Developers See Lenders Becoming More Selective With Multifamily Construction
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The DC multifamily market, especially in booming neighborhoods like NoMa and the Capitol Riverfront, has a surge of supply coming down the pipeline. While population and job growth remain strong enough to keep absorption positive, lenders are becoming more hesitant to finance new construction and some are considering waiting a couple of years before breaking ground on new projects. Hundreds of multifamily leaders will convene at Bisnow's Multifamily Annual Conference East on Oct. 20 to discuss why this is happening.
MRP Realty delivered Dock 79 on the Capitol Riverfront on Aug. 1 and managing principal Bob Murphy tells Bisnow it has leased 115 of the 305 units in the first two months. Just last month, MRP bought one of the last available sites on H Street NE, and Bob says MRP is moving forward with the development of a 112-unit residential building with ground-floor retail.
Bob, who will speak at BMAC, says the strong absorption numbers still make getting financing possible for quality projects, but he has noticed some hesitation on the part of lenders.
"We’ve seen this before in previous cycles," Bob says. "Lenders see a big delivery wave coming at them and that’s when they tighten up underwriting. Right now, I think lenders are looking more carefully and being more selective. If you have the right project you can get financing, I don’t see that changing in the next 12 to 18 months, but it's more selective lending."
Keeping an eye on the future is important for Bob. MRP is planning DC's largest multifamily project, the seven-building 1,550-unit Rhode Island Center. It's still in planning and Bob says he expects to break ground on the $200M Phase 1 in 2018.
"We're optimistic long term about multifamily," Bob says. "We think you need to be thoughtful about what you build, how you price it, how much leverage you put on your deals and to make sure your debt terms give you the flexibility to be able to handle a slower leasing pace if the market gets a little soft."
MRP also has projects in Philadelphia, which Bob says is similar demographically and has some of the same emerging trends as DC, but he says it doesn't have as full a pipeline of new construction projects.
"The difference is, in DC, you’re seeing more ground-up construction," Bob says, "and in Philadelphia you’re seeing some ground-up, some conversions from office to residential and some renovations to buildings to make them more attractive to younger renters."
StonebridgeCarras also has some big multifamily projects in the pipeline. After amassing capital with the sale of a Bethesda high-rise for $207M and last month's sale of Three and Four Constitution Square for $422M, founding principal Doug Firstenberg says his focus is on new development.
The biggest project StonebridgeCarras has in the pipeline is the 1.5M SF Oakville Triangle across from Potomac Yard in Alexandria. The plan had originally been to break ground there next year and deliver by summer 2019, but Doug says he now believes a delivery in 2020 will provide better results, factoring in the time needed to complete entitlements and the wait for better market conditions.
"You have to be a little concerned with the pipeline, but it has been well-absorbed," Doug says. "A lot of the things we’re looking at are not immediate starts, but out a couple years."
Doug also sees lenders becoming increasingly hesitant to finance new multifamily construction.
"Regulators are really coming in and are concerned about exposure to multifamily," Doug says. "If the lenders have to deal with that issue and shrink their exposure to multifamily loans, that’s going to impact the ability for lots of people to get projects started...My instinct given what’s going on in financing is that while the pipeline may be full in planning, how many are actually going to start?"
You can bet regulations and lending will be one of the hottest topics at BMAC in Washington, DC, on Oct. 20.