Multifamily deals of all stripes are getting harder to come by these days as capital sources exercise more caution, according to according to a panel of finance experts at the 2017 NMHC Research Forum.
Bank regulator concern over the pace of new apartment construction has put a chill on construction lending, sending many debt providers on the hunt for more permanent and bridge financing deals than development opportunities.
However, Michael Catalano, senior vice president and market manager for real estate banking for PNC Real Estate Finance, said how much regulators have clamped down on construction lending has been institution specific.
“We are all still very open for business,” he said. “There’s definitely competition for good deals with good sponsors. We’re still looking for good deals. The cranes you see are good deals in good markets. ... The reason you hear about the pullback is that there are a lot of other deals that just never get to market. One of the big problems is construction costs. They are very high and they don’t show much sign of coming down, although I have recently seen some evidence in a few markets that maybe they have flattened. But with the higher costs, the yields just start to get kind of silly.”
And as regulators have prioritized risk-adjusted returns, banks are seeing that construction lending is less profitable than other kinds of lending, which is why many banks are pivoting toward permanent financing opportunities. However, executives said that many banks are more willing to do construction lending when working with a known and trusted sponsor and when there’s an opportunity to do a suite of financing deals with a single sponsor.
At the same time, there’s a record amount of preferred equity and mezzanine financing filling the gap. And some debt funds are active in the space.
“A lot of people being cautious but on the other hand they’ve raised funds and they need to deploy capital,” added John Brownlee, a senior managing director at HFF.
On the investment side, value-add deals remain the flavor du jour, but getting deals to the closing table is getting hard. For example, Brian Adams, a senior director with IPA Capital Markets at Marcus & Millichap Capital Corporation, said out of 10 deals that he’s been pursuing, only about half closed as expected while around three had to go through price adjustments of five percent and two just fell out.
However, Brownlee noted that the value-add deal is a little different today. “Buyers aren’t doing a 100 percent rehab,” he said. “They maybe do 30 to 40 percent to show the rent growth and then sell it because they can show there is still some room for someone else [to invest and reap returns].”
While the domestic investing climate has tightened, foreign capital continues to increase allocations to U.S. real estate.
“Foreign capital is having a bigger impact on the equity side than debt side,” said Brownlee. “Asian capital-although they’ve historically been focused on coastal markets-we are seeing them come to the interior.”
One area where pullback appears to be minimal is in agency lending. Executives noted that both Fannie Mae and Freddie Mac are being more aggressive on workforce housing, particularly since that is excluded from their caps. Moreover, more multifamily firms are taking advantage of the agencies’ green loan executions, often targeting it for the sub-2000 vintage, value-add projects.
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