Capital Sources Remain Hungry for Apartment Construction Deals

Demand for multifamily new construction has not waned. Preferred equity and structured debt capital providers are hungry for new multifamily construction deals in markets throughout the country. Century West Partners and Fifield Cos. have projects in Los Angeles, Chicago, Miami and Minneapolis, and has seen strong interest for multifamily construction deals un both urban core and mid-rise product types.

“In terms of preferred equity and structured debt, we are still seeing a lot of appetite for that type of capital,” Navi Sandhu of Century West Partners and Fifield Cos., tells GlobeSt.com. “This is coming from debt funds and it is high-leverage capital going from 80% to 90% of the capital stack. It gets expensive, but these investors are willing to take a little bit more risk and not make equity returns. We do see a lot of interest from those types of providers across all of our projects.”

While preferred equity and structured debt are the most active in funding new construction multifamily projects, more traditional lenders are also still actively funding these deals. “In terms of traditional debt, that is also no an issue. Lenders haven’t changes, we are still seeing 60% to 65% leverage,” says Sandhu. “If we want anything higher than that, we have to go to the debt funds.”

While appetite is still strong for the right deals, capital sources are being more selective and tracking new supply deliveries in certain markets. “It really depends on circumstances,” says Sandhu. “We have seen some providers over allocated in certain markets and some providers worried about over supply in certain markets. Some providers are also worried about construction costs growing faster than rents. So it all just depends on the type of capital partner that we are talking about.”

Lenders are showing the most hesitation in cities with strong new deliveries in the last few years, like Chicago and Miami. “In Chicago, we have seen concern that there is over building. That is a market where we have seen a lot of supply in the last four or five years,” says Sandhu. “In Miami, there is also concern about over building and too much supply coming online through 2021. In Los Angeles, we haven’t seen concern. Los Angeles is a market where there is so much supply for housing that we haven’t seen investors shift away from that market.”

This cycle, urban core new construction has dominated the construction pipeline, and as a result, some investors have shifted to suburban or tertiary deals. “For IRR-driven investors have started to shift away from urban core deals, which are the deals that we typically focus on,” says Sandhu. “They are looking for more yield in a tertiary market or garden-style suburban product. We have also seen interest from family offices or international money, and those groups are willing to invest in urban core multifamily because the are looking to build to core and they are willing to exchange yield for safety of returns in the future. It all depends on the types of properties and the location.”