As the prospect of a softening market intensifies, now is the time to solidify strategies for negotiating the new lending landscape.
The economy, she breathes—Contract, expand. Contract, expand—albeit irregularly and not without a fair share of fits and spasms.
Of course there is no crystal ball, and prognostications about where we are in the current economic cycle are just that: Guesses. But that doesn't mean the apartment industry has to wait to exhale-there exist strategies poised to be delivered this fall to contend with a potential softening in the market. Anyone in asset management will want to sit up and pay attention
The Softening
Heather Wallace, SVP, SARES-REGIS Group, clearly recalls the past several economic cycles affecting the industry. "The last cycle was a great education in leverage," she says. "The current cycle is more conservative: Developers have more skin in the game and the fundamentals are different."
Yes, this time is different. No dot.com bust, where brand new jobs evaporated just as new supply hit the market. Gone is the housing boom, where banks enabled overleveraging among commercial real estate developers heading into the contraction. Now equity and debt are following much more modest underwriting guidelines, which significantly affects the financing of new developments.
"The plateau is happening where high-end supply outpaces jobs," says Wallace, "but the worry in this current cycle seems more centered around affordability than jobs."
In a softening market, conventional tensions between developers, equity partners and lenders can escalate. Basic feasibility, expected return, loan type and proceeds, covenants and takeout strategies all can be contested as emotional states sour when data begins to confirm all parties' worst fears.
Fortunately for asset managers and other apartment professionals, Wallace will be speaking at the General Session Panel, "Underwriting New Development in a Softening Market," during MAXIMIZE: 2016 Multifamily Asset Management Conference, Oct. 17-19, at Loews Coronado Bay Resort. Registration is available at www.naahq.org/maximize.
Joined by Glen Seidlitz, Bozzuto Group Vice President of Finance, and moderator Elizabeth Karl, Alliance Residential Company Regional Vice President, this trio of financial mavens will examine the deal underwriting process and how to reconcile the biases of the major actors. They will offer strategies for understanding the meaning of a partner's term sheet when time is of the essence, and will illustrate how their market understanding ultimately coalesced with that of their capital partners.
MAXIMIZE remains the sole industry event dedicated to boosting NOI, with education focused on five key areas that address current challenges and offer solutions for those professionals tasked with creating long-term value for owners, managers and investors: Revenue management, risk management, sustainability, innovation and affordable housing.
This year's educational offerings truly represent some of the industry's brightest minds and best ideas. And as icing on an already delicious cake, not only do attendees enjoy hearing first-hand from these industry leaders, MAXIMIZE offers the exclusive opportunity to network with these paragons in a private resort setting.
The Big Questions
As Donald Rumsfeld so famously (and, granted, less than eloquently) said, "There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don't know. But there are also unknown unknowns. There are things we don't know we don't know."
Wallace underscores this point by channeling Mark Twain: "It ain't what you don't know that gets you into trouble. It's what you know for sure that ain't so." Every economic cycle is different. "A smart investor/developer would rather do a bad deal with a great partner than a great deal with a bad partner." she says.
MAXIMIZE offers an unparalleled opportunity to tackle some of the industry's "known unknowns" as they relate to underwriting deals in a softening market. Wallace offers three that will be of critical importance during the session and for asset managers in general.
Effects of Supply and Demand. Future supply affects the underwriting of deals today, says Wallace. What remains to be seen is how jobs will affect absorption. While at MAXIMIZE, keep a keen ear out for conversations centered around the type and size of concessions that will be required to respond to the supply and pricing of units.
Income and Expenses. "We've been in a vertical market for a long time," says Wallace. "What expense lines need to be shored up to remain competitive in the market? If we're headed into a more normal market, what income lines and expenses are you going to need to future-proof? Are you going to reserve enough money to cover these adjustments? Which line items affect occupancy in a shifting market?"
Interest and Cap Rates. What's going to happens with interest rates? The perennial answer: No one knows. As for the capitalization rate, Wallace wonders whether the overwhelming demand of equity will remain. Debt providers are selective-will that make deals harder? While equity at present remains strong, debt is harder to source. It seems debt at present only wants to finance core, "A" markets. As long as debt markets are being selective about what they finance, the size of a deal remains problematic: Generally, too big of a loan means fewer debt sources.
The apartment industry has enjoyed years of high quality fundamentals, rising rents and lofty occupancy rates. But with continued new supply coming online, concerns about rent ceilings and the general unpredictable nature of the economy, it serves every asset manager and high level apartment professional to prepare for the worst, and hope for the best.
Frank Mauck is Director, Communications for NAA. He can be reached at [email protected].
Underwriting New Deals in Softening Markets
Tuesday, Oct. 18, 9 a.m. - 10:15 a.m.
Register now at www.naahq.org/maximize
There's No Such Thing as Over-Prepared
For many asset managers, the last time they worried about marketing effectiveness was 2012. This refresher session will detail top tactics for maintaining awareness and demand in increasingly competitive markets. Up for examination are new tactics like geotargeting, customer relationship management and lead nurturing, and review how to find, analyze and use marketing effectiveness data at a strategic level.
Marketing Strategies for Softening Markets (Immediately following the General Session, "Underwriting New Deals in Softening Markets")
Tuesday, Oct. 18, 10:30 a.m. - 11:30 a.m.
Marti Burrows Managing Director, Greystar (Moderator)
Kate Good Partner, SVP of Multifamily Development,
Hunington Residential, Owner, KateGood.com
Lauren Curley Director of Marketing, Bonaventure Realty Group
You Wouldn't Build Without Blueprints, So Why Budget Without Benchmarks?
As referenced in the second "Big Question," achieving success tomorrow requires one to take care of business today—that's why leading communities turn to the 2016 NAA Income & Expenses Survey in Rental Apartment Communities (IES). Results of the 28th annual IES are available at www.naahq.org/16IES.
The survey includes an executive summary, detailed data, reports and charts about rental communities. More than 100 single markets are available. Each report provides comprehensive data and economic analysis including: market rent, metro area income and expenses, subsidized properties and utilities. The NAA member price is $175 for a single market and $625 for the full report. The price for non-members is $350 for a single market and $1,050 for the full report.