LOS ANGELES—In the hyper active class-A markets, yields are being crushed, according to Scot Cunningham, VP sales manager of the multifamily division at AmericanWest Bank, and one of the speakers on the Stacking the Debt, Capital Markets Overview panel at Marcus & Millichap‘s second annual Multifamily Forum. Cunningham was not alone, the other panelists, who included Tony Fire, SVP and regional director at Intervest/Umpqua Bank; Edward Ratinoff, managing principal at James Investment Partners; Lydia Shen, managing director at Cornerstone Advisors; and Carlo Tabibi, co-Founder and CEO at Patch of Land, agreed that either B and C product or assets in secondary markets are becoming a more attractive place to invest capital.
Although yields are coming down, Shen says that may be a good thing because it leaves a space for developers to launch more projects. In Shen’s opinion, new development is the most compelling sector. “The demand for apartments is rising, from millennials to echo boomers who have a different lifestyle,” she said. “The existing stock doesn’t meet those needs. We are looking at was to provide financing for those projects geared toward a new generation of renters, and in general, we are staying away from properties built before 2000.”
Of course, not everyone on the panel agreed that new development was the most compelling place for capital, largely due to the heightened risk. Tabibi and Ratinoff both preferred the redevelopment and remodel markets while Fire explained that his firm is focused on b-class product. “A lot of sellers using low cap rate environment to trade to better buildings,” Fire said on the panel. “The buyers are looking at tired properties and are seeing an opportunity to inject money and raise rents.” For Cunningham, great projects are about location, and he said that Southern California is ripe with opportunities.
In an earlier panel, developers noted that a property’s story was key to any project, but the lenders didn’t agree. “Lenders don’t really care that much about the story, but sometimes it can be important,” said Ratinoff, with Fire adding, “the story matters if you come to the property if there is some detail as to why the property isn’t performing or if it is performing under market.” Above all, however, the panel looked at rental history and the surrounding market to ensure the project would be successful. The exception is Tabibi, whose crowdfunding platform Patch of Land is very focused on the story. “Our investors want to know the background of the property, and they deserve to know it,” he said. “We’re building more technology to be able to bring that information to investors.”
Overall, the lenders on the panel were very confident about the current market and had a lot of financing options to offer borrowers with competitive rates. There is a lot of discipline in underwriting and an excess of capital in the market, and that is a really good combination.