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April 9, 2014
Multifamily Danger Ahead?
Is multifamily headed for a bust? Panelists at yesterday's BisnowChicago Multifamily Summit warned of relaxed underwriting standards, the risk of developments that don't make sense, and a dash of overly ambitious flipping.
But panelists made it clear the music will keep playing for at least a couple more years, given the scope of this recovery. (Think “Stairway To Heaven” versus “Fell In Love With A Girl.”) More than 425 of you joined us at the JW Marriott to peer into multifamily's crystal ball, and the near term is looking rosy (more on red flags later).
Investors are injecting new life into fringe neighborhoods in a search for yield; international capital continues to pour in; and lenders keep inventing new-and-improved financial products to win a piece of the highly competitive business (that must be how the Big Mac was dreamed up). GRS Group director JulieSorensen, above, moderated.
Solomon Cordwell Buenz design principal Devon Patterson says the booming asset class is breeding best-in-class design, and SCB is dreaming up some of Chicago's first large-scale condo projects in years. The theme at DRW's 25-story tower at State and Elm (just approved by the Plan Commission) and Sandz Development's Webster Square: much bigger units (as large as 2,500 SF). On the rental side, he's seeing the explosion of targeted amenity packages. Take the project SCB did for AvalonBay across from Twitter's HQ in San Fran: Rooms feature a gear wall for “urban hipsters” to display their $10,000 bikes, he tells us.
Local small investors are back on their feet post-downturn, looking to redeploy capital, First Western Properties president and managing broker Paul Tsakiris says. And they're not alone. Chicago's also become a mecca of funds, wealthy investors, and citizenship-motivated EB-5 investors (particularly Chinese), he says. But there's still a lot of wealth to be created. Many local investors will look at historically ignored areas like Pilsen, Chatham, and Portage Park, he says. When we start to see developments that don't make sense breaking ground just to keep people's lights on or projects being built simply for the purpose of flipping, its time to worry, he adds. The market needs checks and balances.
Windy City RE principal Josh Rubenstein's firm has 1,000 units across 80 buildings, and its buyers used to be primarily owner/operators. These days he'll see capital from places like China or Israel, as well as some REITs surprisingly interested in these smaller-play investments, he says. The market's transition from adaptive reuse to new construction is one of the first signs we only have a couple years left, he notes. And no matter what, diversification is your best asset for when the market turns. Windy City RE's value-add portfolio includes multifamily properties of all shapes and sizes, and last year it saw 56% returns, he tells us.
Centerline Capital Group managing director Vic Clark says the market is full of younger, short-term-hold borrowers looking for flexibility with a loan product to upsize leverage, sell an asset quickly, and move on to the next deal. Enter agencies. In the last month, Freddie Mac created a float-to-fixed program for investors to capitalize on properties' cash flow in the first couple years. Then their loan converts to a pre-determined fixed rate right when rates are expected to go up down the road. The refined Freddie Mac CME Capped ARM provides non-recourse, IO, and low rates that allow borrowers to limit bank exposure with flexibility and rate protection, he says.
Greystone managing director Jef Elm originates bridge and mezz debt. His loans assist borrowers with quick closing requirements on value-add acquisitions, or allow borrowers to free up their existing bank lines to develop or acquire another asset. Greystone's perk: it's privately owned, which allows for greater flexibility and quicker processing. It's been the country's No. 1 FHA lender for the past three years, meaning it clearly predicts a bright future for multifamily, seniors housing, and student housing, Jef says. But you have to buy well, because the downturn is never easy to predict. (Think ruble crisis, 9/11, and the subprime fiasco.) View more event pics here, and stay tuned for more coverage tomorrow.