Amid increased volatility in the financial market, investors and managers are gearing up for what could be more challenging times. At the end of 2018, real estate asset management firm Terra Capital Partners obtained a $150 credit line from Goldman Sachs that would facilitate the expansion of the company’s investment strategy in this unusually long cycle. Terra decided to grow its first mortgage division, in addition to its mezzanine and preferred equity business. In an interview with MHN, Dan Cooperman, chief originations officer at Terra Capital, evaluated market current market conditions and described the main challenges that could impact investment.
This appears to be an opportune time for lenders, particularly alternative lenders. What are your views on the market today? What are the general trends?
Cooperman: The apartment markets, on the whole, are pretty well balanced from a supply/demand standpoint, with the oft-cited exceptions of course. As for the capital markets, cash is king, and by that I mean deals with any level of cash flow are very aggressively pursued by all types of lenders. As a result, there has been meaningful spread compression. With relative restraint among lenders and borrowers alike, leverage has, for the most part, been kept in check. We are, however, seeing more borrower-friendly deal structures of late, which is a slight cause for concern.
A consistent part of Terra’s portfolio are multifamily financing deals. What are your views on the sector?
Cooperman: We are generally bullish on multifamily, again with some exceptions. There are more renters in the U.S. than ever before, and that has put owners and investors—both debt and equity—in an enviable position. Lower and moderate-income or “workforce” housing are, in our opinion, particularly undersupplied and, as a result, very desirable.
How are rising interest rates impacting multifamily financing in particular?
Cooperman: On the one hand, it should—and has to some extent—gapped out cap rates. However, as interest rates rise, homeownership becomes more expensive and, in turn, rental housing demand increases. These are opposing forces at work.
Are there any reasons for concern in how the market is evolving? What are the main challenges in the financing sector of real estate?
Cooperman: Concern in the market, as a society, is that there is a very real lack of affordable housing. Most of what is being built these days is a higher-end product, and there is only so much of that product that we need as a society. As for challenges on the financing side, it is a super competitive market, so the challenge is finding good sponsors and good properties where you can get paid a decent return for the risk you are taking. There always seems to be at least one group that stretches on every transaction to a level that we just can’t make sense of.
What are your predictions for 2019? What should we expect going forward?
Cooperman: More of the same. We do not foresee any meaningful deviations going forward, neither positive nor negative.
Terra Capital has recently expanded its investment strategy to include first mortgage originations. What led to this step?
Cooperman: We have actually been providing first mortgages for quite some time, but we recently decided to make a more concerted effort to play in the space given where we are in the cycle and given our desire to be in a more secure part of the capital stack as the cycle matures.
What are Terra Capital Partners’ goals going forward?
Cooperman: We want to continue to build on our reputation as a trusted and reliable capital partner that plays up and down the capital stack, from senior debt through joint venture equity to middle-market developers and operators nationwide.
Image courtesy of Terra Capital Partners