Cash Flow Reigns King in Small Deal Multifamily Sector

By Dennis Kaiser

Connect Apartments brought together more than 350 attendees in Los Angeles for a full day of CRE conversations and networking. Six deep-dive panel discussions featured some of the U.S.’s top CRE leaders who shared insights into the still-hot multifamily market.

The Small Deals ($1M to $20M) panel featured a group of owners, lenders and brokers who discussed financing, investing, building and value-add. With cash flow reigning king, these expert panelists shared how the smaller deals are leading the market, and what lenders are doing to accommodate the small loan deals that make up the bulk of the market.

Greysteel’s John Mullen noted “that new high net worth investors continue to enter core markets seeking less risk, while others have sought higher yields in secondary and tertiary markets.” He added, the biggest factor driving the small deal sector is the spread between bid and ask. He pointed out the situation is reflected in two market views, with some believing the market has “not crested,” while others are saying “yes, the market has crested.”

Prices have gone up and Mullen says “sooner or later it has to stop.” Among the factors clouding the horizon are tax returns that are still taking shape, and the market is still getting used to a “normalized” interest rate situation, while adjusting to a “lack of assets to trade into.”

Matthews’ Dave Harrington says, “demand still exists,” though noted single asset sales year-over-year are down 18% on transaction values, while garden-style MF assets are 20 BPS lower and the average cap rate in Los Angeles is 4.2%. They are now seeing extended escrow periods to accommodate uplegs, with private buyers making up 64% of deal flow nationally and 62% in L.A. He points out that so far no major portfolios have traded, though that could be on the horizon. “There’s a lot to be positive about. 2017 has been a year of stability,” Harrington says.

Greystone’s Ana Ramos says they are seeing more cash deals with refi’s planned later, as buyers who have capital bring it to the market, often buying properties ‘as is.’ She notes the buyers who moved from the single family home flipping market into multifamily properties found the going more complex. Lenders typically require them to put a property management firm in place or look for higher leverage.

Positive Investments’ Srinivas Yalamanchili notes they’ve completed 100 acquisition deals this year, but it has gotten competitive and so expensive in L.A. that they now look at deals in secondary markets, such as the Inland Empire. He says deals are still getting done. Though with prices so high, it has changed from a time when they received 10 offers, to one when properties that sit longer are only generating one or two qualified offers, typically an exchange buyer. The smaller buyer today is generally looking to trade small properties for a larger one.

Hunt Mortgage Group’s Mark Besharaty says they are seeing all cash buyers in this market, but for those envisioning short holds or looking to flip properties, it will be “tougher in this market.” That’s especially in tertiary markets, he points out, and it will likely be the “deeper pocketed buyers who will win.”

Besharaty notes today’s market is “higher than before the last frothy market,” which evokes caution, as LTV is less important and it is “all about cash flow.”

Previous, recaps of the conference included the overall takeaways from all panels here, the institutional capital panel here, a look inside the capital stack here, a conversation with Freddie and Fannie here, development panel here, deal flow and dealmakers discussion here.

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