as "single family housing" which is a relatively new concept in the UK). A few common themes emerged during the conference which will resonate both sides of the Atlantic, which can be grouped together under the headings of Affordability Crisis, Local Barriers, Innovation, Data Sharing and Climate Risk."

Affordability crisis

Chris: “Urban areas across the US are experiencing a housing crisis. As populations in these areas grow, housing production is not keeping pace. Up For Growth, a non-profit advocacy group in attendance at the meeting, reports that from 2000 to 2015, 23 states under-produced housing by more than 7.3 million units. In those communities, numerous obstacles make constructing new rental housing a challenge, including the cost and time to obtain entitlements, proffers and other impact fees, inclusionary zoning, and construction costs. This leads to a lack of qualify, affordable and workforce rental housing. The meeting made it clear that NMHC is focused on bringing the public and private sectors together to tackle this challenge.”

Nigel: "Sound familiar? Whilst the numbers are vastly different (reportedly, the US need to build 4.6m more multi-family units by 2030 and in the UK we have 140,000 units in the pipeline) this issue is evidently confronting US and UK in exactly the same way. There is a financial barrier to entering the home owning market in the UK and there is a tension between the levels at which a new build to rent scheme can be viable for an investors and the level of income it can generate and still be accessible to a large segment of the market. It's clear we need to be doing all that we can to build more of every type of tenure of housing, both sides of the Atlantic".

Tom: "There also appears to be a focus in the US on renovating existing stock and not just building new stock. There was a lot of discussion around being able to add value to that and being able to create a viable product to rent to "workforce America". It appears that this approach allows generation of rental returns more quickly, as distinct from the UK where the focus appears to be on the (relatively) slow push towards building new developments".

Pam Rothenberg (real estate partner, Washington DC office):

“Housing affordability, in particular for those in our workforce earning in the range of 60 to 120% of AMI, was one of the dominant themes at last week’s annual meeting. The Middle Income Housing Tax Credit (MIHTC), modeled on the Low Income Housing Tax Credit and developed with the joint support of NMHC and the National Apartment Association, is expected to be reintroduced to Congress this year. The MIHTC was among the various initiatives discussed at the Workforce Housing Committee meeting that took place during the meeting. The Opportunity Zone tax incentives, enacted as part of the Tax Cuts and Jobs Act of 2017, was also discussed as another tool that could be used to help address the mounting housing affordability crisis in the US. Our Opportunity Zone Team is structuring and documenting transactions, establishing qualified opportunity funds and deploying opportunity zone capital to developers and asset managers that are focused on building and preserving workforce housing. We have put together a Guide outlining selective provisions of the Treasury regulations implementing the Opportunity Zone tax incentives that have key implications for real estate investments in designated opportunity zones.”

Local barriers

Tom: "We heard from various panellists that it is a source of frustration that different local jurisdictions have differing requirements in terms of building regulations, zoning (planning) rules and similar. Whilst on paper this is a marked contrast with the UK, on the basis building regulations and planning regimes like NPPF should be applied consistently across the nation and give a level playing field, we all know that is often not how it is applied in practice, with various inconsistence in approach between different local authorities. If there is a key take away here then it is surely that if we're to attract non-UK investment into UK build to rent and to build at scale, application of the planning rules and similar in a transparent and consistent manner will remove these local barriers to entry".

Innovation

Tom: "I was fascinated by the session from Neri Oxman who demonstrated some truly cutting edge technology involving semi-autonomous robots capable of building towers, however, when panellists discussed actual innovation in use, it struck me that the US market isn't apparently that far advanced of the UK. There were the usual concerns around the cost of modular construction (paying up front for all the units, fixing the design on day one, the practicalities of road transport to the site) and a suggestion that panel construction is more efficient than whole modules. These are all conversations I have been involved with in the UK and it struck me we seemed to be in pretty much the same place on this topic. There is clearly an opportunity here for the UK to lead the way by adopting new construction methods from the beginning in this emerging market".

