The multifamily industry is at an inflection point, as cautious optimism based on improving fundamentals clashes with some sobering challenges, according to a leadership roundtable discussion that kicked off the 2010 Apartment Finance Today Conference earlier this week.
The operative word was “uncertainty,” but it’s a different flavor of uncertainty than 12 months ago. Instead of a pitch-black horizon, there is now a little light pointing the way forward. The industry is moving ahead slowly and cautiously, but at least it has shaken off the paralysis that characterized much of 2009.
“We went through last year waiting for the other shoe to drop, and it never happened,” says Don King, a managing director for Needham, Mass.-based lender CWCapital. “We’re seeing property performance slightly improve, but it won’t fully improve until job growth comes back. And when it does, because of the lack of new supply, property performance will go through the roof.”
Getting from here to there, however, will be no cakewalk.
On the positive side, access to capital is improving, as the market shows there is life beyond the government-sponsored enterprises (GSEs). Life insurance companies and the CMBS industry have begun to jump off the sidelines and re-engage the market with competitive rates, according to the panelists.
Former conduit giants such as Goldman Sachs, JPMorgan Chase, Wells Fargo, and Bank of America, are now actively re-igniting their programs, though their initial focus is on larger deals valued above $15 million.
“There are a half-dozen lenders pursuing CMBS transactions, and you can get 6 percent conduit money today for traditional stabilized properties,” says Guy Johnson, president of Irvine, Calif.-based Johnson Capital. “It looks a lot like it did in the early days of the industry, in 1992 and 1993, with conservative underwriting.”
As the GSEs continue to narrow their credit boxes, other capital sources are seeing opportunity as well. “Not since the mid-2000s has life company pricing been as competitive as it is now,” says David Durning, executive managing director of Newark, N.J.-based Prudential Mortgage Capital Co. “Part of the opportunity we see is lending from our on-book business, such as on bridge loans.”
But many community and regional banks are still out of the construction debt game, and those that continue to lend are cherry-picking the best of the best. While the FHA has become a primary source of such debt, the agency’s notoriously slow deal cycle timeline and bureaucratic requirements can offset its benefits, panelists noted.
Order Out of Chaos
Developers have found strength in diversity during the downturn, and are creatively sifting through the capital markets chaos to uncover growth opportunities.
For instance, Chicago-based Laramar Group launched a special servicing and receivership division 15 months ago. During that time, it has taken in more than 20,000 units between the two initiatives to expand its presence in key metro areas such as San Francisco and New York, according to managing partner and CEO Dave Woodward.
The first wave of distress was mostly "the dogs," C-minus assets that turned into Ds. “But the quality of assets coming back is starting to get better,” Woodward says. “We’re seeing more and more B and B-plus assets and a lot of newer construction deals done in 2003 or 2004.”
This presents a growing opportunity for investors who have waited for a volume of distress to materialize. Broken condo deals in markets like South Florida are plentiful, and the opportunity “to put Humpty Dumpty back together again,” is another area ripe for the picking, according to Trip Stephens, chief investment officer at Orlando-based developer ZOM Cos. Despite this, many distress acquisitions are all-cash transactions: Offers contingent on financing will often lose out to those with the dry powder to move quickly, he noted.
Niche sectors are also presenting opportunities amid capital markets dislocation. For instance, ZOM is now back in the affordable housing space, encouraged in part by the U.S. Treasury Department’s New Issue Bond Program, which pumped much-needed liquidity into the sector, Stephens said.
Seniors housing has also held up relatively well, with occupancies creeping up over the 90 percent mark nationally in early 2010. Much of the reason is increased absorption. In the fourth quarter of 2009, only 2,300 units of seniors housing were produced nationally, compared to 20,000 units in the first quarter of 2008. That lack of new supply, combined with favorable demographics, positions the sector well for the next cycle, according to Mel Gamzon, principal of Fort Lauderdale, Fla.-based Senior Housing Investment Advisors.
On the other side of the demographic spectrum, enrollments at major universities have increased at significant rates over the past six years, which has somewhat insulated student housing from the larger recession, noted Brent Little, vice president of higher education at Indianapolis-based Buckingham Cos.
The 800-pound gorilla in the room, of course, is the future of Fannie Mae and Freddie Mac, whose importance to the industry over the last two years can’t be overstated. But as Congress begins to debate a way forward for our nation’s housing finance system, the political climate in Washington, D.C., doesn’t bode well for a quick resolution.
“In the last 30 years, I don’t think I’ve ever seen Capitol Hill as polarized as it is now,” says Doug Bibby, president of Washington, D.C.-based National Multi Housing Council. “There is no plan emerging with any consensus at all."
Right-wing politicians call for the GSEs to be eliminated and replaced instead with covered bonds. The left wing believes they could remain federalized and be repositioned to focus only on affordable housing. Somewhere in-between is probably the sanest approach.
Whatever the outcome, most stakeholders agree that the government must play some role in ensuring counter-cyclical liquidity. “Life insurance companies have a limited amount they will invest in multifamily; CMBS delinquencies continue to hit the fan; and banks are encumbered by their balance sheets,” Bibby says. “So who’s going to fill the gap? There has to be a federal role that’s there in good times and in times of dislocation.”
Editor's Note: For more on the future of the GSEs, check back soon for additional highlights from the conference, including key takeaways from a session moderated by NMHC president Doug Bibby on the future of the GSEs.