Walker Webcast: When Will it End? W&D Experts Discuss Financing Challenges
Panelists participating in the Dec. 7, 2002 Walker Webcast presented a mixed bag on issues including financing, housing and affordability. Joining moderator Walker & Dunlop chairman CEO Willy Walker were corporate colleagues Ivy Zelman (CEO of Walker & Dunlop’s Zelman & Associates), Kris Mikkelsen (Managing Director and COO, Investment Sales) and Aaron Appel (Senior Managing Director, Capital Markets).
Perhaps unsurprisingly, the webcast launched with grim news due to Zelman & Associates’ October 2022 transaction survey. Stringent underwriting requirements combined with conservative rent assumptions and elevated costs of capital prompted Zelman to point out that “it feels like the transaction market has come to a bit of a halt.” MIkkelsen agreed, indicating that “it’s been an exceedingly challenging six months.”
Construction is especially hurting when it comes to financing, Appel commented. “There’s not an abundance of liquidity in the development space whatsoever,” he observed. He added that sponsors in the construction space these days must guarantee project completion, good location and equity to obtain loans.
But there is a light at the end of the tunnel. Sort of. Mikkelsen explained that his area had generated approximately 40 transactions since early November, at an average transaction size of $55 million. “We’ve priced about a dozen assets, and we’re starting to see a bit of a floor forming on pricing,” he added. Appel also pointed out that some asset classes are attracting financing, especially core-plus and value-add multifamily assets. There is plenty of liquidity, “it just costs more. I think it’s a cost-of-funds issue relative to what value people want to pay.”
Zelman also explained that the 10-year Treasury is rallying, while cost of debt is somewhat starting to come down. “I think there might be some signs of price discovery, and maybe a slight increase in (transactional) interest,” she said. “We’ll have more to say with the November survey.”
So where is the smart money going these days, Walker asked his panelists. Mikkelsen told the story of one buyer that recently closed on a multifamily asset with a 35% discount off peak pricing when put under contract in March 2022. “I have no idea what rents are going to do in that market over the course of the next three to five years,” he said. “But it’s a great neighborhood, in a growth market with high in-migration and a ton of employment growth,” he said. “(The buyer) achieved a phenomenal basis in the right location, and they’ve got the ability to hold that asset for the next 5 to 10 years. I think that’s a pretty smart play.”
Zelman’s smart money focused on mergers and acquisitions. Specifically, “taking advantage of the weaker players in the market that aren’t well-capitalized,” she said. Her example was DR Horton’s recent acquisition of regional homebuilder Riggins Custom Homes in Fayetteville, AR. “I image they probably got this builder at a pretty attractive price,” Zelman added.
Appel’s smart money target is multifamily, especially that acquired at break-even leverage of today’s rates and “locks in what I would deem to be seven-year financing with the ability to get out after five.” Yes, the Federal Reserve will continue raising its effective federal funds rates. And that is bringing many interest rates well above SOFR. But that won’t last forever.
“The Fed cannot hold rates at a high, high level for an extended period of time, so it’s a waiting game,” Appel said. “If you can buy a break-even leverage in good rental markets where there’s going to be demand drivers and eventual employment drivers back on the horizon and some level supply constraint,” I think you’re going to be a huge winner five to six years from now.”
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