For equity investors, playing in the multifamily space over the last couple of years has been all about making adjustments. As cap rates have moved down, return expectations have changed for active insurance companies, commingled funds and private wealth in the sector. Lower yields were just one of the variety of topics that came up at the "Opening the Gates: Equity Investors Step Up Their Game" panel at the Apartment Finance Today Conference this week in Las Vegas.
"[Equity investors] had their heart set on 17 to 20 percent," said Bob Hart, president and CEO of KW Multifamily. "Now they've compressed to the mid-teens."
But Hart thinks investors may have to be willing to accept lower returns for the long term. As the sophistication of the commercial real estate market has increased, so has transparency. And yields have fallen as a result. Operators now have to differentiate themselves through operational experience and the ability to create value.
Another market shift has been in the development arena, where many developers complain about lack of equity availability. Guy Johnson, president of Johnson Capital, said that development money is available for good concepts and people. And those people are not necessarily multifamily builders: He's seeing hotel developers jump into the apartment space.
Even in a world with development starts picking up and competition increasing for existing assets, there are still a lot of problem loans out there. Eric Silverman, managing director of Eastham Capital, warned that there were a "well" of maturities on the way. "There are clearly opportunities coming," he said.
Hart didn't see as many "truly distressed" deals coming down the pike, though. "I'm not seeing the kind of distress that the curve may indicate," he said, referring to a chart Silverman showed of maturities increasing over the next few years. "It has been far more orderly," Hart said.
Here were some other key takeaways from the panel:
-In the affordable sector, Andrew Weil, managing director of CWCapital, said that equity is looking to core markets first. Though deal size hinders investment a bit, he expects things to pick up. "As people look for new things to do, that part of the market will pick up," he said.
-The panelists were not crazy about auctions, with criticisms of the amount of resources they sapped for due diligence and the quality of product found in them. "I see people put a lot of time into auctions and, [by the end of the process] they just want to make a buy," Johnson said.
-Interest rate concerns were, not surprisingly, a topic of discussion. Weil said the biggest place owners and investors will see their impact is on the exit from deals.
-If the downturn taught equity any lessons, it was that sponsors needed skin in the game. "It's hard to be serious asking for 80 or 90 percent without putting in your own equity," Hart said.