This Multifamily Developer Had to Approach 48 Lenders About One New Project
That will put many into a tough situation unless they can find additional capital or sell the property in an inhospitable market.
People need housing, so building apartments should be a reasonably certain activity for developers. Find a place in need, secure land, acquire funding, and get to work.
Just one problem on step three: lenders are reluctant, even though the subject isn’t the uncertain office market. Ask Texas-based Howard Hughes Corp. CEO David O’Reilly recently told Bloomberg that after approaching 48 lenders about a new project, “Zero showed up and gave me a bid.”
The company is a recognized player that describes itself as developing “on a massive, ambitious scale that is transforming American cities by planning and designing intimate communities and lived experiences that are at once personal, organic, and authentic.” It operates across six states with 6.8 million square feet of office, 2.6 million square feet of retail, 5,587 multifamily units, 36,000 acres of remaining land, 9% historical yield on cost, and 21% historical return on equity. Board chair Bill Ackman is also CEO and portfolio manager of Pershing Square Capital Management, which owned about 31.9% of the business at the end of 2022.
What’s not to like from a lender’s perspective? It’s a case of nothing personal, just bad timing. Although office has received the lion’s share of bad CRE news, multifamily has not been immune. According to Green Street’s latest commercial property outlook by Co-Head of Strategic Research Peter Rothemund and Analyst Alex Boyle, multifamily values are down 21% since the general market high of March 2022.
PGIM Fixed Income has a similar take. The firm expects multifamily to see between a 17.5% and 22.5% peak to trough price change. The only sector PGIM thought would fare worse was office, with a 20% to 50% drop.
Banks already face risk from CRE loan exposure. Multifamily, often considered relatively invulnerable because people need a place to live, presents potential weakness because of the large volumes of construction that have virtually ensured vacancies will trend upward, meaning downward pressure on rent growth, and possibly absolute rents, all the while facing higher interest rates and significant volumes of maturities needing refinancing, or workouts, or large increases of capital, or lenders finding themselves holding the keys to the properties as owners walk away.
Construction loans will face the need for refinancing, and many of them won’t be able to afford either the additional capital investment when loan-to-value ratios go from about 70% to 55% and rates are up multiple percentage points.
“Everything’s overpriced,” Marcel Arsenault, CEO of Real Capital Solutions, told GlobeSt.com last month. “If there’s a million units, [whatever vacancy is today,] I can promise it will be higher tomorrow. Why buy at a 6% vacancy if it’s going to 11%?”
And if prices are dropping, with higher vacancies to temper rent increases, putting money behind more of the same may seem unappealing by lenders.