Banks More Active in Larger Apt. Loans

IRVINE, CA—As GlobeSt.com reported last week, Bellwether Enterprise Real Estate Capital LLC has hired Trent Brooks as EVP to lead the firm's expansion across the Western US, and the company is establishing a regional office here. We caught up with Brooks to discuss his assessment of the Southern California multifamily market, trends in multifamily lending and how the borrower profile is changing with the economy.

GlobeSt.com: How would you characterize the multifamily market in Southern California?

Brooks: The market is stable, with strong fundamentals. Occupancy is strong, and rent growth—although somewhat modest—is evident. Not unlike other markets, rent growth here is tied to wages, which we know are pretty static. The good news is occupancies are strong. There's the age-old law in Southern California of supply and demand. There's never enough supply relative to the demand of quality rental housing. That said, there's a sub-plot there again that's especially evident, and that's the undersupply of truly affordable housing. Looking at the rental market as stock, if you take away the class-A and market-rate space, there's an exaggerated undersupply of truly affordable housing.

GlobeSt.com: What are some of the trends you're noticing regarding multifamily lending in this market?

Brooks: There continues to be an ample supply of mortgage lending for multifamily assets. It's a favorite asset class for good reason: it's outperformed other asset classes in the lender space. Lenders like loans that are collateralized by apartments. The banks are also a bit more active than they used to be. They were predominantly active in the small-loan space, but now they're in the larger space as well as Fannie Mae and Freddie Mac are adjusting.

The other trend we're seeing is bifurcation of borrowing. Long-term owners are trying to lock in long-term rates for good reason: the consensus is that rates will eventually be heading higher. So they're locking in through FHA on a fully amortizing basis; life companies on a 20-year basis and agencies on a 10- to 12-year basis. Also, an increasing number of borrowers are choosing LIBOR-adjusted-rate product. They have a much greater prepayment flexibility, so borrowers or sellers who may want full renovation can take a LIBOR-based adjustable at a low pay rate and access a loan at a much lower cost than a defeasance-maintenance structure.

At our company, we've worked with, borrowed from and observed a lot of lenders in the space, and we have the broadest level of lending programs in the market. There's a wider universe of borrowers, and they need everything from long term, to short term to bridge, affordable housing, agency loans, life companies and all the others. We're providing that kind of menu. No two owners' business plans are the same, so we offer a varied menu.

GlobeSt.com: Is the borrower profile for this asset type changing as the economy improves?

Brooks: The percentage of individual owners is decreasing, and the percentage of larger portfolios is increasing. There are not a lot of trades on the market; it's not robust, although trades are occurring. Regional portfolio and national REITs own more units, and individual owners own fewer units. As the economy continues to improve and as wages begin to rise again, we should see more upside in rents. If we see that, we will see more and more owners investing in project upgrades and significant renovations—they'll take their '70s, '80s and '90s vintage product and bring it up to date to meet current resident demands and rent at a higher price point supported by higher wages and a better economy. We're not seeing as much of that to justify charging higher rents; it has to be affordable, and if wages are static, it's not going to happen.

GlobeSt.com: What are you noticing about the multifamily sector as compared to the single-family sector?

Brooks: There's a bit of a sea change going on. Homeownership is at a near historical low in our country and in our market here, and by definition there are more renters. For every 1% drop in homeownership there are a million new renters nationally. There's a correlation in each market to that ratio. The sea change is there is a greater percentage of renters by choice; this is especially true for the younger demographic, the Millennials. They do not want the burden of homeownership in their 20s and early 30s. But, new starts in multifamily are relevant to new-construction development costs and the cost and availability of land. When you add it up, it's hard to get that deal to pencil unless you're the Irvine Co. That's why you see more single family coming out of the ground proportional to multifamily in Southern California.

It strikes me that that's a good window ahead in terms of multifamily. We're in a cycle that's trending favorably. We're expanding in select markets in the next 12-24 months in the West. We're at a great time in the cycle to be expanding in to the Western region and bringing the entrepreneurial piece to the West.