Portman: Multifamily Will Slow in 2015

MIAMI—When John C. Portman, IV, COO of Portman Holdings, looks back on 2014, he'll have fond (and refreshing memories) of how equity financing continued its recover and construction debt financing softened, at least a little. He told me 2014 gave us a steady rise in competition among equity players—and that resulted in increased international capital heading into secondary markets, with primary focus on urban cores.

“Secondary markets are booming,” Portman tells GlobeSt.com. “These shifts in 2014 have left owners more willing to exit and sell into the market. Overall performance of assets has improved enough to stave off some of the 10-year CMBS maturities that many were expecting to default. In some cases, existing assets are already becoming over-levered.”

Overall, Portman concludes, 2014 was a strong year for the commercial real estate industry. What does that mean for 2015? Moving into the new year, Portman's team is focused on development in primary urban locations within what he calls tier 1.5 and 2.0 cities. With that focus in mind, he made some strategic predictions.

“Office development will increase—including speculative development—as many corporates are moving into growth and expansion mode,” Portman says. “Hotel development will remain strong, and there will continue to be interesting urban adaptive reuse projects as available in-town land parcels diminish.”

Of course, he acknowledges, this outlook hasn't changed much over the past several months because the indsutry still has not seen supply catch up with the increase in demand. The notable change he expects as we roll into 2015 is for multifamily development to slow down, while condos make a comeback. 

“Although 2015 will be another good year for real estate, there will be some challenges,” Portman says. “For example, sourcing deals will be a challenge, as competition continues to increase both among capital players as well as among real estate operating companies.”

As Portman sees it, key tier 1.5 and 2.0 markets will continue to be compressed making barriers to entry much higher. What's more, he predicts, arranging construction loans greater than $75 million will be challenging, especially for hotels and new speculative office developments.

“An increase in labor and materials costs will continue to hurt underwriting, and some subcontractors will be so busy that they're not able to take on much of the new work coming their way,” Portman concludes. “However, those higher costs may potentially be digestible given supply shortages, growth rates and compressing cap rates.”