Nigel: "There is always a tension between the costs of innovation as an early adopter and a phrase often used at the session was the benefit of being a "fast follower", being someone who is not the first in to a new innovation but follows hot on the heels, benefitting from the innovative techniques but at a fraction of the cost of entry of the early adopted. If we are to build bigger, better and faster in the UK we clearly need to innovate both construction techniques and methods of delivery generally. The costs of innovation are a barrier to doing that of course and so there is advantage to be had in the UK if we share the costs of innovation. Trade bodies such as UKAA, BPF and others have a role here in sharing best practices and we are seeing some fantastic collaboration around the use of building information modelling.

Tom: "When I think of innovation I have a mental image of modular construction but what is potentially of equal value to the UK market is learning from other innovations from the US. These could include innovations in operation of blocks (if I've learnt one thing from my time in the US it's that all build to rent blocks in the UK need to make provision for pets!) or methods of making deals happen, which would be innovative to the UK. On the latter, there is a marked contrast between the UK and US in terms of the availability of accessible debt finance for new developments. Whilst US debt is currently relatively "cheap" compared to the UK, that appears to not be the only distinction. The time it takes in the UK to acquire a site and get through planning is markedly drawn out compared to the US, something that makes debt funding less attractive as the money will be out for longer before a return is seen. Anything we can do to make delivery quicker will make the developments more suitable for and attractive to a larger number of debt funders. In the interim, the UK market will remain more attractive for someone looking for an equity multiplier rather than a rate of return."

Nigel: "Innovation was described as not being about achieving sustainability but creating an environment for the future. What will we leave behind? It was interesting that Greystar are looking at the convergence between multi-family and the hospitality industry and by 2020 all of their appliances will have IP addresses so will be able to accurately predict maintenance requirements."

Data sharing

Nigel: "We heard from Michael Allen of Quintain, about the Wembley Park development, which is one of the most significant build to rent schemes in the UK, in terms of both scale and application of innovation. Their use of integrated wireless networks throughout the whole estate will generate a tremendous amount of data from their customers, both in terms of how they use their apartments but also what they do in the retail and common areas and similar. As Michael commented, this will enable them to design the next wave of developments in a way that suits their customer even more because of the hard data they have acquired from the earlier phases."

Tom: "I was struck by how open the US developers and operators are in sharing data and, in particular, financial information. There is an apparent culture of openness in sharing acquisition, financing, development and income figures. With the US market operating at such a scale and generating such huge amounts of data, surely the certainty that brings about cost of delivery and likely income is better for the market as a whole. I do not believe we're yet in a place in the UK where that level of information is routinely shared. I suspect it's partly a reflection of the nascent build to rent market and people closely guarding their hard-earned intellectual property in how they've made a deal work but I can certainly see how a culture of sharing will help us all turn build to rent into an event more significant market. For example, if the data acquired from Wembley Park is going to shape the future of build to rent design, there must be real value in sharing those lessons with the wider market in helping us all to deliver "bigger better faster". One sage commented to me that the reason the US are so much more open with their information is because they compete with each other on performance levels and not on keeping their numbers secret. Perhaps we're a little way off that in the UK but competing on performance in an open environment seems to me to be a symptom of a healthy and well-functioning market and something the UK should aspire to."

Climate risk

Chris: “Climate risk and resilience was a hot topic at the annual meeting. Owners and developers are increasingly concerned that climate risk will drive up costs and decrease demand from investors and renters. Some owners, such as Heitman, have applied a data driven approach to evaluating climate risk, with a risk score attached to each asset in its portfolio. Others owners have eliminated certain submarkets from their portfolio due to climate risk. Those that operate communities are also focused on climate risk preparedness – for example, making sure they have a plan in place to get employees to properties after an event to both evaluate damage and serve tenants.”

Ranking in the UK's top 20 law firms and by Chambers as a Band 1 firm for National Leaders (Outside London) in real estate, WBD provides legal expertise in eleven key sectors from across eight offices in the UK and 19 offices in the US, including the recently launched Houston office . The firm's housing and real estate client portfolio in the UK includes Homes England, Akelius, Taylor Wimpey, RentPlus, Grainger and Places for People.