Lending Discipline Is Protecting Houston's Multifamily Fundamentals
It’s no secret Houston’s multifamily market is soft. Supply is flooding nearly every submarket. Last year, 20,000 units were delivered, and this year Houston’s on track to deliver another 27,000. Yet despite the softness, experts aren’t too concerned. At Bisnow’s 7th Annual Multifamily Event, experts agreed this is the best ditch Houston’s ever been in, and that’s in large part thanks to discipline from the lending industry.
HFF senior managing director Todd Marix (above with INSGroups' Butch Novy) says new development in Houston is shutting down, and that’s a good thing. The market needs time to catch up. While many investors and money-men see red when they look at Houston, Morgan Group COO Stan Levy (below with EPCO Investments' Austin Walsh) doesn’t think lenders will be taking back buildings any time soon. Houston’s had a great run from 2010 to mid-2014. The market is taking some of that back to find an equilibrium.
Alliance Residential managing director Cyrus Bahrami offered a firsthand account of how lending is affecting his portfolio. Alliance is leasing up 10 properties in Houston. Cyrus says despite the bad headlines, things are by and large on par with the initial underwriting. In fact, Cyrus claims rents, net of concessions, and lease-up velocity are outperforming underwriting on six of the assets, at 108%. The others are within 90% of the initial underwriting.
Vic Clark (speaking above), managing director at Hunt Mortgage, broke down just how the lending industry is factoring into submarkets' underlying health. Assets that have been delivering during the downturn had so much upfront equity to begin with. When coupled with low interest rates remaining low, it’s easier for borrowers to hold on. The gaps, where they exist, aren’t unmanageable. Lenders are increasingly willing to work with borrowers on gap financing and refis.
Lease-ups are a huge deal for new deliveries, but Greystar executive director Stacy Hunt pointed out that a key factor will be renewals. Property managers across the 40,000 units he helps manage are asking what can be done to encourage people to stay. If renewals start to chase concessions, things will get worse. Another important factor Phillip highlighted was demographic shifts. The housing market is drawing fewer multifamily tenants. Home prices continue to rise and getting a good mortgage is difficult.
Credit committees at the major banks have put a cap on multifamily lending. In addition, the price of multifamily has gotten higher. ARA Newmark vice chairman Matt Rotan (right, with JLL's James Brolan) pointed out that when banks are paid appropriately for risk, it leads to healthy development. But just under nine months into the year, most banks are at their cap. To get things going again, loans need to start being paid off, then banks will start lending again. It’s a lender's market.
Hanover Co CIO Brandt Bowden sees cause for concern. Rents have been volatile over the past year, but generally, they’re trending down. There are reasons for optimism though. That’s why on the assets that need it, they’re moving to refi instead of dispose.