Sharkansky: I think that you have investors that are either new to the business or are having short-term memory loss and aren't pricing in some of the risks that are associated, especially in our space of value-add investing. We are looking at where some of these deals trade and it seems like there is almost no premium for creating the value. Investors are buying properties assuming that the value has already been created, but they still have to do the work of creating the value, so a lot of the risks have been priced out of the market.

GlobeSt.com: Are lenders willing to lend on these riskier deals?

Sharkansky: We are seeing several recourse and non-recourse bridge lenders out there lending on properties at a sub 1.0 debt service coverage that are rent controlled. There is a huge risk there, especially in the last cycle when we saw rent controlled assets that were over-leveraged go back to the lender because they weren't able to turn units. Generally speaking, I don't think we are remotely close to 2007, other than maybe that one silo of the market where you are seeing very aggressive lending and price levels on rent controlled assets. On a broad level, fundamentals are still very strong in the capital markets and not close to where we were in 2006 or 2007, where you were seeing 90% plus leverage with extremely low debt-service coverage ratios.

GlobeSt.com: Are you seeing capital move out of multifamily for this reason?

Sharkansky: Not more so than usual, other than maybe what you always have in the marketplace, which is a lot of mom and pop investors trading out of legacy assets into lower management intensive assets, like single tenant net lease. I am not seeing an exodus of capital into other asset classes.

GlobeSt.com: What is your strategy in this tight multifamily market?

Sharkansky: We rarely look at rent control assets anymore, specifically for the reasons that we discussed. If we are going to buy a property at a 3% cap rate, I would rather buy a property that is non rent controlled and have certainty of execution and know that we are going to get something close as opposed to the pro forma cap rate that we are underwriting as opposed to a rent control asset where we just don't know where we are going to get the yield to because we don't know who is going to move. We are primarily buying non rent controlled assets in primary markets. In the last year, we have bought in Highland Park, Culver City and Portland. In the evolution of our company, we have gone from buying not just value-add assets but value-add assets in value-add markets.

GlobeSt.com: What is the difference in yields that you would get in a core market of Los Angeles versus one of the gentrifying markets where you are finding deals?

Sharkansky: There is a 50 to 100 basis point delta between the core markets and the gentrifying markets. In our opinion, that is a no brainer because not only are you getting a little bit of extra yield but you are getting more opportunity for growth. You are going to see a lot more rent growth in markets that are feeding into the core markets submarkets.

GlobeSt.com: Like many value-add investors, you have a three-to-five year hold period on your investments. Are you nervous, at this point in the cycle, to underwrite multifamily for three-to-five years?

Sharkansky: We still feel that in the next five years we will see a tremendous amount of rent growth. With regards to the cycle, we feel that there will probably be some sort of technical recession in the next two to three years, and it will probably be something more along the lines of 2000 and 2001 than what we saw in 2008 and 2009, which was more of a crisis. We think that it will be more of a blip, and we think that the actual real estate cycle has five to six years to run.

GlobeSt.com: What is your 2016 forecast for multifamily?

Sharkansky: My forecast is that we are going to see more of the same. Fundamentals are strong; we are seeing more household formations and we still haven't seen much movement in the single-family lending market. It is still extremely onerous to obtain a loan, especially for a first time buyer. All positives for multifamily operational fundamentals.

LOS ANGELES—The multifamily market is becoming increasingly tighter, with more and more new investors showing up to the party and plenty of capital chasing deals. So, it is no surprise—even if it is disappointing—to hear that some investors are taking on significant risks that are a little too reminiscent of the now proverbial pre-recession mania. Max Sharkansky, managing partner at Trion Properties, says that the multifamily market is becoming “difficult” and has seen first hand some of the questionable risks that investors are taking in the market. In this exclusive interview, Sharkansky delves into the new competitive norm in the multifamily market, how Trion Properties' strategy is evolving and what he is expecting in 2016.

GlobeSt.com: You have said that multifamily is becoming an increasingly difficult asset class. Tell me what you mean by this.

