AUSTIN, Texas (July 13, 2023) — Scott Lamontagne, Northmarq’s national director of development services, recently spoke with Texas Real Estate Business in an article titled, “Multifamily sales volume slips across Texas,” focusing on the dip in multifamily investment sales activity across major Texas markets in the first half of 2023.
“In some cases, especially for the rare Class A transaction today, the dearth of product in the market is actually creating a competitive environment that’s keeping cap rates artificially low,” Lamontagne said. “That should eventually level out as merchant developers hit the transactional market. But right now, cap rates on Class A deals in Austin are in the low fours because these buyers don’t have other options right now.”
When more economic stability returns to the market, watch for institutional capital to be more aggressive. It’s a group that’s known to be in the market for choice asset classes like multifamily.
“From an institutional and fund perspective, retail is flat, hospitality still has a black eye from COVID and there’s not enough industrial on the planet to meet the demand of these massive funds,” Lamontagne said. “So multifamily is really the only place they can deploy and scale. We’re also hearing about re-balancing in the pension funds and life companies nearing completion, which will allow those groups to get back into the market.”
There may be some opportunistic buyers in the market today, and unlike sellers, the buyer side tends to exhibit more group-think behavior. Buying a property in the low fives or high fours today would likely establish moderately negative leverage, and a buyer’s going-in cap rate would be below the all-in interest rate.
“Buyers are still accepting some negative leverage, but the more well-heeled, institutional capital wants and expects to be at neutral or positive leverage within 18 to 24 months max,” Lamontagne said. “They need to believe in the trajectory (of the rent growth) to accept negative leverage. And while brokers or sellers might currently be underwriting 5% to 5.25% cap rates, the reality is that because there are so few deals and so little transactional velocity right now — especially in the Class A space — those numbers are somewhat propped up.”
As for leverage ratios on their loans, Lamontagne said that regardless of where trailing cap rates are, 65% loan-to-value is about the minimum threshold for private capital sources to do a deal.
Financing for construction
In terms of construction, regional banks are tending to be the go-to source for financing.
“There has been a lot of talk about difficulties in getting construction debt, and there is a fallacy in the market right now that banks are not lending on new construction,” Lamontagne said. “Banks have finite buckets of capital, which is usually a percentage of the total available dollars to loan out. But right now, developers are extending loans or going into mini-permanent finance structures — so capital isn’t available for redeployment.”
“On top of that: Overall deposits are down at a lot of banks, and since banks lend at a multiple of their deposits, there’s fewer total dollars available to be lent out across all service lines,” he continued. “That’s where the pressure on construction lending is coming from, not them being entirely out of the market. Regional bank failures aren’t great for overall market sentiment, but they aren’t punitive to multifamily beyond the construction lending space.”
Topics covered in the article include:
- What could change in the market.
- Buyer sentiment.
- Construction concerns.