By Keat Foong, Executive Editor
New York–Speakers at a recent webinar suggested that conditions are being laid now for developers to begin to look into apartment development again.
The webinar, “2010 Kick-Off Event for Apartment Development,” was sponsored by the architectural firm of Humphreys & Partners Architects LP.
2012 could be a year in which more apartments will be rented than ever before, and 2010 could be the year to prepare to meet the upcoming demand, said Mark Humphreys, CEO, Humphreys & Partners Architects LP.
Hessam Nadji, managing director, research services at Marcus & Millichap, said that employment statistics are currently neutral to moderately positive. He said that a V-shape economic recovery, however, is unlikely this year, as consumers have lost jobs and cannot easily pile on additional debt.
Until the job market recovers, the industry will see a drag on demand from the 20-to-34-year-old cohort, and the recovery in the apartment sector will not match those of previous recoveries, he said.
Nevertheless, Nadji indicated that the apartment industry will see a low supply level and a “very robust release in pent up demand” from 2011 to 2015. From 2010 to 2020, the 20-to-34-year-old group should increase by five million, he said.
Although the echo boomers will total 70 million compared to the baby boomers’ 80 million, “The sheer size of [the echo boomers] should be something that we should be excited about,” he said.
John Fenoglio, senior vice president at Grandbridge Real Estate Capital LLC, described signs of easing in capital availability in some sectors. He said development financing is as strict as he has ever seen, and is relationship-driven with LTC is the 50 to 75 percent range. Bridge financing is in the 50 to 70 percent LTC range, with full recourse, he says.
Life insurance companies are providing fixed-rate money at 65 to 75 percent leverage range for stabilized properties. However, he noted that some life insurance companies are taking on construction loans as a way to compete with Fannie Mae and Freddie Mac for permanent financing business.
Fenoglio also noted that there are signs of life in the CMBS market which has been stimulated by the government’s TALF program. He said some sources have emerged in past months that are using their balance sheets to close loans on CMBS documentation with the hope of eventual CMBS securitization.
Fenoglio said that equity financing is also starting to show signs of “a heart beat.” He said some sources may not be willing to provide capital yet, but are willing to discuss transactions. He said private equity is available from “country club” sources and “hometown” buyers. These sources have return on cost requirements of 9 percent or better. “It is very difficult to attract this money now,” he said.
Humphreys said that his company is observing that 80 percent of its new construction projects today use FHA 221(d)(4)-insured financing. Philip Melton, senior vice president at Granbridge Real Estate Capital, described the FHA 221(d)(4) program, which is administered under the Department of Housing and Urban Development (HUD).
Melton said the financing provides 40-year rollover construction and permanent financing at current interest rates of 5.75 to 6 percent plus 45 basis points for mortgage premium insurance. Leverage is up to 90 percent of replacement cost, at 1.11 DSC.
“[The HUD financing] is not synonymous with with subsidized housing,” Melton pointed out. He added there has been a significant upswing in the volume of the financing in 2009 driven by the lack of bank financing.
Doug Bibby, president of the National Multi Housing Council (NMHC), outlined some of NMHC’s legislative priorities this year, including the need for a balanced housing policy and modernization of the Low Income Housing Tax Credit program.
He said that as regards the possible reform of Fannie Mae and Freddie Mac, NMHC is working with legislators to emphasize the need for a “smooth transition.” It will take years “year and years to effect any changes,” said Bibby. “We are by no means saying that they should be disbanded.” Bibby noted the industry would be dead in the water if not for the liquidity provided two agencies.