How Much Longer Can We Ride The Multifamily Wave?
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Over 500 guests packed into Bisnow's BMAC Midwest conference Wednesday to learn about the state of multifamily real estate across the Midwest and what the landscape holds for 2017. While most agree there's still some runway, the end of the tarmac is in sight. Here are nine takeaways from our multifamily experts.
1. Deal Fatigue Is Slowing Volume
During our investing secrets panel, John Buck Co CIO Kevin Hites noted there's some deal fatigue in the market. This is leading some investors to reload and have more capital for residential deals down the road, while larger institutional groups are taking stock of what's happening and becoming more selective on deals. Kevin says there's pressure from Buck's partners to do more ground-up development, which is harder now that the options for construction loans are dwindling. But his firm's expertise in the Chicago CBD, existing relationships with banks and an influx of foreign capital (Chicago is third among major CBDs in foreign capital investment) means those funding gaps are easily bridged.
Marquette Cos president Darren Sloniger says there are growing concerns about oversaturation of supply in some Midwestern markets. Houston, in particular, is starting to soften thanks to oversupply and layoffs in the energy sector workforce. Marquette is building a high-rise in Downtown Houston that Darren believes will be immune to the downturn because of a lack of competition nearby. Darren is optimistic that the economic hardships in Space City are temporary. The fundamentals remain strong, with no major distress, and there are no extreme price drop-offs when an asset can be acquired at a 6.5 cap rate.
3. You Can Avoid Competition By Going Affordable
The Habitat Co president Matt Fiascone raised eyebrows during our owner's roundtable when he announced Habitat would be shifting its 2017 focus from market rate to affordable housing. Matt tells us there's less competition with affordable housing and the demand is endless. It also dovetails smoothly with Habitat's long-standing mission. Matt says Habitat expects to do very well in Chicago, where the changes in the cgrowing ity's affordable requirements ordinance is leading many developers to avoid it completely, allowing Habitat to swoop in and fill the need.
4. Uncertainty Is Driving Investors Back To Basics
Ever-colorful AMLI Residential CEO Greg Mutz says 2017 will be a year where most developers return to basics, with growing investor caution and short-term uncertainty. In a sign of the times, Greg says AMLI didn't buy a single asset in 2016, but sold $500M, much of it older product that investors see long-term value-add potential in. As part of the back-to-basics approach, AMLI did an analysis of its portfolio and determined there are 25 developments Greg terms "forever" assets that won't be sold as long as he's around. These assets are well-located high performers that serve AMLI's investors well in product and returns.
5. Condos Residents Are All Ages
Here's our condo panel of Magellan Development national marketing director Jim Losik, JK Equities principal Jordan Karlik, Belgravia Group founder Buzz Ruttenberg, JDL Development's Jim Letchinger, The Hebson Team president Colin Hebson and Marc Realty principal David Ruttenberg. "Fortunate" seemed to be the theme of this panel, especially with regards to the fundamentals of scale, size and location. Jim Losik says Magellan was lucky to have already owned the sites in Lakeshore East where the firm is building the 95-story Vista Tower, and have the existing relationships to get the project underway. Jim Letchinger says JDL is focused on top-of-the-line projects like 9 West Walton because he did a horrible job at entry-level condos.
There's also a change in the demographics buying condos. Buzz says Belgravia's customers are a mix of first-wave Millennials and Gen-X'ers who don't want to move once they settle down, and empty nesters returning to the city who want smaller buildings with larger living footprints like the three-bedroom condos that are Belgravia's bread and butter. David agrees and notes that he thought buyers for Marc Realty's River North and West Loop projects would be people in his mid-30s age bracket. Instead, he's found that same mix of buyers. Jim Letchinger says the larger footprints attract a mix of buyer demographic, especially younger buyers, because their footprints allow them to raise families. The average condo size at 9 West Walton: 4,100 SF.
6. Projects Are Becoming Obsolete Very Quickly...But Amenities May Scale Back
Fifield Cos CEO Steve Fifield (right, with Marc Realty principal Jerry Nudo, wearing his firm's 2017 motto—Make Marc Realty Great Again—on his head) says the pace at which newer apartment buildings are becoming obsolete is breathtaking. Thanks to the amenities arms race and improvements in design, product built 10 years ago are considered value-add.
Steve also declared the amenities arms race over, now that every builder and property manager is including the same packages in their assets. He sees a time in the near future where owners may start to scale back amenities. Example: Steve says coffee supplies at Fifield's K2 cost $50k annually. Steve says it makes sense to revisit details like lobby coffee service, as there's a sense of fairness with the renter.
7. Your Pre-Conceived Notions About Neighborhoods May Need An Update
Clayco director Alan Schachtman, Akara Partners Rajen Shastri, Prime Property Group co-CEO Michael Zaransky and KIG principal Susan Tjarksen agree that investors these days are chasing yield and finding it in neighborhoods they normally wouldn't consider. Susan recounted a story about an out-of-town investor who didn't want to consider investing in Hyde Park. Once that investor was in town, Susan asked if they wanted to visit President Obama's Chicago home. The investor agreed and was surprised to find the Obamas lived in Hyde Park, which changed the investor's perception of the neighborhood.
Rajen and Alan say they're specifically targeting neighborhoods with strong transit infrastructure and focusing on TOD developments. Alan says the residential density attracted by multifamily projects in these areas eventually have retail and entertainment following in close pursuit, and these neighborhoods eventually become self-sustaining.
8. Trump May Be Good For CRE
Barings Real Estate Advisors managing director Pam Boneham—pictured with Heitman EVP Jim Bachner, Jenner & Block partner Don Resnick and LaSalle Investment Management managing director Derek Lopez—says that while it's still too early to tell what kind of impact President-elect Trump's economic policies will have on commercial real estate, there's positive sentiment for growth with the infrastructure improvement and tax cut policies Trump outlined. Jim agreed and called Trump's Cabinet a symbiotic group that could set the stage for economic growth if they work together.
Derek says the landscape has proven challenging for LaSalle to put cranes in the air this year. His firm did more buying than building this year. LaSalle is being priced out of gateway cities, and migrated to secondary and tertiary markets.
9. Speed Networking Is Pretty Great
Before the panels started, our guests engaged in a couple of rounds of "speed dealmaking." They embraced the concept of finding deals in a rapid-fire time, and many of them came away with leads they hope to follow in the upcoming weeks.