Borrower profile: Workforce housing specialist OneWall sees growing demand as interest rates rise

OneWall Communities, a Connecticut-based workforce housing manager, is seeing a confluence of factors bolster its already-strong conviction on a segment of the market where there is a severe supply-demand imbalance. 

Rising mortgage rates and housing prices, along with new household formation, has meant demand for affordable rental housing has surged, said Nate Kline, founder and chief investment officer of OneWall Communities. 

Kline and his partners launched the strategy 10 years ago to tap into the supply-demand imbalance in this part of the market. “We are focused on that segment of the market because we believe there is a perfect storm that will gone on for a long time that supports returns, investment and the sustainability of the investment,” Kline said, citing affordability, demographics and general supply-demand imbalances in the sector. 

The manager has a rare focus on multifamily and workforce housing properties in the Northeastern and Mid-Atlantic regions, investing in properties close to high employment centers in cities like Baltimore, Washington, DC and Newark. “Other investors are gravitating toward different markets right now, have a national focus, or are not necessarily focused just on workforce housing,” said Kline. 

“For the past several months we have had the highest year over year rent growth anyone has ever seen for these assets, which supports the allocation of equity and debt capital”

Nate Kline, OneWall

OneWall generally caters to residents who make 60-100 percent of the area median income in the markets in which its properties are located. The company tends to focus on outlying suburbs of major cities up and down the East Coast, with some investments in inland markets in Pennsylvania and upstate New York.  

“The entire region is really anchored by New York, Philadelphia, DC and Boston and the natural outgrowth from these areas,” Kline said. “There are a lot of very stable employment bases in those areas, with jobs attached to the federal government, healthcare, education and other industries.” 

The manager sees an extended, albeit not permanent runway for this strategy. “We are in a very expensive housing and construction market and people in the middle-income bracket can’t really afford to purchase homes and developers can’t afford to build homes that cater to these income demographics because the cost of doing so is just too high to create an economic return,” Kline added. 

According to data from Moody’s Analytics, the US multifamily markets are showing historic growth, with average effective rents rising 17.5 percent year over year at the end of the second quarter.  

“It is important to look at the larger arc of what is happening generally on the debt and equity side. Apart from this volatile situation, what we’ve had for the past couple of months that will probably go on for the new dew months, there has never been more investment and trading in this asset class,” Kline said. “For the past several months we have had the highest year over year rent growth anyone has ever seen for these assets, which supports the allocation of equity and debt capital.”

Allocating capital 

The vertically integrated manager goes out and raises capital on an individual deal by deal basis as well as discretionary funds. OneWall targets apartment buildings of 100-500 units, with purchase prices of $20 million to more than $100 million. The firm works with a stable of high-net-worth and institutional investors, with a number of repeat relationships.  

The firm has roughly 3,000 units under management now, most of which are in Pennsylvania and Maryland. Historically, the firm has acquired more than 6,000 units and, in the past, had concentrations in parts of New Jersey. Despite the ups and downs of the global economy, OneWall has seen stability. 

“The demand from investors and liquidity from lenders has been very good. There have been some hiccoughs of late with the debt markets and, over the past couple of months, there has been a noticeable shift in the terms of uncertainty around sources of capital. Debt funds and other bridge lenders have either pulled back or increased their spreads and rates to prevent borrowers from being interested in borrowing, even if they are still open for business,” Kline said.  

While there was concern in the early stages of the covid-19 pandemic about how these assets would perform, these fears were largely assuaged. “While there have been some dislocations and even some overhang on collections, it is all working its way through the system. This segment of the market has been tried and tested through recessionary environments and difficult economic situations but hasn’t necessarily seen a negative impact,” Kline added. 

The institutional bid 

There has been greater institutional interest in the asset class as the price per unit of properties has risen. A 300-unit property that might have traded at $100,000 per unit is now trading closer to $200,000 per unit, which doubles the size of the deal from $30 million to $60 million. 

“That opens up a much larger audience of investors,” Kline said. “As appreciation has occurred, it has opened the doors to a much deeper base of equity investors because this market can now support the equity investments the larger firms like to make. That has created more liquidity and action in deals.” 

Still, it is more difficult for the firm to generate the returns it would like to see because of interest rates and pricing. 

“We’re having to accept lower leverage than we would have had to historically, come up with more equity and pay higher interest rates on the debt we have. Naturally, that that negatively impacts the cashflow,” Kline said. “The only logical reaction to such an environment is to reduce the price. This means we are very regimented in the way we underwrite. This year, we’ve reviewed more than 500 deals and have only closed one, with a couple of others about to close.” 

The manager locked its interest rate on a loan for a deal that is about to close soon, anticipating an increase in rates. “It turns out that we saved anywhere from 60 to 70 basis points alone in rate just in that short amount of time. This is something we are doing strategically and, as a buyer evaluating new deals, we’re adjusting our prices because it is more costly,” Kline added.  

Rising mortgage rates along with higher housing prices are pushing more people toward rentals.  

“Mortgage rates for homes breached 6 percent for the first time in 10-plus years and housing prices have also gone up tremendously as well,” Kline said. “If you start to do the math and look at what is an affordable home from a mortgage and purchase price standpoint, the cost of home ownership is anywhere from 50 percent to 60 percent higher or could even be double what it was just a couple of years ago. From what I know, no one is seeing their wages double.”