Construction financing for new multifamily product was notoriously this year, but the outlook for next year is strong. According to Gabe Weinert, an SVP at Walker & Dunlop that recently closed a $109 million in construction financing for new multifamily builds in Southern California, 2018 may be a better year for construction financing. Softened regulations and strong demand for apartment rentals will continue to fuel lender appetite for multifamily deals, including new construction deals.
“I think that it is getting a little easier. Most banks have concentration issues where they have done too many construction loans, and they are worried about doing too many construction loans,” Weinert tells GlobeSt.com. “They have to diversify their real estate, but the people that are invested in real estate still very much want to be in construction an multifamily.”
The biggest driver of lender appetite for multifamily construction deals is the undersupply in the market. Multifamily is undersupplied in most markets, and in Los Angeles the supply issues have led to gross affordability issues. “There is still a huge demand for housing, and in general there isn't enough supply being delivered,” says Weinert. “All underwritings and deals that we see, there are usually increases in rents; although some people are giving concessions to get tenants in, but that isn't abnormal.”
It may sound counter-intuitive, however. Recent reports have shown that rental rate growth in Los Angeles is slowing and deal velocity is down compared to 2015 and 2016. Weinert says that the slowed growth momentum could be attributed to the new housing stock that has recently come to market. The bottom-line is that there are endemic supply issues that will continue to fuel demand. “There is a lot of supply coming online right now, and that is all projects that were started in the last two to three years. That product is starting to lease up and will be absorbed by the market over the next 12 months,” he says. “We are seeing that all get absorbed without giving many concessions or drops in rental rates. Based on appraisals and research and data we see for multifamily, there is still a big housing shortage in Los Angeles and we have the worst affordability problem in the nation. It could take years and land-use reform to build enough houses to make it affordable for middle-class workforce families.”
In addition to the dearth of apartment stock, Weinert says that reduced regulations will also fuel construction financing activity next year. “Most banks are seeing that there is less regulation, and there are more favorable interpretations that regulators are imposing upon them,” he adds. “The high volatility real estate classification is one example. Because banks understand that they are going to be regulated less, there is more appetite for them to put capital out in the sector. In general, people are bullish an positive about 2018. We see more capital sources coming to the market, and those that are in the market are getting more aggressive about the market.”
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Kelsi Maree Borland
