Connect Apartments in Los Angeles dove into the trends, sources and strategies surrounding multifamily market investments. Recaps of the conference include the overall takeaways from all panels here and the institutional capital panel here.

Today, we take a look inside the capital stack to better understand how 2017 has fared financially, find out what surprises popped up and explore what was expected. Top leaders, representing a variety of capital, reflected on what they have seen, where we’re going in 2018, and what it takes to get a deal done today.

George Smith Partners’ Gary Tenzer says they are seeing a flood of debt coming through the door, though they are not seeing people do “stupid” deals. Lenders have money, but “2008 still rings true and conservativism prevails.”

Wells Fargo’s Dan Borland says the bank’s investment strategy is set up for the next downturn. He noted 2016 was a high point for investments, though expects to complete fewer acquisitions in 2017, as a result of a movement in borrower leverage and debt yields that have gone below the bank’s standards. They are doing “more A/B structures to get deals done” and have noticed they’ve “lost deals to higher leverage options.”

CapitalSource’s Jason Baker notes there’s been remarkable discipline in the marketplace, as lenders have learned from past mistakes. The approach is more about living to fight another day. He says there’s been “good subordinate debt to fill out the capital stack.”

Though Mesa West’s Brandon Bachner notes they used to be one of 10 in the late 2000’s in the market, but now more players have debt funds, which is the primary capital available in the space. That’s helped push price points up so that when the deals come in, they are “so much higher that the math just doesn’t work.” Bachner predicts those who stretch into secondary and tertiary markets will face more volatility in a downturn.

RealtyShares’ Bill Lanting says he’s seeing some rather “aggressive deals in our space,” but since they aren’t a debt fund, there’s still discipline in the institutional space. He notes, it is “alarming to see so many cranes” in markets like Downtown Los Angeles and San Francisco, though.

Walker Dunlop’s Mark Grace notes the housing demand and affordability issue isn’t likely to be resolved anytime soon in California. The “lack of development is a thematic problem we’re going to see” for awhile, partly because it is “tough to build in California. I’m not sure if we’re ever going to catch up.”

Another issue Wells Fargo’s Borland sees is the increasing cost of labor and materials that “went out of control the last few years.” It is causing “equity events” to be triggered now, often “midway into deals.”

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