FEATURE ARTICLE, SEPTEMBER 2011

TEXAS MULTIFAMILY ROUNDTABLE: VIEWS FROM THE LENDERS

The following professionals participated: Bud Malone, partner and CEO, Mortgages USA; Mart Martindale, senior director, Berkadia Investment Client Services; Steve McAllister, president, D. Ansley Co.; Jamie Mullin, director, LMI Capital; David Schmidt, agency sales manager, KeyBank Real Estate Capital; and Keith Van Arsdale, president and CEO, BMC Capital.

Texas Real Estate Business: In what markets and for what types of multifamily properties are deals getting done? What are some of the largest multifamily sales that have occured in 2011?

Schmidt: The primary markets in Texas (DFW, Houston, Austin and San Antonio) remain very healthy.  The tightening of underwriting standards for single family buyers and the dearth of new construction of multifamily over the past few years have resulted in a good environment for rental housing.  The demand for refinances remains strong as owners are able to secure new loans at historically low interest rates.  On higher quality transactions we are able to couple the low interest rates with the ability to provide a few years of interest-only financing.  For a borrower, this is one of the best periods in which to secure long term fixed-rate debt in the past 25 to 30 years.  In addition, we have seen a significant increase in requests for acquisition financing.   The combination of stable markets and low rates is driving investment activity as investors can still achieve positive leverage with the anticipation of solid rent growth over the next few years.  Due to capital constraints there has been limited new supply brought to the markets, thus the general consensus is most markets in Texas will experience solid rent growth over the next few years.

TREB: What is the status for multifamily development activity in Texas markets? What areas are hot, and for what type of product? For what reasons?

Malone: The status for multifamily development activity in Texas markets is extremely positive at this time. Subprime lending on residential properties across the nation did not leave Texas unscathed, compared to other areas of the country. Although the effects in Texas, and in Dallas particularly, were moderate, the financial near-collapse that was the consequence of the housing bust has created a paradigm shift in all markets — from the desire to own to a demand for rental. Texas markets for rental housing are certainly experiencing the rise in demand as a result. This general paradigm shift is enhanced in Dallas, which is now showing job growth, not loss, as other metro areas outside Texas are exhibiting. Population growth and household formation remains strong and continues to foster vacancy decline and absorption exceeding new supply in 2011. With rents continuing to rise, we look to a strong year in 2011/2012 for local apartment demand.

TREB: What are the challenges you’re seeing with financing for multifamily properties — both for transactions and development?

Mullin: The CMBS 2.0 market has grown tremendously over the past 18 months, but spreads remain unstable as the recent U.S. credit downgrade and the ongoing issues with the Eurozone have unsettled B-piece buyers.  We have been closing loans consistently at 70 percent to 75 percent leverage, which is up from the 65 percent we were seeing last year, but a far cry from where loans were earlier this decade.  We are routinely seeing new lenders entering the market (and old lenders returning), so this is another positive sign that the capital market recovery is taking hold.

TREB: What is the climate like for distressed multifamily properties? What are developers, property owners and lenders doing to reconcile these situations?

Martindale: Older properties are struggling across the board, and it’s not market specific.  We are seeing that in most major Texas markets.  We are seeing occupancy and rent growth throughout Texas, but the top half of the product is carrying the bottom half.  While newer product is at or near full, older properties are continuing to struggle with occupancies in the 80 percent to 90 percent range as opposed to overall occupancy in all Texas markets that are north of 90 percent. I’d actually say the economy has helped the multifamily real estate market across Texas.  For a while there, close to 70 percent of Americans owned homes when historically that number was around 60 percent.  Simply put, not everyone can be a homeowner.  Today, it is getting tougher and tougher to qualify for a home loan.  People are downsizing and in some cases choosing not to own a home at all.  That coupled with the fact that there has been some job creation in Texas and people are still moving here at an impressive rate has really boosted the multifamily market here.  We have managed to absorb much more than we’ve delivered recently, and the apartment markets here are very healthy.

