SPECIAL REPORT: Leading Multifamily Developers Face Shortage of Equity Financing

By Keat Foong, Executive EditorColorado Springs, Colo.–The scarcity of some forms of capital will be responsible in part for lower multifamily production numbers for their companies this year and in the next few years, according to a panel of leading multifamily developers speaking at the National Association of Home Builders’ Multifamily Pillars of the Industry Conference and Awards Gala held here April 1-3.The plenary session was moderated by developer Leonard Wood, founder of Wood Partners, while speakers included Bryce Blair (pictured first from top), chairman and CEO of AvalonBay Communities Inc.; W. Dean Henry (pictured second from top), president of Legacy Partners; Constance Moore (pictured third from top), president and CEO of BRE Properties; and Steve Patterson, president and CEO of Zom Holding Inc. Speakers noted that it is not debt, but rather equity and capital that is currently in short supply. “The debt side does not dramatically affect us, but on the equity side, there is a problem trying to find that equity and a good real estate deal,” said Legacy Partners’ Henry. Henry suggested that the tightened financing makes what was previously considered a good real estate deal at 5 percent cap rate to be impossible today. He expects the difficulty in financing to continue. “That is why we think our production will fall in the future.”AvalonBay’s Blair said that unsecured and common equity capital markets are not very active currently. He said his company is raising capital through cash flow and, for the first time, Fannie Mae and Freddie Mac financing. Overall production numbers, he noted, are likely to fall, though the entry of condo developers is likely to counter-balance the decrease in apartment construction.  As far as construction financing, Zom’s Patterson said that banks are “knocking down our doors.” “The debt side is not a problem, but obtaining equity capital is difficult for us,” he acknowledged. The developers on the panel appear to be expecting to ease on development going forward. Moore said BRE will be “prudent” about new deals it puts in the market as it wants to make sure it has a strong balance sheet to take advantage of possible upcoming opportunities. Blair said AvalonBay will be “measured” in its development activities. And Henry said Legacy Partners expects to be involved in more acquisitions and less development in the next three to five years. Even affordable housing may experience decreased production in the new environment. The scarcity of financing is manifested differently for different groups. While the large developers on the panel generally report little scarcity of debt financing, for smaller and less experienced developers, debt may be harder to come by. And moderator Wood noted that Low Income Housing Tax Credit (LIHTC) production is expected to fall 25 to 30 percent because land costs remain high for LIHTC developers while debt is harder to obtain and more gap financing is required.Some of the speakers also said that with Fannie Mae and Freddie Mac remaining strongly in the market, cap rates have not declined as much as they could have in the apartment market. In response to questions from Wood, speakers cited cap rates increases of anywhere from 25 to 100 basis points. In addition to the contributions of agency capital in the market, “until land prices fall and construction costs stabilize, we are not likely to see deals in the 6 percent range in many markets,” says Henry. The panelists, who rate industry conditions currently to be anywhere from “5” to “8” (or even “10” in the Bay Area) on a scale of “1” to “10,” agree multifamily fundamentals remain strong. That the positive demographic trends are working in favor of multifamily is “real,” said Blair. “The biggest uncertainty is the capital markets.”