How to Buy Right and Finance Appropriately

COSTA MESA, CA—Panelists at the recent Crittenden National Real Estate conference here on Wednesday focused how to stay ahead in an ever-changing multifamily world and how to adopt new technologies in order to compete with new players in the market, among other things.  Moderator Noah Miller, VP of acquisitions and finance at Pensam Residential, first asked panelists about the most pressing issue in California today, which is housing affordability and rent control.

As mentioned in an earlier panel that day, rent control is one fear on everyone’s mind. Panelist Barry S. Altshuler, EVP of Equity Residential, said that rent control is the single most pressing issue not only in the multifamily space, but in CRE in general. And it isn’t just a California issue, he added.

“People have to be aware that what may start in California will go to other places. The measure that is likely to get on the ballot is a repeal and a very organized effort to unwind rent control protections,” he said, adding that battles are being fought as we speak.

“Rent control is permitted on pre-1995 product so there is a number of cities trying to implement rent control in those cities. Glendale, Pasadena, Long Beach to name a few. This issue is very important and there are different ways it is being addressed.”

What is happening today, he explained, that is different than in the past, is that you have very well organized tenant groups. “In the past, they were not very organized or well-funded. Now it is a machine that is very aggressively trying to implement rent control.”

He explains that “Rent control is bad policy and doesn’t do any good for anyone except for the few people who live in the units that are protected. As much as half of the rent controlled units are actually occupied by people who would never qualified …they are taking away needed housing from those who really can’t afford it.”

So, if it passes, what does that mean for the industry? It is very significant, explained Altshuler. “If it passes, each city will have the right to put rent control in any form that they want in place in their city. Vacancy decontrol is off the table. It is a very bad thing. There are a number of cities that have already said they will expand rent control aggressively.”

For the CRE industry, it will affect everyone, he added. “It will slow construction. Today, it is already hard to pencil new deals in CA and in most places around the country and if you add a rent cap on that, it will slow things dramatically. It will mean we all need less people on that. All these systems and softwares pricing units, or architects, or construction workers etc…there will not be as much of a need.”

When asked about land and the severe housing shortage in California, he explained that the state isn’t what it used to be. “The real issue in California, the state needs to accept it isn’t the place it used to be and that more dense housing is needed and if you put it by light rail and transportation quarters, you aren’t increasing traffic by adding more housing.”

When the panel changed gears to discuss what buyers are looking for in 2018, Mary Ann King, co-chairman of Moran & Co., said she has seen almost all of the capital pile on value-add. “I have never seen such a large percentage of buyers out there looking for a value-add deal and as a result cap rates on a value-add deal are coming down.”

According to King, value-add players are bidding cap rates down to the point where the other side of the market, the core market and new deals, have yields are drifting up. “We are seeing a compressed yield and that to me is so interesting. I see these compressed yields between value and core and the nimble money making the transition. “

And it isn’t just on the west coast, panelists agreed. “Very competitive people are chasing those deals. As far as velocity, we are dead on both on a national basis and here in California. Everyone is looking for value and there is a bit more core on the market.”

Matthew S. Romney, managing director of Sundance Bay, who has been heavy in value-add plays, says that he has had to go outside of their box and get creative to make those deals pencil out. “In 2012, when we were doing those deals in secondary markets, there wasn’t much competition at all. And the competition there was wasn’t as sophisticated.” Today, he said, in order to combat that, “we are having to find deals that have more hair and are more complicated and scare other groups away.”