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Multifamily Just Won't Quit

Los Angeles

Apartments are the place to be—for one, this past year, investor demand returned to the last cycle's peak. (Now if only we could coax Jack Nicholson out of retirement LA would be fully restored to its former glory.) So says an upbeat Delta Associates CEO Greg Leisch, who kicked off BMAC West, Bisnow's big West Coast apartment conference.

Some 300 people attended the event, held on Thursday at the JW Marriott at LA Live. Greg, citing demographic shifts, says lifestyle changes are propelling a wave of apartment absorption that’s keeping pace with rising production.

Greg, whom we snapped chatting with CG Design and Development's Catherine Guentert, says apartment dwellers increasingly are living alone (makes it easier to split the chores, or just not do them), driving a shift in the size and mix of units. The average apartment has shrunk by 10% to 15% in virtually every metro market over the past 13 years, but particularly since 2010. With this shrinkage comes more built-in furniture, more common-area amenities, and more obsolescence of older buildings.

Bernards EVP Steve Pellegren moderated a developers roundtable that included Champion Real Estate prez Bob Champion and RE3 managing director Don MacKenzie. Don discussed the numerous challenges posed by making units smaller, such as a lack of room for closets housing the A/C system's vertical air handlers. To accommodate smaller kitchens, islands are becoming movable. (Don't tell Hawaii.)

Bob notes a lot of developers, himself included, are making the bet that renters will accept a smaller living space to bring down the rent in amenity-rich communities like Santa Monica and Hollywood. (Live in a smaller unit and maybe you'll get to see Jennifer Lawrence.) However, the jury's still out as to whether this works in other markets.

Chuck Cowley notes that three years ago, financing for a medium-sized firm like Cowley Real Estate Partners (for which he's president) was next to impossible. Today, it’s just incredibly difficult—so it’s gotten a little bit better. Still, you need a sponsor partner to come up with the major banks' 50% liquidity and net-worth requirements, or find a community bank that’s hungry. While Mill Creek Residential senior managing director Sam Simone says Millennials entering the renter market may max out in 2013 and '14—and be on a decreasing slope thereafter—he still sees a long runway through 2020 to 2025. (By then some of these Millennials will have kids looking for apartments.)

Our event marked the first-ever Bisnow Deal Tank, with panelists looking at actual deals and giving their inside perspective. The Picerne Group managing director Greg Galusha brought the panel a project involving just under 200 units in Laguna Niguel, which faces competing projects by Mill Creek and Alliance. With development costs on the rise, Greg says the firm is debating delaying the project's start, gambling that pricing may come down in 2015 with the added benefit of seeing how Mill Creek's initial lease-up goes. (Patience is a virtue if you've got the time.)

CohnReznick partner Garrett Ushiyama moderated a panel on funding new development. Meridian Capital managing director Seth Grossman is seeing first debt/mezz blends that are cheaper than what people were penciling on first debt 18 months ago. Going up to 85% to 90% leverage to make a tight cap deal work sounds scary, he says, but your cost of funds is exactly where it would have been at 80%.

Opus Bank prez Dan Borland says cap rates baked into purchase prices are starting to get compressed, putting pressure on portfolio lenders who are now having to introduce mezz options. On development deals, lenders aren't trending rents—using second- and third-year NOIs was an '06 thing; today, it's in-place rents.

Walker & Dunlop SVP Jeff Burns says capital is going outside the the core markets to places like Fresno and Modesto, and the agencies are still actively lending out there. He's seeing an uptick in HUD construction loans in tertiary markets. Jeff himself has two construction deals in Chico.

The event also provided plenty of time to munch and mingle...

...or shine your boots, compliments of GRS Group.