Marc Padgett, a principal with builder Summit Contracting Group, feels good about the upcoming year.
Contracting business is expected to continue to boom, a rising trajectory from the low-point of the Great Recession. In 2008, Jacksonville, Fla.–based Summit had just five or six projects going. By the end of 2011, the company was taking on about 15 projects concurrently and the pace of business has stayed around that level ever since. Summit has even had to turn business away, Padgett says.
Since most of their clients are repeat business, the company may be able to take on a few select extra projects in the upcoming year, but are cautious with commitments.
“We want to do a good job and not spread ourselves too thin,” he says. “We are cautious not to grow too fast. I’m sure we will do a little more, but nothing too substantial."
But while the pace of business is the same, the type of developments Padgett is working on have grown in size and scope. He expects the 15 or so projects being started in 2014 to be larger, on average, in number of units.
“I think with multifamily being in such high demand, the equity requirements with the other REITs and people like that getting into the market—it’s all resulting in bigger jobs,” he says.
In lieu of developing from the ground up, Jon Bell, president of Greensboro, N.C.-based Bell Partners, believes there will be plenty of wiggle room at the property level for companies to boost their bottom line through value-add rehabs and renovations.
“We are very focused at the asset level,” he says. “What can we do at this specific property to push performance? Each property may have a little bit of a different strategy.”
As one of the largest renovators in the country—Bell was the ninth largest renovater on this year’s MFE Top 50 ranking, having rehabbed more than 2,600 units in 2012—the company will continue to add value to units during turnovers.
“There’s still some good pricing power on effectively renovated units,” he says.
But the cost of doing those rehabs, as well as new development, is likely to continue rising in 2014. The price of labor and materials skyrocketed over the last 12 months, and many of the cost associated problems contractors saw this year are expected to roll over into 2014, Padgett says.
“Dry wall has gone up a lot, earlier in the year,” he says. “Lumber, it’s still a lot higher than it was a year ago. A lot of subcontractors have had price increases.”
Finding and retaining a well-skilled labor force will likely continue to pose problems for subcontractors next year.
“They seem to be jumping ship for 10 cents,” he says. “It seems to be whoever has the biggest wallet is where they go.”
But given the state of the market for short-term debt, such as construction loans or bridge loans, money is no issue when it comes to finding funding to get a project going. And Padgett doesn’t expect it to slow down either.
“I would say there’s a demand and there’s certainly money to do it,” he says.
Fund Finding
All experts noted that finding a debt source to get a deal moving shouldn’t be difficult in the upcoming year.
Five years ago, during the depths of the recession, Bell was working almost exclusively with Fannie Mae, Freddie Mac and the Federal Housing Administration for debt financing. As the economy improved, more options emerged from the private sector, including banks and life insurance companies.
Bell believes his company will still work with the agencies in 2014, but only for about half of its debt needs. And he wonders just how long those sources will remain available. The fate of the government sponsored enterprises (GSEs) is on the radar for next year as federal leaders debate housing finance reform, and an end-game for Fannie and Freddie comes into focus.
“We are curious and we are going to stay plugged into the agencies as much as we can,” Bell says. “As a defensive mechanism though, we are acquiring high-quality assets in good locations and we should have good liquidity should Fannie and Freddie not be in the market in the next five to 10 years.”
Chicago-based Jones Lang LaSalle's international director for capital markets, Jubeen Vaghefi noted the GSEs won’t be the only debt player next year as life companies and other options will continue to be competitive. And the market for Commercial Mortgage Backed Securities (CMBS) debt has roared back to life and is looking for a piece of the action. He believes the transaction market will also continue to be robust next year.
“There is still plenty of debt capital out there for multifamily deals,” he says. “There certainly is an expectation that the CMBS shops are going to be pretty active—it’s a very active asset class. They’re trying to be more of a player.”
As head of a brokerage firm, Brian Murdy hopes 2014 will be a bona fide seller’s market, but realistically, he isn’t so sure.
“It’s going to be all a matter of perspective,” he says. “There are going to be people that are looking to sell because they’re concerned about rising interest rates and cap rates.”
But overall, Murdy, national director of Encino, Calif.-based Marcus & Millichap’s Institutional Property Advisors, predicts the transaction market will be pretty even.
“I think you’re going to see the markets neutralize,” he says. “We’ve had seven years of craziness. The markets were going through the sky, then fell for two years and now the last three years you’re seeing growth in apartments.”
And he doesn’t expect to see many large, history-making portfolio transactions next year, but he also noted that he’s no fortune teller.
“Expect the unexpected in 2014,” he says.
Lindsay Machak is an Associate Editor for Multifamily Executive. Connect with her on Twitter @LMachak.
