Executive Insight: Michael Duggan and Warren Higgins on Berkadia’s Fruitful Year

By Ioana Neamt, Associate Editor

Michael Duggan and Warren Higgins

Ever since its inception back in 1994 as GMAC Commercial Mortgage Corp., Berkadia has managed to establish itself as a force to be reckoned with in the real estate industry. The company we know today was formed in December 2009, when Berkshire Hathaway entered a joint venture with Leucadia National Corp., and has become one of the largest real estate services firms in the U.S.

The New York City-based company has been keeping itself busy this year, with deals secured all across the country, in California, Texas, Washington, and Colorado, to name just a few. We recently spoke with Berkadia Senior Director Michael Duggan and Head of Mortgage Banking Warren Higgins about the company’s recent activity and its plans for the future.

CPE: How did you first get into real estate and what drew you to the field?

Duggan: After graduating from college in 1992, I got my start in real estate finance as a loan analyst with Hanover Capital Mortgage Corporation. Hanover had just signed a purchase and sale agreement with Daiwa Securities to deliver closed multifamily loans, which would be securitized by Daiwa and sold off as perhaps the nation’s first CMBS. Having read Michael Lewis’ Liar’s Poker as an undergraduate, I was thrilled to be working at the intersection of commercial real estate finance and Wall Street.

CPE: Berkadia has been very active over the last months all across the U.S.  To what do you attribute this boost in activity?

Duggan: The fundamentals of commercial real estate and the multifamily sector in particular, continue to remain strong. With the full support of our parent companies – Berkshire Hathaway and Leucadia National Company – we have built a mortgage banking, investment sales and servicing platform that is well-positioned to take advantage of the healthy market. After an incredibly strong start to the year, we are in a position to have a record year with our Fannie, Freddie and FHA loan programs.

CPE: Based on your expertise, how is the Midwest multifamily real estate market performing by comparison with the Pacific Northwest?  If there is a difference, what might be the reasoning behind it?

Higgins: The Midwest market has seen quite a bit of sales and financing activity due to its perception as more of a “value” market. Cap rates tend to be higher than in high growth Coastal markets like Seattle, and this has drawn increased deal activity to the Midwest. Despite the prevailing wisdom that these markets will have lower future rental growth, buyers and borrowers are attracted to the high cash on cash returns they can generate with today’s low interest rates. In addition, while rental demand and growth may be higher in a market like Seattle, there is also considerable new construction which may limit the immediate rental growth versus most Midwest markets, which have modest new construction pipelines.

CPE: Berkadia recently closed on the sale of Emerson Lofts, a Class A apartment community located in Denver.  Based on what you’ve seen, what is the current outlook for the area’s multifamily market?  What makes it so attractive?

Higgins: The attraction to Denver is that it has strong job growth and population growth, the main drivers of multifamily rental demand. Denver job growth was 3.2% in 2014, 1.3% above the national average.   The 2015 forecast is for 3% growth, another 45,000 jobs. Forbes ranks Denver as the 6th fastest growing city nationally with a 2014 population growth rate of 1.74%.  The growth has driven apartment demand – 6300 units absorbed in the past 12 months and 11,700 in the past 24 months. Current apartment vacancy in stabilized buildings is only 4.1%.

CPE: In your expert opinion, which are the most promising markets for multifamily in the U.S. right now and why?

Duggan: We are seeing incredible demand for multifamily properties in virtually all markets across the U.S. Located in the Midwest; I can say that cap rates are approaching all-time lows in our one primary market, Chicago, as well as our secondary markets such as Kansas City and Minneapolis, and even our tertiary markets such as Peoria, Illinois. There is strong demand for anything multifamily, whether it be a stabilized, value-add or opportunistic play. Given the sales values on existing properties exceeding construction costs, we can expect to see a strong increase in new multifamily developments in many markets across the Midwest.

CPE: Can you tell us a bit about the company’s upcoming projects?

Higgins: Berkadia’s foundation revolves around its unsurpassed loan origination, investment sales and loan servicing capabilities. We plan on continuing to expand each one of these businesses and feel we are uniquely positioned to do so due to our strong ownership, private  structure, and talented people. This expansion will be through a combination of organic growth, hiring of top flight outside talent, and selective acquisitions of companies.  As a private company with a long term horizon, all of this growth will be focused on sustainability and building a culture focused on excellence and customer service.