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The Multifamily Real Estate Boom

Multi-Family is Boomin'

Marty Heflin is the Founder and Managing Partner of Range Light Partners. In his career, Marty has been involved with developing over $150 million worth of real estate in the Southeast and Metro Washington DC. Marty is past president of the Tennessee Apartment Association and the Greater Nashville Apartment Association. He was recently named one of Nashville’s “most important real estate players.” Apartments are being developed and rehabbed across the country in nearly every major market and submarket. Why is multifamily booming?

Marty: The multifamily rental sector is big in most markets for three primary reasons:

  1. A total lack of construction particularly in the multifamily rental sector because developers in the 2000’s were focused on condos, and after the recession there was little development in any sector.
  2. Secondly, as the economy improves, and job creation heats up, we should see recent college graduates move into the rental market. I read an article recently that said over the past three years over 53% of recent college graduates were living with their parents. They are doing so because they are saddled with huge debt loads from their higher education and they are un or under-employed – baristas with BA’s. As the economy improves, this cohort will move out and will want to rent. They are close enough in age to know folks that got blistered by the for-sale real estate market in the ‘00’s
  3. Investors like rental multi-family – developers are creatures of habit, we follow the money. What about financing in this multifamily?

Marty: It is the preferred asset class right now. The reality with multifamily is as long as we have population growth, there will always be a baseline level of demand. Unlike industrial, office and retail that can fluctuate wildly, the backside risk is covered for multifamily. Financing sources have paid attention to this. The caveat is that you have to be well capitalized. The debt side is still very cautious. Guarantee provisions are still very stout ad they are looking to see real equity in deals. The old days of ghost equity, fees left in the deal, is unacceptable. They want to see cash equity upfront. You can no longer get away with overvaluing land or other schemes to get a deal past the finish line. Financing enthusiasm varies from market to market - as you travel around the country, some markets are also doing better than others. The Sunbelt is improving as well as LA and other parts of Southern California. But markets like Detroit and Chicago are still flat to negative. The good news is that for the time being there is discipline in the market. Lending is constrained and developers are not doing deals just to earn fees – they have to make economic sense. Development companies are leery of expanding too fast with traditional staff. Assuming they survived, the memory of contraction is very real and they are being careful and taking a more prudent approach to growth. Coupled with tighter financial standards, growth is tempered which may not necessarily be bad. So talking about financial standards, have you seen any impacts of Dodd Frank?

Marty: It is starting to get sorted out. One has to remember that the 2,300 pages of legislation have to be turned into even more pages of regulation. This is still being crafted and sent out to the field. This has caused banks to be very careful because they have been continuously told different things about rules. When the game changes every month, it makes lenders very cautious about taking on any risk. This lack of clarity seems to have leveled off. Dodd Frank does increase lending costs. It has had a big impact on CMBS where it has reduced lenders capacity to make more loans. However, CMBS is up four times this quarter compared to the same quarter last year, albeit it is still very anemic compared to the mid-2000’s. Have there been changes in how apartments are built now versus before the recession?

Marty: There is a focus on quality infill sites. The days of 24 units in suburbs with 10 units per acre density seem to be gone. Even in the suburbs, people want to create an urban feel in a suburban location. This higher density is driven by land prices, design standards and simply what the market wants. I have heard that people want smaller units, is there any validity to this trend?

Marty: I don’t know if that is driven by demand or design, but it is definitely occurring. People are getting used to living with smaller units. This is actually a benefit to developers also because with city living, the city provides the amenities. The developer is no longer providing the racquet ball courts or giant business centers that make developing even more costly. It is a win-win for everyone. What about Construction Prices?

Marty: The crash resulted in a large chunk of the labor force leaving the field. A large percentage of the force had come from Latin America and many simply returned there as opportunities evaporated. Some are coming back but tighter regulations have made this difficult. Because of the uptick in construction, lumber prices have also been rising quickly as well as dry wall. Concrete has been flat and steel has actually been down slightly. there been any impact of energy prices?

Marty: This is built into all raw materials. Getting lumber to and from has been much more expensive than ten years ago. As far as development features, are developers actively incorporating green trends?

Marty: This is becoming more and more the norm. I do see people steering away from LEED and utilizing other evaluating systems such as Green Globes, which is a more common sense approach to being environmentally conscious without the regulatory burden that LEED brings. But across the board, you see built into DNA of builders and developers, a tendency to look at things like alternative water treatment such as bio-swales and semi-pervious pavement. I am glad to see an ethos of stewardship becoming common in our trade. Developers of infill products are considering white or green roofs. What do you think about real estate crowdfunding?

Marty: I think it is a fascinating concept. Across the board, the real estate industry has had a business model that has stayed unchanged over the years. There are many societal changes right now such as e-retailing that the industry has not entirely felt the impact of. The notion of the home office or flex office or e-spaces -these are business models that make sense in a rapidly changing entrepreneurial culture. Trends are developing rapidly and here comes a financing platform that can respond more quickly and seize new opportunities as they evolve. Today you have more computing power in your iPhone than the Apollo space program. Where does that leave us? Crowdfunding seems to provide a flexible, responsive platform that may sniff out the new opportunities faster than stodgy institutional real estate investors!

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