San Diego Multifamily Summit Recap – Part 1

Integra-Multifamily-Appraisal-San-DiegoOn July 16th, Eric Schneider, MAI and Joseph Rizzo attended the 2nd annual San Diego Multifamily Summit put on by Bisnow. Several San Diego apartment trends were discussed by two panels: a lending and a development panel. In this two-part recap, we summarize what each panel discussed beginning with the lender panel.

What trends are we seeing in the San Diego multifamily lending market?

One of the major changes that has occurred recently is that lenders are more active in providing financing compared to three to four years ago. There has been a resurgence in loans for construction, mezzanine financing,  private money, and full non-recourse loans. Additionally, borrowers that have been previously foreclosed on are no longer considered to be automatically rejected for a loan; instead, lenders are more interested in the reputation and character of the borrower. Lenders are also interested in the story, or why they were foreclosed on in the past. They are not concerned about over-building, but rather financing a sound project.

Another trend is that, based on the panel’s recent experience, there is more capital “chasing deals” than there are actual transactions. Whereas a few years ago it was difficult to finance a good deal, lenders are now in competition with each other, with lenders even competing over construction lending.

What are some current and future concerns with multifamily lending?

As far as concerns, one that was highlighted was that rents are currently outpacing economic growth, which means that it may come to a point where renters are not able to afford the apartments being built because wages have not increased. That being said, the panel’s consensus was that lenders are closely watching what is happening in the economy, and that the borrower should be concerned about deals making financial sense in the long run. For example, a deal may make sense if capitalization rates continue to be low, but what will happen when interest rates increase? Will the deal still make sense if apartment properties are not selling at a 4% or 5% cap rate?

Outlook and Summary

Each of the panelists were asked what is going to happen to interest rates in the next 12 and 36 months. All generally agreed that interest rates will increase, but they were uncertain as to how much. Compared to historical numbers, the interest rate has remained relatively low following an economic downturn, so they were unsure how interest rates would be impacted in short run and in the long run.

For now, the lending market continues to improve with more available financing options compared to a few years ago. While borrowers will benefit in the short run with lender competition, lenders are concerned with how long these types of deals will last, especially considering that interest rates are expected to increase in the near future. Though market conditions are positive, borrowers need to be considering both the short term and long term effects of their deals.

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