Q&A with Dr. Delores Conway: Developers Want Projects That Can Bring Stable Source of Income

Dr. Delores Conway (pictured) is the director of the Casden Real Estate Economics Forecast at the USC Lusk Center for Real Estate and associate professor at the Marshall School of Business. This past month, Real Estate Southern CA Magazine listed Dr. Conway as one of the “50 Women of Influence in Real Estate.”  She is an elected fellow of the American Statistical Association and a recent chair of the Business and Economics Statistics Section. She also served on the editorial boards of major academic journals, including the Journal of the American Statistical Association.  Prior to joining USC, Dr. Conway served on the faculty of the University of Chicago at the Graduate School of Business. She talks to MHN Online News Editor Anuradha Kher about how the crisis has made it a lenders’ market, why buyers are buying to own instead of sell and how despite all that is happening people in the industry are not depressed.MHN: How is the credit crisis affecting financing in the apartment sector?Dr. Conway: I recently attended the Apartment Outlook Conference in Los Angeles where everyone was talking about the credit crunch that is affecting the multifamily sector. It has become extremely difficult to get loans and even though Fannie Mae and Freddie Mac are continuing to provide a lot of financing, it remains a small portion of what is needed. There were CMBS loans, conduit financing, investment banks and other banks providing capital and it has all disappeared now. The banks are now busy shoring their own balance sheets. Until last year, they were willing to give loans of up to $1 billion and the number has now dropped to $300 million. As result lenders now need outside support and a lot more cash to get projects off the ground.MHN: How has this changed the process of getting financing?Dr. Conway: There is much more scrutiny of each deal. Lenders now want thorough documentation. They don’t want developers to push the numbers (such as rent growth and vacancies) pertaining to a project. MHN: How is this impacting development of projects? Dr. Conway: Construction starts are down from last years. A couple of years ago, multifamily projects received several bids from lenders and now developers have to approach several lenders to get loans. It truly has become a lender’s market.MHN: What are some of the other changes playing out in the industry due to this crisis?Dr. Conway: There is a major shift from value-add kind of properties to properties that can bring a stable source of income. Student housing for example, where there is high demand and limited supply. In addition, no matter what happens in the economy, this sector will remain stable. So buyers are now buying to own instead of buying to sell.MHN: What impact will the fed rate cut have on multifamily borrowing?Dr. Conway: All these steps help in freeing up the credit market but the real question facing the multifamily sector right now is not the price of loans or the rate of interest on the loans, but the availability of loans itself.MHN: What was the mood at the apartment conference you attended? Dr. Conway: People were very realistic. They weren’t depressed but very aware of the market realities. People talked about the niche sectors of the multifamily industry that are doing well, which include seniors housing and student housing. MHN: What are the major concerns in the apartment sector right now?Dr. Conway: There is a great deal of uncertainty due to the financial crisis and economic downturn. Job losses and unemployment are both bad for the apartment sector, and people are concerned about it. In markets where there have been a high number of foreclosures, the industry is also concerned about the shadow rental market that is competing with apartments in a big way.MHN: What is the forecast for the multifamily sector?Dr. Conway: There isn’t much visibility about the future due to the economic uncertainty but it is unlikely that rents will go up anytime soon or that vacancies will come down. Everything depends on the job growth numbers.  MHN: According to NAR the pending home sales including condos and coops are up. Have you seen this as well? What do you think the reason for this?Dr. Conway: Prices on the West Coast have dropped by 20 percent and in the Inland Empire by 40 percent, which is why sales have gone up. There is a lot of investor interest in these foreclosed properties as well as interest from individuals.