Secondary Markets, Millennials Driving MF

SAN DIEGO-As apartment development begins to slow in many core markets, secondary and tertiary markets are seeing deals get done, said speakers at the Capital Markets Forum during PCBC here this week. Three separate panels addressed capital markets in the homebuilding world and maintained that developers need to look farther out to find opportunities in the white-hot multifamily market, and they should probably concentrate on Millennials as their tenant base.

Mark Vitner, managing director and senior economist with Wells Fargo Securities LLC led off the conference's Economic Panel by saying that multifamily has driven the economy and that better locations that petered out at the top of the cycle are where new-home development has been the strongest. Some of the Western markets that have seen great improvement since the economic downturn include Seattle, Denver, Las Vegas and Phoenix, and foreign buyers, in particular, have shown great interest in these markets. Vitner also predicted that national GDP would not begin to rise above 2.25% until 2014.

Mark Schniepp, Ph.D, director of the California Economic Forecast, said that California was second nationally in terms of job growth, with the Bay Area leading the state. He pointed out the bifurcation of coastal vs. inland California, and while the fastest population growth in the state has been in Riverside, all of the other top cities for growth in California are coastal. Schniepp added that investors, with one-third of all home-market purchases, are helping the housing market recover but are also driving up housing prices.

As many industry executives are saying, Schniepp echoed that Millennials are driving the California housing market currently and will continue to do so between now and 2020 at least. However, the nearly $1-trillion in student-loan debt that this cohort faces “doesn't bode well for credit to buy homes.” He predicted that Santa Clara, San Francisco and Sacramento would be the best markets in California for housing development, and he added that the increase in home prices “is part of making up for the overcorrection” the industry suffered during the downturn; therefore, there's no housing-bubble threat in his estimation.

In the “Little Deals and Big Deals” panel, Dan Green, principal with Wheelock Street Capital, said that the secondary and tertiary markets are where the deals are getting done, but Connie Emmitt-Stern, SVP investments with the Resmark Cos., countered, “I don't think the tertiary markets are the best place for private developers to compete.” Emmitt-Stern pointed out that her firm would choose a value-add opportunity if it was in a good location.

Erik Pfahler, SVP of IHP Capital Partners, offered that while his firm is not involved in tertiary markets, it is putting “a lot of energy into the secondary markets.” Since he focuses primarily on the land-development process, he noted that the entitlement process varies significantly (from less than a year to five years or more), but if a property were unentitled his firm would consider buying it if there were a clear path to entitlement. Meanwhile, “good deals with quality operators” is what Green seeks.

When speaking of trends over the next 12 months, Pfahler predicted we would see more land deals put together, “but everybody has to be cautious. Land prices have blasted off from the correction.”

Green said that as far as investing in land goes, “we at Wheelock will begin to take our foot off the gas a bit,” but Emmitt-Stern says her firm never takes its foot off the gas. She said the big question going forward will be how many builders are public vs. private and warned attendees to be wary of land banking. Pfahler echoed her caution, saying, “There's a lot of BS out there.”

Finally, in the “Capital Markets Survey” presentation, Jeff Meyers, principal with Meyers Research, led off by saying, “There's clearly interest in investing in housing. Getting the money into the market is the challenge since there's no conduit to do that.” He remarked that a positive change in attitude has happened quickly post-recession and said that public companies will have a huge advantage in the home investment market.

In most markets, lot prices have exceeded previous peaks, and the larger funds are still challenged to find deals, said Meyers. “The smaller deals make sense as you move into the cycle.”

Despite the strength of the multifamily sector, there are disparities. A full 60% of those surveyed said they prefer to be in single-family housing even though there seems to be a call for more multifamily development. While more private equity is moving into the single-family market, it's more difficult for large institutional investors to get the deal size they need in this market, Meyers pointed out.

Echoing what other panelists said earlier in the day, Meyers said that California is a preferred investment market, and in fact, “prices double almost every decade in California.” He pointed out that people are buying new homes here now because they can't buy resale, but land prices are rising “incredibly fast.” California also dominates the market due to deal size.

The sweet spot for investors seems to be the $20-million to $50-million range, but housing deals in this range are difficult to find, said Meyers. “The best terms are for recourse debt” in order to stay within reasonable price points. He also said that more capital groups are entering the $500,000 to $1-million price range.

The aftermath of the overcorrection is evident in markets where recovery is accelerating. While 30 new communities being built in Orange County this year seems like a lot, “it's not an issue when you look at the jobs they're generating” in the county, said Meyers.