Max Sharkansky: Everyday that goes by, we are seeing more competition in the market, driving down yields, as well as a scarcity of inventory. We are starting to see a lot of investors who are new investors that don't have the experience of downturns and might not be pricing certain risks into deals. For example, we have seen a lot of rent control product trade at extremely low cap rates, where in our opinion, people aren't pricing in the risk of the uncertainty of turning over the units. There is not a dwindling demand. We are seeing more household formation, and it is extraordinarily difficult to get a home loan, and there is still a lack of supply here in L.A., and I would say a lack of supply in every primary market along the West Coast, creating huge rent growth, low vacancy and the perfect scenario for strong multifamily fundamentals.

GlobeSt.com: Isn't that pretty risky?

Sharkansky: I think that you have investors that are either new to the business or are having short-term memory loss and aren't pricing in some of the risks that are associated, especially in our space of value-add investing. We are looking at where some of these deals trade and it seems like there is almost no premium for creating the value. Investors are buying properties assuming that the value has already been created, but they still have to do the work of creating the value, so a lot of the risks have been priced out of the market.

GlobeSt.com: Are lenders willing to lend on these riskier deals?

Sharkansky: We are seeing several recourse and non-recourse bridge lenders out there lending on properties at a sub 1.0 debt service coverage that are rent controlled. There is a huge risk there, especially in the last cycle when we saw rent controlled assets that were over-leveraged go back to the lender because they weren't able to turn units. Generally speaking, I don't think we are remotely close to 2007, other than maybe that one silo of the market where you are seeing very aggressive lending and price levels on rent controlled assets. On a broad level, fundamentals are still very strong in the capital markets and not close to where we were in 2006 or 2007, where you were seeing 90% plus leverage with extremely low debt-service coverage ratios.

GlobeSt.com: Are you seeing capital move out of multifamily for this reason?

Sharkansky: Not more so than usual, other than maybe what you always have in the marketplace, which is a lot of mom and pop investors trading out of legacy assets into lower management intensive assets, like single tenant net lease. I am not seeing an exodus of capital into other asset classes.

GlobeSt.com: What is your strategy in this tight multifamily market?

Sharkansky: We rarely look at rent control assets anymore, specifically for the reasons that we discussed. If we are going to buy a property at a 3% cap rate, I would rather buy a property that is non rent controlled and have certainty of execution and know that we are going to get something close as opposed to the pro forma cap rate that we are underwriting as opposed to a rent control asset where we just don't know where we are going to get the yield to because we don't know who is going to move. We are primarily buying non rent controlled assets in primary markets. In the last year, we have bought in Highland Park, Culver City and Portland. In the evolution of our company, we have gone from buying not just value-add assets but value-add assets in value-add markets.

GlobeSt.com: What is the difference in yields that you would get in a core market of Los Angeles versus one of the gentrifying markets where you are finding deals?

Sharkansky: There is a 50 to 100 basis point delta between the core markets and the gentrifying markets. In our opinion, that is a no brainer because not only are you getting a little bit of extra yield but you are getting more opportunity for growth. You are going to see a lot more rent growth in markets that are feeding into the core markets submarkets.

GlobeSt.com: Like many value-add investors, you have a three-to-five year hold period on your investments. Are you nervous, at this point in the cycle, to underwrite multifamily for three-to-five years?

Sharkansky: We still feel that in the next five years we will see a tremendous amount of rent growth. With regards to the cycle, we feel that there will probably be some sort of technical recession in the next two to three years, and it will probably be something more along the lines of 2000 and 2001 than what we saw in 2008 and 2009, which was more of a crisis. We think that it will be more of a blip, and we think that the actual real estate cycle has five to six years to run.

GlobeSt.com: What is your 2016 forecast for multifamily?

Sharkansky: My forecast is that we are going to see more of the same. Fundamentals are strong; we are seeing more household formations and we still haven't seen much movement in the single-family lending market. It is still extremely onerous to obtain a loan, especially for a first time buyer. All positives for multifamily operational fundamentals.