July 17, 2014
Tough But Rewarding Times for Multifamily
BisNow San Diego
The panelists at Bisnow's San Diego Multifamily Summit yesterday said that California’s a tough place to develop multifamily. (It's easier to get on a reality show at this point.) And San Diego's even tougher, but deals are getting done—apartments at least, since financing isn’t quite as impossible as it used to be. And condos might be in the wings, via conversion.
The challenges of getting new product out of the ground are many, according to the developer/owner panel. The regulatory environment is infamously complex in California (paperwork is the great equalizer), and developers need to spend a lot of time with community groups to generate goodwill. And that’s just the beginning of the challenges: Labor’s getting shorter and somematerials more expensive. The event drew 125 people to the Hilton San Diego Bayfront.
Snapped: MG Properties Group prez Mark Gleiberman, MVE & Partners principal Ken Nilmeier, and OliverMcMillan senior managing director Dan Nishikawa. All these factors might challenge developers, but on the upside, they constrain supply. Demand for apartments is still brisk, and for those deals that do get out of the ground, returns are high. Existing properties are able to drive rents, too. For companies looking to acquire existing product, competition is strong, and prices are up. Cap rates on A product are 4% or even below, and C-plus to B-plus are close to 5%.
Allen Matkins partner Matt Marino, who moderated the owner/developer panel, and Sudberry Properties SVP Marco Sessa. (Matt is a real estate litigation specialist in the multifamily space.) Another condo conversion craze, like San Diego experienced in the mid-2000s, is theoretically possible, but not too likely, according to the panel. Conversions might come back, but not in the form of a craze. (We're all being more level-headed; we're not those wild kids of the '00s anymore.) Still, apartment developers are building to condo specs, so that some conversion will be possible. The panel also explained that energy codes are only going to get stricter, and developers and owners need to get in front of them now.
Freddie Mac Multifamily managing director-Western region Scott Croul and Meridian Capital Group managing director Seth Grossman. Lenders are fighting hard for business these days—a 180-degree turn from the climate of only a few years ago, according to the multifamily finance panel, since there’sa lot more capital chasing deals now. Lenders have to become more innovative to win business, and they’re competing on pricing. For qualified borrowers, that means good times are ahead. They’ll have more options, and they'll able to shop around on price and service.
Lone Oak Fund loan originator Alexa Mizrahi and Berkadia VP Jackson Cloak. Another way that lenders can compete is speed of execution, the panelists noted. That’s especially true for borrowers who are looking to capitalize onvalue-add, where time is of the essence. Multifamily loan products are alsoevolving rapidly to meet new competitive market realities. For instance, there’s demand for financing with elements of a bridge loan, but also similarities to permanent loan, for borrowers who don’t need a full-fledged bridge loan.
Pathfinder Partners senior managing director Lorne Polger moderated the finance panel. San Diego based Pathfinder, specializing in opportunistic real estate investments, recently sold the 107-unit Wellshire in Denver, which it add acquired and renovated as a value-add.