Berkadia CEO Says Bet on Property in Right-to-Work States

Hugh Frater, who leads a commercial mortgage venture backed by Warren Buffett’s Berkshire Hathaway Inc. (BRK/A), said apartments in states that have passed right-to-work laws may fare better than property in other regions.

Almost half of U.S. states, including North Carolina and Alabama in the Southeast, have enacted the legislation, which bans labor unions from collecting mandatory dues. A revival of U.S. manufacturing may be stronger in areas that have the restrictions, increasing demand for apartments, Frater said.

“I would tend to bet on right-to-work states in the southeast as compared to the old industrial hub,” the chief executive officer of Berkadia Commercial Mortgage LLC said in a phone interview this week. “It’s not a political statement.”

Organized labor has clashed with legislators and groups advocating for the laws in states such as Michigan. Americans For Prosperity, backed by billionaires Charles and David Koch, say the restrictions give workers the option of withholding support from unions they view as ineffective or politically questionable. Labor groups say the measures lower wages and hurt the ability to negotiate with management.

Frater cited Toyota Motor Corp.’s decision to make North America a bigger source of vehicle exports as an indication of the manufacturing rebound. The Japanese automaker has plants in right-to-work states including Mississippi and Indiana.

Apartment owners may also benefit in North Dakota, which has gained jobs from a boom in oil and natural gas exploration, he said.

Of the ten metro markets with the largest declines in apartment vacancy rates during the fourth quarter, nine were in right-to-work states, according to data from Reis Inc., a New York-based real-estate research firm.

Job Driven

Half of the ten states with the highest unemployment rates had right-to-work laws, according to November data from the Department of Labor.

“Demand for apartments is very job-driven,” said Jeff Langbaum, a senior real estate investment trust analyst for Bloomberg Industries. It makes sense “if the thesis is ‘I want to own apartments where you’re going to have above-average job growth.’”

The risk in those markets is that, unlike cities such as New York and San Francisco, there are fewer barriers to new construction, and rising rents can prompt competitors to add new units to the market, he said.

Dan Fasulo, managing director of research firm Real Capital Analytics Inc., said apartment prices have already been rising faster in the U.S. South than in other regions as investors take note of job growth. The value of apartment buildings climbed 17 percent last year in the Southwest, 7 percent in the Southeast and 5 percent in the Midwest, according to data from his firm.

“The market is not ignorant to that thesis,” he said.

Down Payment

Many of the jobs being created last year were low-wage or part-time, preventing workers from building up enough savings for a down payment on a home, Reis said in a report this month. The addition of jobs is enough to spur demand for apartments, the company said.

Berkadia has been expanding its bet on the apartment market and this week said that it agreed to buy closely held Hendricks & Partners, a company that advises clients on the sale, purchase and financing of multifamily real estate. The deal adds to Horsham, Pennsylvania-based Berkadia’s loan servicing, mortgage- origination and proprietary lending operations.

Buffett and Leucadia National Corp. (LUK) formed Berkadia in 2009, betting that the U.S. real estate market would rebound. Multifamily properties have been the strongest segment of commercial property because demand is outstripping supply, Frater said. Millions of people forced out of their houses by foreclosure since the housing bubble burst have switched to renting.

Mortgage Lenders

Rebounding home prices probably won’t damp demand for apartments, Frater said. Mortgage lenders have tightened standards in the wake of the largest housing crash since the Great Depression, keeping some potential buyers in apartments.

“Some of those people shouldn’t have been in the ownership market in the first place,” he said. The effect of a recovery in single-family housing on the apartment market “will take a while to play out.”

To contact the reporters on this story: Noah Buhayar in New York at nbuhayar@bloomberg.net; Oshrat Carmiel in New York at ocarmiel1@bloomberg.net;

To contact the editors responsible for this story: Dan Kraut at dkraut2@bloomberg.net; Kara Wetzel at kwetzel@bloomberg.net

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