Among real estate property types, multifamily has been strong and the outlook is positive for 2016. Investment dollars are still flooding into the apartments sector, although investment is more focused than ever on core strategies (new construction in urban infill) and will continue to be more conservative and careful. What can we expect to see in the capital markets crystal ball? Here are my top five predictions for 2016.
- I believe that construction lenders will likely remain conservative in their underwriting of new multifamily development deals. In this cycle, they have not over-leveraged construction projects and in 2016 are likely going to stay in the 60 to 70 percent to cost range.
- Based on the headwinds we are experiencing from global economies and the current strength of the dollar, I don’t believe our economy will go into “overdrive” anytime soon. More likely we will see a flat domestic economy with little inflation and continuing demand to rent versus buy. Interest rates will likely stay low through the end of the year.
- A lot of capital is being raised in the mezzanine debt and preferred equity arena. Mezzanine players are a lot more aggressive than they were a couple of years ago, and developers who may be unable to find equity in the latter stages of this cycle are turning more and more to mezzanine debt to finance their deals. Aggressive mezzanine lending is a concern. Due to HVCRE requirements, banks are asking for more equity as well. Properties will need to achieve aggressive growth over the next two to five years in order to meet interim covenants imposed by mezzanine lenders.
- On the equity side, I am seeing the major institutional players being increasingly discerning with respect to new investments into multifamily development deals. They are raising money, but there’s a general feeling that a lot of the markets across the country are overbuilt with value-add deals too pricey and difficult to justify. So institutional capital is being selective with locations, sponsors and deals. This trend will continue.
- There is also a growing trend toward core and core plus investments, with capital focused on strategic, high quality assets and long-term (seven- to 10-year) holds. I believe money will continue to flood into quality assets, especially in key locations including highly sought after coastal markets such as San Francisco, Seattle, Portland, San Diego, Boston, Manhattan and Washington D.C., as well as select strong job growth markets like downtown Austin and Chicago.
2016 will be another interesting year for multifamily developers and investors, but as long as we remain focused and strategic, there is still plenty of opportunity to be pursued.
Michael Sorochinsky is the CEO and founder of Cypress Equity Investments. Cypress Equity Investments makes strategic investments with local apartment developers and operators in major U.S. Core cities, such as San Francisco, Portland, Chicago and Manhattan. In 2010, Michael and Steve Fifield of the Fifield Companies formed Century West Partners to build sophisticated, best-in-class apartment communities on urban infill, transit-oriented sites in highly-sought areas of Los Angeles. The firm is currently one of the most active apartment developers in the Los Angeles metropolitan region with a core specialization in tech-friendly and amenity-rich contemporary communities. The current Century West Partners’ development pipeline includes 2300 quality apartments.