McAllister: The majority of the distress in multifamily properties has been by CMBS lenders and is being dealt with by the special servicers. As loans have come due, many of these properties are over-leveraged and are either being recapitalized by new ownership or property owners are paying down the existing debt and the lender is extending the loan for several years to give the property owner some time for the market values to come back.

Van Arsdale: Distressed properties are coming into the market at a steady pace.  Due to improved fundamentals for apartment leasing, we have seen more purchases of distressed assets in 2011. Why?  Investors believe rents are going to increase over the next 2-3 years.  From a lending perspective, there are bridge programs available for distressed properties offering up to 75 percent of costs (acquisition plus cap ex) and floating rates between 5 percent and 8 percent.

TREB: What are the biggest concerns you’re seeing in the lending environment going forward for the next few years? What are some reasons to be optimistic?

Malone: The biggest concerns have to do with the general unavailability of financing on terms that developers/operators can accept. Low loan-to-cost and loan-to-value requirements when funding can be obtained limit the players to those who are willing to accept high-equity requirements, and can, in fact, contribute such equity. On the optimistic side, I believe that low interest rates, which apparently will be with us for a good while yet, combined with the paradigm shift to rentals augers well for the future of rental housing, particularly on projects that can demonstrate eligibility for HUD/Ginnie Mae securitized financings, which remains an open window to the capital markets.

Schmidt: Fortunately, there aren’t any markets that are having difficulty achieving good occupancy levels.  There are specific assets that may be struggling, but the markets as a whole are in good shape.  We are seeing occupancies steadily increasing in virtually every market.  Most markets are above 90 percent and many markets have pushed above 95 percent.  The combination of limited new construction and the continued struggles in the single family market have led to increased occupancy for multifamily properties in virtually all markets.  The single family (shadow market) remains a factor, but I don’t believe it will have a significant impact on the multifamily occupancies.

Van Arsdale: Let’s start with the optimistic part first.  There is more competition for apartment loans since 2009.  There are more lenders entering the market every day.  CMBS 2.0 is getting traction and volumes should continue to increase.  A secondary market for the sales of loans is starting to take form.  The main concerns are the UA and worldwide economy and its effect on the investors and capital markets.  As we have seen the past week, a lack of confidence can cause extreme volatility.  The commercial real estate market is not insulated.

TREB: What are some of the differences in the trends you’re seeing for condos, apartmets, student and senior housing?

Martindale: Condos are one of the first product types that react, positively or negatively, to a fluctuating market.  Today, we have an abundant supply of condos in the market that were developed in a completely different economic climate.  Some of these properties were apartments, converted to condos that will face new challenges as they evolve to match this market.  That said, there is still some minimal demand for these but only if the price is right.  As far as traditional apartments, student housing and senior housing, all are relatively healthy.  Enrollment at Texas colleges is at an all-time high and people are living longer and longer.  I think senior housing will be the next big thing that we see take off in the residential market.

McAllister:  In apartments, we are seeing many tenants wanting to rent instead of buying due to the uncertainty in the job markets. In the student housing area, there continues to be demand for this type of housing and developers have now begun initiating construction in college areas that have student populations of 7,500 or less. In regard to senior housing, the majority of the financing that is being done is being done through FHA, and it is taking well over a year to secure a commitment for new construction or for a refinance.

Mullin: Condos have traditionally had a tough time in Texas, notwithstanding their perceived popularity during the recent boom.  There seems to still be a demand for them in central Austin, but in general condos are a tough sell right now. We have touched on many of the key trends in apartments already, but the takeaway is that this is an extremely exciting time for the apartment industry with rising rents, falling vacancies, and improving finance environment all favoring apartments. Student housing continues to be an area of opportunity.  While developers focused great attention around what I would call the “name brand” schools during the last boom, we are seeing increased investor interest in some of the other growing public universities (around UNT, University of Texas-Arlington, UT-San Antonio, etc.) that mostly missed the last boom and as a result have extremely low vacancy rates.

Van Arsdale: Apartments are very strong and we are seeing rent increases along with increased occupancies.  Student housing is doing very well too.  In Texas for example, all of the major universities are at maximum enrollment. Condos are still sluggish due to lack of demand and lack of financing available.

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