New Dawn

Multifamily in California sees renaissance as economic woes recede.

By Philip Shea, Associate Editor

As markets across the country continue to sulk in the light of economic recovery, the state of California is seeing an especially bright future on the horizon. Occupancies and rents are trending toward peak levels, and the state’s budget and economic difficulties no longer dominate the headlines.

“You can certainly see, just driving around, you see cranes in the air, a lot of buildings under construction—so there’s a lot of money out there for multifamily development,” says Gary Tenzer, principal and managing director at George Smith Partners. “I clearly think that employment has a lot to do with it.”

Tenzer adds that, before the Great Recession, many large-scale projects had been planned and were subsequently put on hold due to banks restricting their loan activity. But now these projects are seeing new life as confidence in the industry and overall economy has led to an increase in construction lending amidst historically low interest rates.

Kasey Burke, executive vice president of Meta Housing Corp., notes that while “there’s no bad place to be” with respect to his company’s affordable housing division, the market-rate activity has begun to hover between 97 and 98 percent, and this highlights the strength of multifamily and the improvement of certain fundamentals in the economy.

“I think there are a couple of things,” says Burke. “One, I do think the job market is improving, and I think folks are starting to see that. And then I think you just have the general improvement of the economy and overall confidence of people that you’re probably seeing across the nation.”

Burke adds that the single-family sector has begun to see marked strength and recovery as well, and that while activity in this sector and multifamily are traditionally seen as a zero-sum game, such has not been the case in recent times.

“It sounds like a bit of a paradox, but I think a strong housing market creates a strong rental market, especially here in California and Southern California,” says Burke. “It’s so expensive to buy homes that a lot of first-time homebuyers are priced out, and so the housing market has really stabilized and now is on an upward trend.”

With respect to regional nuances and distinctions, Hendricks-Berkadia Senior Investment Advisor Marty Higgins notes that multifamily in Northern California weathered the economic downturn quite well, and that booming industries like social media—particularly Twitter and Yelp—continue to provide considerable energy to employment and housing.

“They’re making their home in San Francisco, and you kind of have this resurgence of the Tech Bubble if you will,” says Higgins. “I think San Jose up through San Francisco [are] really our hottest markets right now.”

In terms of specific numbers, Higgins says Bay Area job growth continues to outpace the rest of the nation by 40 to 80 basis points. Additionally, rent growth in the region continues to surge, with San Jose, San Francisco and Oakland posting rates of 6.2 percent, 5.5 percent and 4.2 percent, respectively.

Tenzer also emphasizes the strong growth in the San Francisco Bay Area, noting that the market is “on fire” with respect to rent growth, job growth and occupancies, while also mentioning some particular spots in Southern California that are showing similar trends.

“You see areas like the Marina Del Ray area going through rapid growth, and a lot of tech development on the west side of Los Angeles is driving that,” says Tenzer. “Hollywood is growing rapidly, and [there is] some concern about overbuilding. I don’t know… whether that is a real concern or not, but you drive down there and there is a lot under construction.”

Burke adds other submarkets to this list of desirable development opportunities while also pointing out how the recovery is reshaping the industry’s dynamics in certain parts of the city.

“I think downtown L.A. has kind of cooled of a bit, but it’s Santa Monica, certain places on the West Side, [and] Hollywood that have got a ton of stuff going on,” says Burke. “A few years back, the Platinum Triangle was the big place to be—right around Angel Stadium and the Honda Center. It was really hot and then kind of hit a wall and cooled off, and now all of a sudden it’s just super-hot again.”

Additionally, Burke says that REITs in the metro are ramping up acquisitions in core A-plus areas such as Anaheim and Hollywood, indicating that investor confidence is rising along with all the other major fundamentals.

Yet not all areas are sharing in the resurgence of the region’s multifamily market, at least not to date. Inland Empire, a submarket that traditionally lags, has consistently posted vacancy rates two to three points above other submarkets, and absorption of existing product is expected to fall over the next two years.

“I don’t think the market there has fully recovered from an economic standpoint, meaning there [are] not really job centers out there,” says Burke. “I think it also has a huge commuter element to it, and I think the apartments tend to do better in areas where folks don’t have to commute, where you have a younger population and people are a little more flexible with their jobs.”

But overall, the swelling momentum of the state’s economy and housing markets cannot be denied. Of course, many factors play into this, but one that is quite prominent is the curtailment of the state’s budget crisis achieved by a combination of spending cuts and a ballot initiative to increase certain types of taxes, which voters approved in November.

“I think that, overall, just taking that bureaucracy out of it—where you’ve got that senseless requirement of the budget being approved by a two-thirds majority—I think that will help to quickly stabilize business, creating more certainty in the state and the economy,” notes Higgins.

While confidence in the Golden State abounds, there remain questions as to whether regulatory safeguards and certain types of financing that buoyed the market during the recession will continue or be gradually phased out. Even though the Federal Reserve insists interest rates will remain extremely low until unemployment falls to 6.5 percent, there are other linchpins that may create complications if suddenly removed.

“The one question mark right now is that the fuel for survival of the multifamily industry during the downturn were Fannie and Freddie,” says Tenzer. “It’s not clear whether they’re going to stay in the multifamily finance business, although their multifamily portfolios have done very well… and then the question’s going to be who’s going to step in and fill the void. My guess would be CMBS for the higher leverage deals and life companies for the lower leverage deals.”

Yet in Burke’s affordable housing niche, confidence in government-sponsored financing will continue to roll on. Given this, he points out another interesting paradox taking place in Southern California, as demand and thus rents for market-rate units resume their stratospheric growth.

“The affordable rents are driven by HUD statutes—they set them each year—and those are actually going down because they’re tied to area median income (AMI),” says Burke. “So those rents… are actually going down, while you have the market-rate apartments going up significantly because those are current based on what the market’s doing today.”

With such resilient growth in market-rate product and rays of optimism about the economy overall, it may not be naïve to assume that the state—instead of being the laggard in growth many critics assumed it would be coming out of the recession—may actually prove a beacon of performance and expansion in the years to come.

“I don’t really hear people bemoan California’s fate; I think there’s still tremendous optimism about California,” says Tenzer. “I certainly know that the business climate has improved a lot; the attitude has improved.”

Adds Tenzer: “It’s the good old days, I think. The good old days are here again.”

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