Capital Market Panelists Say Biggest Risk to Rates Moving Up are At Federal Level

LOS ANGELES—“Multifamily remained a favorite asset type for lenders and investors in 2018 and we saw an increase in activity around some asset types like senior housing and mixed-use buildings but the opportunities continue to change.” So said panelists during the Deal Flow Drivers: Lending & Investing In Various Asset Types at panel here Monday afternoon at RealShare Apartments.

The panel talked about the types of revenue models that were successful and what we should expect from occupancy rates and the debt space in 2019 and beyond. Moderated by Sule Aygoren, editor-in-chief of ALM’s real estate media group, the panel also discussed the 2019 capital markets outlook, the influence of Fannie and Freddie, challenges, opportunities and the not-so-easy to spot trends.

According to Zach Murphy, co-founder and managing director of originations at Pender Capital, said that there are many shifts currently going on in the capital markets multifamily space. He mentioned a softening or stabilization, noting that here is some apprehension on the equity side from those who are looking at those markets. “They should not just assume things are going to continue to appreciate in the three- to five- to seven-year terms…we are seeing some of those leveling off.” He added that interest rates and cap rates have a lot to do with it.

But there is a lot of liquidity still out there, said Gregory Karns, a partner at Cox, Castle & Nicholson. “I think there will be more debt available than before.”

And Greg Reed, SVP of origination at Capital One Multifamily Financing, said that it is a good time to be a fixed-rate or floating-rate borrower. “If you are a partnership that wants to hold long-term, you are good…it is a great time.”

Reed continued to note that what we are seeing now isn’t too different from what we saw a few years ago. “You have seen volatility back into the market…wild swings in the stock market, but you are starting to see a general pause. You have interest rates that have largely moved up since August. People at this point in the year are pausing and digesting especially on the coast. You are seeing longer term rates drift up and the math doesn’t work very well.”

Karns pointed out that in looking at different sectors in his firm, the capital markets sector has never been busier. “Personally I can also say that for the last 26-27 years and pre-dating tariffs and the Trump administration, China has put the clamp on what is coming out—Many China based companies are not able to get the capital out.”

As for top concerns or important issues out there right now, Karns said that he mainly works on the foreign investor and lender side. “At least on the equity side, the issues with China will probably last longer than the Trump administration.” He added that “the reason for that is because there was a relatively free flow for a while and now there is not and the issue is that if it turned on again, there would be a mass exodus that would scare them so there is going to be this restriction on moving capital. I don’t think you will see the activity we have seen. Most of these companies don’t have problems in china. Their problems are with what they were doing here so they can’t necessarily continue, but they don’t have to sell. The nuance might be trying to find an approach for the ability to continue. I think there are entry points, but it is tricky.”

Murphy pointed out that there are still many opportunities out there but you can no longer just go out there and buy anything on the market and expect that it is going to appreciate. “Those days are gone,” he said. “It takes more realistic underwriting—it takes underwriting period—but that is just one aspect of it. We are also starting to see people come off the side lines, the capital that has withdrawn, but they are looking for opportunities in distress or looking at maybe preferred equity or a JV that wasn’t available 12-18 months ago. The opportunities will be different than they were in 2008, 2009, or 2010.”

As for opportunities, Reed said that here is always opportunities in the market but they have changed over time. “A lot of the players that may have exited are coming in and looking at the environment and you really have to pick your spots. There is going to be some interesting things that are going to happen, where they might be oversupply in some submarkets etc. but you really have to be willing to sometimes sit on it for a long time.”

When you get out of the primary markets where caps are a bit higher than in certain regions of the country, he said, financing costs have gone up. “But you still have positive operating leverage…it has narrowed a lot over the last two years which makes it harder if you are a borrower but all things considered and relative to other asset classes, they are still good returns.”

Keep checking back with GlobeSt.com for more from the RealShare Apartments 2018 conference in the coming days.