September 16, 2016
By Dennis Kaiser
Connect Apartments brought together more than 500 CRE leaders for an information-packed conference at the JW Marriott in DTLA. The event featured a keynote conversation with G.H. Palmer Associates’ Geoff Palmer, and an economic outlook forecast from MPF Research’s Jay Parsons. During six panel discussions, more than 30 top CRE leaders shared insights into the trends, drivers and future of the multifamily sector.
Connect Media will be sharing more in-depth reports of each panel over the coming days, but here’s a few key takeaways that stand out from yesterday’s conversations:
Behind the Real Estate: One on One with Geoff Palmer
GH Palmer Associates’ Geoff Palmer, one of the nation’s most prolific and pioneering multifamily developers, shared how he’s successfully developed 10,000 multifamily units, and has a full development pipeline. The typically low-profile developer revealed that he’s passionate about polo and plays it all over the world.
- Palmer’s land acquisition strategy is to buy at a low cost, and that’s been the foundation of his success.
- The practice of renting to students typically drives up management costs 15% higher than conventional apartment communities as a result of high-touch customer service needs.
- Palmer believes Los Angeles will continue to be a supply constrained market that’s “not going to be changing any time soon” because of regulations and initiatives.
Economic Outlook Forecast
MPF’ Research’s Jay Parsons delivered a 2017 outlook on the overall economy, employment, construction and the effects they are having on the multifamily market. Key findings included:
- Multifamily market fundamentals remain strong, though an interesting stat that stands out is the “unusually high retention rate.” Parsons says that is likely attributed to the fact that new developments are priced out of the existing renter pool, making it more difficult for them to move.
- Parsons says that regulators are carefully watching the hot market stats, which has them “nervous.”
- Multifamily developers need not be as concerned with higher homeownership rates, since the numbers show “a rising tide boosts all ships.”
- When demand slows, it will be a challenge for markets, such as DTLA, where new supply is being delivered. That’s because it is a more expensive product being built, and there’s a big gap between A- and B-type product, typically on the order of 50% rent premiums.
Multifamily Investment: A View From The Top
Investment in the multifamily space remains the darling of institutional investors, pension funds, major owners and individuals alike. Industry leaders explored the reasons behind the trend, and forecasted Q4 investment into 2017.
- Cushman & Wakefield’s Marc Renard noted that the three parts of the CRE equation, supply, demand and capital are “rarely in alignment” like they happen to be now, though he sees a “wave of caution among institutional investors.”
- AECOM Capital’s Ted Fentin says they have shifted their investment approach to “a little more cautious,” including “lower leverage than in the past so as to sustain any bumps.”
- UBS’ Rod Chu said the big “elephant” question on investor’s minds is “how deep is the market, and how much are people willing to pay?”
- Greystar’s Kevin Kaberna noted that surveying the global landscape reveals “ the U.S. is very attractive compared to global markets,” a condition he expects will continue to fuel continued investment.
Development, Design & Construction Costs
An esteemed group of the country’s most prolific and forward-thinking developers, architects and designers tackled today’s development climate, and answered pressing questions facing the industry.
- Fifield Companies’ Steven Fifield noted that “there’s still tightness in the markets, or we wouldn’t be able to get the rents we are.”
- Camden Property Trust’s Ben Brosseau pointed out that it is the first time when two large demographic groups, Millennials and Baby Boomers, are showing up at the multifamily doorstep.
- Essex’s John Eudy added that the effort to accommodate two generations encompasses a change in space design and layout. That means creating “placeholder areas that are smaller and broken up” rather than large rooms. The smaller spaces are adaptable to future needs. He also advised “overdoing IT” to accommodate future tech advancements.
Trading Hands: Buying and Selling
Top apartment brokers, owners, investors and finance players shared insights into the best way to navigate a volatile economy, while remaining profitable. CRE is an ever-changing and dynamic creature, and these leaders know how to strike while the iron’s hot.
- ARA Newmark’s’ Curtis Palmer says one of the most interesting trends he’s seeing is existing, well located product being brought up to today’s standards, especially in projects that aren’t functionally obsolete. To compete, owners are being forced to “bring up the finishes to what is being developed today.”
- TruAmerica Multifamily’s Greg Campbell noted there’s a lot of product available now, and he expects that to continue next year. “Investors like the safety and security of the multifamily sector.” He says acquiring Class B assets that “80- to 85% of the market’s renter pool can afford” is a smart strategy because Class A product is priced out of the majority of the renter pool’s budget.
- JLL’s David Young says the “value-add story is where everybody is now. He also believes “once Gen Y grows up, we will do more traditional units.”
Inside Today’s Capital Stack
Top multifamily finance players took a look at today’s capital stack, and where apartment finance is coming from. Coupled with a volatile CMBS market, increased balance sheet lending, changing needs for bridge lending, and stricter agency regulation, they covered all deals from the smallest to the largest investment plays.
- Marcus & Millichap Capital Corp.’s Bill Hughes noted “there’s a lot of capital chasing deals, and not a lot of alternatives. The spread in cap rates is pretty good – though investors are smarter about how you get that.” He is also seeing a reduction of institutional investors in the market, where once there were 10 buyers lined up, now there may be “two that come to the forefront,” which has shifted the marketplace toward private clients.
- JP Morgan Chase’s Al Brooks says he’s encouraged by the shift in attitudes about renting. It is more acceptable to rent today and “Millennials are less excited about homeownership than previous generations.” He noted that’s likely a result of job changes or tenuous job situations.
- Related Fund Management’s Michael Fleischer says a big challenge the multifamily market faces, despite massive housing demand, is “will it be economically viable to meet that demand?” as a result of soaring land and construction costs. “The cost structure may exceed what people are able to pay.”
$1-15MM Deals: Cashflow Kings
Multifamily investment has been opened to everyday investors with great pride of cashflow on deals in the $1- to $15-million segment. The panel of brokers, owners and financiers offered insights into why this is the hottest deal size today.
- Universe Holdings’ Henry Manoucheri says they’ve shifted focus into the smaller $5- to $20-million sector, because there’s less competition for acquisitions. Typically, since assets have been held for decades by mom-and-pop owners, there’s value that can be unlocked by completing $30,000 to $50,000 “upgrades to get big rents,” since in many cases they are unimproved properties and well below market rents.
- Hunt Mortgage Group’s Mark Besharaty says, “the competition is fierce in Los Angeles and San Francisco,” but noted “outside of those markets, there’s far less competition.”
- Luther Burbank Savings’ Jason Pendergist says the competition in the smaller deal size has been fierce for 20 years, though today “the play for the last dollar lent comes at a higher price point.”
- Greysteel’s John Mullen said one reason they work in the small deal category is because “the private capital sector is much simpler, and the real metric is cash-on-cash.”
For comments, questions or concerns, please contact Dennis Kaiser
Tags: Acquisition, ARA Newmark, baby boomers, Broker, Camden Property Trust, Development, DTLA, Fifield Companies, Financing, Greystar, Housing, hunt mortgage group, Lease, millennials, Multifamily, Research