Capital drives the CRE industry. Without it, projects don’t get built and transactions can’t be executed. Virtually every conversation among those in the business includes a discussion on where capital is coming from, where it is landing and what types of investments are favored.

The institutional capital panel at Connect Apartments in Los Angeles dove into the trends, sources and strategies surrounding multifamily market investments. Connect Media is recapping each panel in the coming days, and shared the overall takeaways from all panels here.

While there was consensus agreement among panelists that capital is available, how long the tap will remain on and the ways it is being deployed are less certain.

Cushman & Wakefield’s Marc Renard notes he just returned from meeting with a group of pension funds and REITS in Chicago where it was clear there is significant capital available at “good pricing for core plus or value add sectors.” Yet, investors appear to have a “psychological impediment” to deploy capital as a result of being eight years into a recovery that is translating into a view that it may be too late in the cycle. Despite strong supply and demand market fundamentals remaining in place, investors are adopting a defensive orientation to their investment strategies today.

The Praedium Group’s Robert Murray agrees that he has concerns that it is later in the recovery and real estate cycle, thus the company tailors investments to that condition. Typically, that means seeking higher quality properties, securing liquidity mobility and applying less leverage than before, typically in the 65% range.

Murray notes their focus is on in-place cash flows. It is a more defensive position based on income to rent ratios. He points out that given the cyclical nature of the business, a correction event is inevitable, which is leading to more caution. Cap rate compression is “troublesome” to Murray, especially when considering high quality assets to inferior products. “It feels like a zenith-like values,” said Murray.

CIM’s John Bruno says the last nine months have seen debt more aggressive after seeming to take the pedal off the gas last year, which now gives him reason to pause. Yet at this late stage of the cycle, they aren’t seeing concerns in their portfolio on the front end.

Given the outsized returns generated between 2011 and 2016, Renard wonders how those “jaded outlooks” will fare against a potential recalibration to historic levels.

CityView’s Sean Burton says investors got used to higher returns, but now he’s seeing some mismatched expectations on future returns, particularly from offshore or smaller invstors. Public pension funds do have patience and long views, and aren’t expecting 30% returns, notes Burton. 

For Greystar’s Shawn Hansen, the niche the firm historically focused on was value add, but he notes it has increasingly become more “challenging the last few years to find opportunities.” That’s led the Charleston, SC-based company to seek investments in diverse geographic markets, as well as in new niches such as active adult assets or in the student housing space. Another approach for Greystar is to explore second generation renovations at properties that may have recently undergone improvements. “We’re going back in and spending more money,” said Hansen.

Cushman & Wakefield’s Renard points out that a version of that value-add approach is being deployed at a recent deal in Los Angeles involving 8500 Sunset Boulevard. The recently-completed 190-unit multifamily complex on WeHo’s Sunset Strip is envisioned to be converted to an upscale extended-stay property.

Bruno notes, it is tough to get deals to pencil as a result of the cost movement on the development side. Increasing costs is a growing concern impacting projects. Burton notes it is “frightening” to see construction costs increase 4% to 7% year-over-year, amidst a tight labor market that’s resulted in shortages. The rebuilding effort from the most recent hurricanes in Texas and Florida will only exacerbate the situation, Burton predicts.

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