By Alexandra Pacurar
Amid high prices and slowing rent growth, unlocking value through multifamily investment has grown ever more complex. However, the multifamily industry is adapting well to the needs of residents and investors alike, with 2018 presenting continued investment opportunities, such as in secondary markets. While financing is still readily available, the challenge will be finding assets that deliver attractive returns, concludes Bryan Sullivan, vice president of acquisitions and development for The Habitat Co. In the following interview, Sullivan outlines his vision of what the multifamily business will look like for the rest of 2018.
In 2017, some of the main multifamily development trends were building micro-units for Millennials in downtown areas, converting old office buildings into residential communities and adding a multifamily component to save dying retail projects. How should we expect those to change in 2018?
Sullivan: In 2018, development will be about what doesn’t get built. We know about the amount of projects in lease-up or under construction, but the real question is how many of those projects in planning or pre-development will actually move forward. I expect a number of these projects will be shelved.
Should we expect the suburbs to make a comeback in 2018 as desirable locations for new multifamily projects?
Sullivan: It’s well known that urban core areas have experienced significant growth over the past five years. But, that same growth has created massive rent disparity between the city and suburbs. The rent differential is significant enough that you will see tenants forego the urban market features and choose “urban core lite” options in the suburbs that will generate meaningful rent savings.
What can you tell us about financing multifamily projects going forward?
Sullivan: Financing is still readily available for the right sponsors with responsible investment strategies.
Which financing sources will become more prevalent this year, and what will contribute to their growing appeal?
Sullivan: Development financing will continue to be more stringent. If traditional acquisition lending sources start pushing back on loan-to-value ratios, the role of structured debt products will become more prevalent.
How will high property values and moderating rent growth impact multifamily investment in 2018?
Sullivan: Multifamily dynamics are still very strong and have very attractive long-term fundamentals in place. But, based upon the amount of new supply in most major markets and current valuations, you will need to use a scalpel—not a machete—to find value.
What does that dynamic mean for value-add investments?
Sullivan: True value-add investments are certainly harder to come by at this stage of the cycle, and investment returns aren’t always commensurate with the risk. Couple this with a high probability of additional interest rate hikes in 2018, and sellers will need to adjust pricing expectations in order to transact.
What are some overarching multifamily investment trends for 2018?
Sullivan: Trends for 2018 include more conservative underwriting in major markets with a reversion to more historical norms for projections and a continuation of capital chasing yield in secondary/tertiary markets.
Image courtesy of The Habitat Co.