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Uncertainty, Rate Hikes Bring 'A Very Hard, Very Fast Stop' To Houston Multifamily

Uncertainty and illiquidity in the commercial real estate market over the past six weeks can only be compared to the Great Financial Crisis of 2008.

That was the word from The Hanover Co. CEO Brandt Bowden and others at the Houston Bisnow Multifamily Annual Conference last week as market players come to terms with inflation, higher interest rates and signs of an economic slowdown that have curtailed activity quickly and drastically.

There have been instances of funding approval for a project coming in at 2 p.m., only to get word a short time later, "hold the wire, we're not moving forward." Bowden said at the Nov. 9 event held at the Four Seasons Houston. “It’s a very hard, very fast stop, and there’s a tremendous amount of fear and concern."

JE Dunn Construction's Patrick Dennis, The Hanover Co.'s Brandt Bowden, Barvin's Susan Pohl, Allied Orion Group's Gabe Lerner and Greystar's Stacy Hunt

Bowden's concern was reflected by other members of a panel focused on the state of the Houston multifamily market, including Susan Pohl, senior vice president of acquisitions for Barvin.

“There’s a huge disconnect between buyers and sellers of real estate since there’s been such a fast run-up of interest rates,” Pohl said, comparing buying and financing at about 3% a year ago to the current 6% to 7%.

Amid the confusion, pricing is being reduced by 10% to 30%, she said, and sellers are not going to sell unless they have to.

To finance deals in a volatile market, Blue Oak Capital founder and Director of Acquisition Cody Laughlin said developers must get creative with their capital stack.

Retail investors likely won’t want to be in a real estate deal for as long as it might take in this market – say, seven to 10 years – so developers will need to find other sources of equity and bring more of it to the table themselves, Laughlin said.

Pillsbury Winthrop Shaw Pittman's Adam Weaver, Northmarq's Warren Hitchcock, CBRE's Clint Duncan, Blue Oak Capital's Cody Laughlin, Westmount Realty Capital's Scott Ferguson and DC Partners' Douglas Dillard

And there will be fewer deals, CBRE’s Capital Markets Multifamily Group Senior Vice President Clint Duncan said.

“It’s pretty dry right now,” he said. “You can’t take rates from three [percent] to likely heading to 8% and expect to get deals done.” 

Until some time next year, it will be tough, Duncan said.

Blue Oak’s acquisition pipeline has slowed tremendously in the past year or two, Laughlin said, adding that the current environment requires a patient approach.

“It’s been incredibly challenging, it’s very prohibitive,” he said.

Houston isn't struggling alone. Global real estate investment in Q3 totaled $234B, a 24% drop from the same period last year, JLL’s data shows.

Like many others, Westmount Realty Capital was using debt fund money in deals last year, said Scott Ferguson, the company’s senior director of multifamily acquisitions. This year, however, they have moved back toward agencies.

“As far as equity capital, it’s few and far between right now,” Ferguson said. “For the right deal, there are groups out there that are willing to make the bet, but it’s been a struggle.”

Howard Hughes Corp.'s Crystal Bledsoe, Powers Brown Architecture's Ben Mahala, CIVE's Hachem Domloj, ADT's Noel Arvizu and Division Six's Ken Mendea

Even so, there are some positives to mention, like continuously rising rents, panelists said.

Although they are rising at a much slower rate than the past 18 months, at any other point in his 30-year career, what is considered slow growth right now, about 5% to 7%, would have had Ferguson "doing cartwheels." 

Multifamily and industrial are the “two best food groups” in the commercial real estate industry, Greystar Executive Director Stacy Hunt agreed. 

“It’s a very interesting time,” Hunt said. “I’ve been through a lot of ups and downs in my career in this business, but I don’t think I’ve seen it where the business fundamentals are good, but we’re on pause right now. No question about it.”

Yet Houston will have its moment in the sun in a couple of years, Bowden said, adding to multiple panelists' predictions there will be huge job growth for Houston from the medical and energy industries.

Unlike some other markets, Houston didn’t overbuild or “get too frothy” in recent years, and that will be recognized in a positive way, Northmarq Capital Senior Vice President Warren Hitchcock said.

“We kept ourselves in check,” he said.