9/26/2017 | By Sarah Borchersen-Keto
Tom Toomey, president and CEO of multifamily REIT UDR, Inc. (NYSE: UDR), is the first CEO of a public firm to serve as global chairman of the Urban Land Institute (ULI). His two-year term began in June. In an interview with REIT.com, Toomey spoke about the forces shaping real estate project development today, the impact of severe weather events and prospects for the multifamily sector.
REIT.com: What do you see as some of the key factors impacting development today?
Tom Toomey: I tend to think of four things that are influencing development challenges today: demographics and population shifts, new economic growth engines, technology and sustainable development.
The United States is going through one of the most tremendous demographic shifts that we will witness in our lives. At 80 million [people], the millennials are extraordinarily strong and are entering the housing and employment markets in large numbers. At the same time, the baby boomers at 75 million-plus are downsizing and retiring or contemplating retirement.
On the economic front, we’re moving into something that’s very unique. Two big drivers are the knowledge economy and the sharing economy. Both are dramatically changing our cities and our daily lives. It won’t be long before we have a significant amount of artificial intelligence and robotics that are offshoots of both of these new economies.
It’s an exciting time. Innovation and challenges breed opportunity.
REIT.com: Is the real estate industry adequately prepared for severe weather events like those we’ve seen recently?
Toomey: Recent weather events are changing dramatically the real estate industry and the lives of the people who live in those cities. The “storm of the century” is happening more frequently and with greater severity – we have to get used to that.
But what I see is that businesses and cities are also adjusting. The ability to bring infrastructure back on line today is extraordinary. You’re seeing the built environment being improved, along with better planning by cities to prevent the loss of life and ensure that businesses are up and running quickly. That’s going to drive a lot of our behavior going forward. It really takes a partnership between the builders, cities and government.
REIT.com: What impact could these weather events have on future development?
Toomey: Capital may move to safer places, and migration patterns may change. That being said, New Orleans, for example, has built a thriving community off of a smaller population base. What I am amazed at is our ability to go back to cities like New Orleans or New York and rebuild the impacted areas better than they were before.
At UDR, we were significantly impacted by Hurricane Sandy. We moved all our co-generating electrical equipment out of basements and first floors basically to 100 feet in the air. As an industry, we adjust and come back stronger every time.
REIT.com: How would you describe fundamentals in the multifamily business?
Toomey: We’ve enjoyed a great run, now almost stretching a decade. With the change in demographics, we have seen new supply, but what’s unique about it is that the U.S. economy is still averaging 180,000 jobs a month. It’s still in balance. We’ve lost a little bit of pricing power, but I think supply is abating and it’s just a matter of time before we get back to a higher growth rate than where we are today.
The product we are building today in the multifamily space is extraordinarily better than we’ve ever built before and appeals to a broader range [of people]. The economics of homeownership or renting have remained pretty much in favor of the renter pool. Supply and demand, demographics and growth of the economy continue to be in our favor over the long term.
REIT.com: Do you foresee any changes to UDR’s development pipeline?
Toomey: We’re very sensitive to our cost of capital to ensure we’re creating long-term value for our shareholders. As we’re facing short-term supply challenges, development gets harder. Construction costs have risen dramatically. The wind at our back for pricing opportunities has slowed a little bit, so development is harder to pencil today.
I would see us staying pretty level in our development activity, but changing the market mix and the price point of our products to be more sensitive to the current environment.
REIT.com: And what about the future of UDR’s Developer Capital Program, which invests in alternative development structures, including participating loans and preferred equity investments?
Toomey: I’m comfortable that the program will continue for probably another three to five years, given the current dynamics of the markets.
When we started the program in 2013, we saw that the financial markets were pulling back in terms of loan proceeds for new development activity. It became apparent that there was an opportunity to invest with some of the best developers in the country and retain an option to purchase the asset or participate in the value creation at a later date. We’ve been able to reap significant rewards by participating in some of the risk.