LOS ANGELES—The multifamily sector is stillgoing strong and rent growth is accelerating, butdevelopers should still exercise caution, saidspeakers at last week's RealShare Los Angeles' “Multifamily Momentum”panel. Overzealous development in ahigh-land-price market could lead to developers not achieving thereturns they had hoped for, the speakers said.

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Moderator Mike Rovner, president ofMike Rovner Construction Inc., said there's lotsof demand, but not much supply in the multifamily market. He hadthe panelists present case studies of multifamily properties theyhad developed, which ranged from redeveloping aproperty to make it feel like new to renovating according toworkforce rents to creating mixed-useprojects.

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David Nagel, president and CEO ofDecron Propreties Corp., said his firm's goal isto take a class-B property and turn it into an A- with the use oflighting fixtures, finishes and amenities such as gyms. “If we canprovide the L.A. Fitness experience, we can raiserents and achieve a healthy ROI of 15%. With that, if you'reraising your rent by 25%, you're turning over your entire tenantroster; maybe 10% will stay, but the rest are all new.

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Robert Hart, president & CEO ofTruAmerica Multifamily, on the other hand,develops workforce housing. “My philosophy inworkforce housing is to renovate according to workforce rents.” Hesaid working through tax-increment financing issues is part of thegame.

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Bill Cockrum, CIO of Genton PropertyGroup, said long lead times stemming from longentitlement processes are one of the risks ofmultifamily development in L.A. “It's hard to develop anything inSouth Pasadena. We're figuring out how we can add value, and we'vedeveloped a relationship with the City. We are trying to findunique niches rather than broad strategies,” including aFour Seasons-brand for-sale tower in L.A., hesaid.

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Jason Pendergist, chief lending officer forLuther Burbank Savings, said the lessons helearned from the last cycle are that lenders must understand theircustomers, their business plans and their motivation for buildingin a particular location, such as commute times and schooldistricts. “We as lenders need to understand all of you asdevelopers. We ask a lot of questions, but it's for a reason—wedon't want to partner with the wrong deal.”

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Rovner asked Pendergist for his interest-rate prediction overthe next couple of years, and Pendergist said he echoesEthan Penner, chairman of Mosaic RealEstate Partners, from the “View From the Top” panel, whosaid he doesn't see a huge rate increase and that interest rateswill be low for a long time.

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When asked where we are in the multifamily cycle, Nagel saidrent growth seems to be growing and that Southern California isearlier in the cycle and hasn't recovered as much as NorthernCalifornia. “We still have a few innings left. We're buying atmid-4%s, and we need to buy at mid-6%s. Hart said he is seeing morerational returns, and Cockrum said we are at mid-cycle. “The supplyside depends on the market. The capital markets have tremendoussources of capital, both debt andequity. It feels a little nervous, but there'sroom to run and it still feels healthy. We capitalize so we canwithstand adversity.”

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Steve Erdman, president of CanfieldDevelopment Inc., said that land prices are rising, so newdevelopment may not get the returns they want. “They need to get$2.50 to $3 per square foot in rent, but how much can rent grow andhow much can people afford? You need to be a little cautious.”Rovner added that high-liquidity contractors are in high demand,which drives up prices.

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Rovner asked the panelists for their concerns for this sector,and Pendergist mentioned the looming student-loandebt, which is second only to housing debt.“Nearly half of all student loans are deferred in some way, andthere's a 23% delinquency. The good news is that each loan onlyaverages about $25,000, which is like the cost of a car. It shouldbe payable because these graduates are now employable.”

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Hart pointed out that we need to see some wage growth in orderto see very high demand for housing, and Nagel said, “I worry aboutwhat I don't know.”

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Carrie Rossenfeld

Carrie Rossenfeld is a reporter for the San Diego and Orange County markets on GlobeSt.com and a contributor to Real Estate Forum. She was a trade-magazine and newsletter editor in New York City before moving to Southern California to become a freelance writer and editor for magazines, books and websites. Rossenfeld has written extensively on topics including commercial real estate, running a medical practice, intellectual-property licensing and giftware. She has edited books about profiting from real estate and has ghostwritten a book about starting a home-based business.