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In the wake of the 2008 global financial crisis, new residential construction slowed to a grinding halt in the LA submarket and, according to Walker & Dunlop SVP Gabe Weinert (pictured), it wasn’t until 2013 that construction started ramping back up. But what was unique about this resurgence, he tells Bisnow, is that most residential developers were focused on multifamily rentals—rather than for-sale product.
“So what happened is that there were limited options for those who prefer to own versus rent and, as the housing market recovered, the increase in demand made for-sale housing infill developments a stronger business plan,” Gabe explains. “It wasn’t until very recently that we’ve started to see more infill for-sale developments getting financed.”
The demand for condominiums is so strong that some multifamily properties with large unit sizes, open floor plans, common areas and interior amenities are being converted into condos. Not only are the unit sizes increased, but their specs are upgraded as well, adding granite countertops, roof decks and more social environments.
River Range, for example, plans to convert 74 newly constructed multifamily units into for-sale condos Element 436 (pictured). This was one of the $175M of deals Gabe completed last year where he secured high-leverage non-recourse acquisition/construction financing from a family office sponsored investment manager, and placed limited partner equity from high-net-worth individuals.
Gabe says increased demand has come from a variety of sources. While new and converted condos are primarily targeted towards “entry level, step-up buyers priced out of multimillion-dollar single-family homes and foreign buyers looking for a second home or for investment purposes,” the LA market also has seen job growth and opportunities from local employers like Amgen, Walt Disney and the federal government, and emerging technology companies in Silicon Beach and DTLA.
But what’s most interesting about some of these for-sale housing projects is their anticipated cost will, as Gabe puts it, “enable buyers to access mortgage financing that still remains within the typical conforming lending limits and guidelines.”
According to Fannie Mae/Freddie Mac/FHA’s high-limit guidelines for LA County, Gabe explains, loans are non-conforming when they exceed $625k.
"For some of the projects we’re financing, the underwritten terminal value is approximately $700k per condominium unit. So assuming a 15% to 20% deposit, which is what most buyers prefer to put down, the loan would be under the conforming loan limit, which is the sweet spot."
And since many banks aren't aggressively lending in this niche, Gabe says there are opportunities to structure deals with high LTC construction financing and limited partner equity provided from a private equity fund or a foreign investor. He believes these sources will be the prime financing sources for LA condo developers in 2016.
A good example of this trend would be the Enclave (pictured), a 45-unit oceanfront condo development in the Channel Island Harbor that's one of the premier housing products released to the Oxnard market in the last 10 years, as there's been minimal construction in this submarket since the recession. Walker & Dunlop arranged high LTC construction financing from a private equity fund along with equity.
Another example would be the Barkley Group's ONYX (pictured), a 14-unit condominium project in the Beverly Hills/West Hollywood submarket currently under construction. Gabe closed $15M of debt and equity on the project.
Not even the volatility in China can slow down the trends. Even with the huge influence of Chinese investors, Gabe says the volatility will help, as more high-net-worth investors concerned with further currency depreciation, a volatile stock market and deteriorating business conditions look for investments outside of China.
As demand continues to increase with no foreseeable hurdles, Gabe expects condos and other infill for-sale housing products to be a dominating force in 2016.
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