Why Apartment Developers May Struggle To Find Capital
Even if you've got the land, the blueprints and a solid plan to build an apartment complex, finding capital may be a big challenge. At least that's what some of our panelists for next week's 2016 Capital Markets Update at the JW Marriott in Buckhead have to say.
Patterson Real Estate Advisory Group's Lance Patterson says it's certainly not the end of the world, but only top-of-class developers with the best sponsors and a willingness to put more equity into a project than in the past will have access to construction financing this year.
The reasons, he says, are plentiful: concerns about burgeoning apartment supply as new units begin to hit the market; banks and institutional investors with a lot of multifamily loans on their books already. But, as Lance sees it, time also is a factor, as most people are concluding we're not at the beginning of this real estate cycle. Most people are concluding we're not even in the middle. "It's just been good for so long, is it going to continue as it has been?”
State Bank & Trust's Blake Snyder certainly echoes the time concern. If a developer starts an apartment project today, it could take up to 24 months before the first renters would move in. What's the world going to look like then? “You're underwriting more cautiously because you’re potentially delivering into the start of a down cycle,” Blake says, especially with the belief that cap rates—likely at bottom now—could start to tick up in the near term.
Blake says he knows finding multifamily debt is getting harder since apartment developers have been calling him on loans, a sector that State Bank has been very selective on even when things were hot. “The tone has definitely changed from the developer stating at what leverage and pricing it will take to get the business, to asking how much equity will they need to inject in order to get financing.”
Even Haddow & Co—one of the city's most respected multifamily watchers—notes the big concern is simply time. Things are going well (occupancy is still well above 95% within the city limits), but Haddow's most recent report notes Atlanta developers are prone to excess. "Painful memories fade with prosperity.”
As of late last year, more than 11,000 units were under construction and another 11,000 were planned for the Atlanta CBD. “When the market transitions from being driven by economic growth and real demand to one fueled by capital, trouble is around the corner,” Haddow execs state, adding hyper-inflated land prices are a big sign of that.
It's not happening yet, but the reports says more vigilance is needed. And it's that vigilance that is causing some lenders to pause when faced with new apartment projects.
“There’s still some appetite for top sponsors that have a location that has a real story to it, and hasn’t been oversupplied. Your run-of-the-mill, throw-it-up-in-the-middle-of-Midtown apartment project...that's not very appealing,” Blake says.
Agency debt on buying apartments is still strong, says Hunt Mortgage Group's James Kelly, especially with Fannie Mae and Freddie Mac's appetite to finance multifamily acquisitions. “In the balance, we are busier than we ever have been,” James says.
But there is a growing gulf between agency and CMBS debt, with the costs to finance through CMBS growing more expensive due to the b-piece buyer’s yield requirements.
Join James, Blake and Lance along with Parkway Properties' David O'Reilly, Ackerman & Co's Kris Miller, North American Properties' Tim Perry and Wells Fargo's Melissa Frawley 7:30am, Wednesday, March 30, at the JW Marriott in Buckhead for our 2016 Capital Markets Update. Register here.