February 24, 2018

The Climate Is Changing

A report from The Oregonian. “Portland’s apartment-building binge appears to be headed off a cliff. Applications for new housing developments have nearly ground to a halt over the past year, and there are plenty of reasons for that. Construction costs have ballooned, as have land prices. The glut of new construction, meanwhile, has taken the wind out of rising rents, at least at the high end. Developers say the market has shifted dramatically since offsets were created. Rents in high-end buildings have been stagnant over the last year, which has prompted some landlords to throw in a few weeks of free rent to land tenants.”

“Close to 10,000 apartments were in the development pipeline before inclusionary zoning took effect, said Tyler Bump, the city economist. Half of those are near approval to break ground. Those projects could keep a steady stream of housing coming online for the next two years. Some, however, may simply not happen. It’s not uncommon for developers to drop projects because of unforeseen logistical or financial problems.”

The Mountain View Voice in California. “For Freddie Farris, 60, the golden years aren’t going quite as planned. For years now, Farris’ family has resided on the second floor of the Del Medio Manor Apartments. But in recent days, the family has faced the harrowing possibility they soon could be out on the street. Her landlord wanted to raise her $1,200-a-month unit rent by $500. Then she saw the row with her sister’s $1,650-per-month, 2-bedroom unit. That would go up by $900 a month.”

“The rent increases come despite the Del Medio apartments already being quite profitable, even under the city’s new rent control program. Last year, the property earned more than $1 million after expenses, according to filings made to the city. The point isn’t the dollar amount, but rather the fact that the return on the property is now capped and will decrease over time, said Elizabeth Lindsay, who owns Del Medio with about 12 other investors. Her father, uncle and grandfather built the 105-unit apartment complex in 1974.”

“Lindsay points out that the cost of vendors, contractors, employees and pretty much everything else is steadily rising in spite of rents being restricted. She describes the push for rent increases as the only recourse left for her and her partners. ‘No investment that has a cap on it is a good investment. That means you can’t have upward mobility on your investment,’ she said. ‘Every month that I’m not getting rent increases, I’m just bleeding money.’”

“What about the $1 million in income after all expenses? Lindsay points out the the property is worth $60 million at least. Getting $1 million a year is like a 1.7 percent return on that value, she said. ‘This is only a little better than a savings account,’ she wrote in an email. ‘Why would any landlord go through what we do for a 1.7 percent return?’”

The Chicago Tribune in Illinois. “After setting a record for apartment construction in 2017, downtown Chicago will take a breather — but not for long. While only about 3,000 apartment units are expected to be completed this year, developers next year could challenge the record number of downtown apartments — 4,350 units — built in 2017, Integra Realty Resources executives said. The firm projects that about 4,200 units will be completed in 2019. The rate of downtown apartment construction is being closely watched amid concerns of an oversupply.”

“Years of ambitious construction of, and investing in, apartments have made the largest deals — $200 million or above — challenging to finance, said Ron DeVries, an Integra senior managing director. Some investors are looking to the suburbs in search of higher returns, DeVries said. After condominium development ground to a halt during the last recession, some of the first big condo projects in Chicago are under construction or marketing units for sale. That comes after just 1,800 condos were marketed for sale in the past seven years, said Gail Lissner, an Integra managing director.”

“One of the big new projects is 1000M, a 74-story tower designed by Helmut Jahn at 1000 S. Michigan Ave. Developers began marketing 323 units for sale in the fourth quarter of 2017. ‘We think the market was ripe,’ said Jerry Karlik, a principal at New York-based JK Equities, one of the tower’s developers. ‘With rental prices hitting $4 per square foot in luxury buildings, we think it’s the right market for a premier condo building,’ Karlik said. ‘It’s an underserved area, and there hasn’t been much built since the last (real estate) cycle.’”

The Express News in Texas. “The future is uncertain for a proposed apartment complex that was expected to bring new life to the near West Side after a partnership that includes local company 210 Development Group lost the property through foreclosure. 210 Development plans to buy back the property, at 700 West Commerce St., and continue to build Vitré, a $45 million, 242-unit apartment complex with 5,000 square feet of ground-floor retail, spokeswoman Holly Thoman said. They are pursuing a partnership with the San Antonio Housing Authority to bring an affordable housing component to the project, she said.”

“The city awarded the project a $3.8 million incentive package in September 2014, but the only part that has been disbursed so far is a $968,000 construction loan, said Veronica Garcia, interim assistant director of the city’s Center City Development and Operations Department. The 2.1-acre property was sold at foreclosure auction on February 6 to VDP Solutions, a company that shares an address with Brevet Capital Management, a New York investment company with a regional office in San Antonio, according to county property records. The sale price was $4.5 million.”

“The foreclosure concerned an $11 million loan that 210 Development’s partnership, Vitre Development Partners, took from another entity named Brevet Direct Lending-Short Duration Fund, according to the county records. The foreclosure sale was part of a ‘restructuring process,’ Thoman said. In 2016, the development partnership ‘paused its plans’ on the project in order to develop it as mixed-income housing rather than as a market-rate complex, according to a news release.”

“‘I don’t think we necessarily chose to go through (the foreclosure), but after discussion with the partnership and the other people involved, it was decided that this was the best path forward in order to achieve the structure we need in order to move forward,’ she said.”

From Bisnow on Texas. “Has San Antonio’s Multifamily Investment Market Peaked? The forecast for renters in San Antonio this year may be great, but a mix of economic factors already is making it tougher to invest in multifamily properties. The market is fairly good for renters. But a combination of factors — changes to the tax code, higher interest rates and a tightening lending environment — could spell the beginning of a more challenging investment picture. At Bisnow’s Multifamily Explosion event, those on both the finance and development side of the multifamily equation agreed the climate is changing.”

“‘Just over the past several months, Treasurys are increasing, spreads are slower to come in. It’s affecting our leverage,’ Westmount Realty Capital Managing Director Michael Anderson said. Westmount has always been a lower-leverage group, so interest rates are an issue, Anderson said. Lately, in some markets, the 10-year fixed rate is bumping up against cap rates. That provides no delta at all in Westmount’s deals.”

“CFH Investment Partners Vice President Benoit Rochard said he has begun to see deals with higher interest rates that are cash-flow constrained or debt-coverage constrained. Rochard has promised a client 80% financing, only to scrub the numbers and see it was only going to be 70% or 75% financing. ‘This is just within the last four to six weeks,’ Rochard said. ‘And it’s all due to interest rates.’”

“Bridge lenders like Pender Capital are less concerned with interest rates since they tend to fill a gap in financing a proposed project. Co-founder Zach Murphy is more concerned with overly optimistic underwriting for returns, especially out of equity lenders. Debt structuring is fine, but equity lending is unrealistic, Murphy said.”

“‘You start seeing ‘blue sky’ underwriting from equity over and over and over again,’ Murphy said. ‘The concept looks great on paper, in black and white, as long as you can underwrite 5% rent growth for the next 10 years. That sounds familiar — 2006, 2007 — but it’s probably not smart.’”

“San Antonio has had some amazing population growth, but it will not last forever, Murphy said. Suggesting the city is going to have 100% growth in rent is simply untenable. If the investment cycle was a baseball game, multifamily would be in the 14th inning, San Antonio-based GrayStreet Partners Managing Partner Kevin Covey said. The game is tied, and it looks like the outcome will be similar for the coming year, if not years.”