CHARLOTTE, N.C. — In its first-quarter report, property management research firm RealPage stated that the “supply wave for multifamily was cresting” as the U.S. apartment sector set a record in terms of units absorbed (138,302), outpacing deliveries (116,092). A year prior, RealPage reported that deliveries (135,652) outstripped absorption (103,826) in first-quarter 2024.
Will Block, partner and co-founder of Olympus Development Co., said that the flip in the U.S. apartment market’s supply-demand dynamic the past 12 months has made all the difference in terms of lenders’ perception.
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“It couldn’t be more different what it looked like a year ago trying to capitalize deals in tertiary markets,” said Block. “Last year we would call 50 lenders with the hope of one to get to do it at terms that we didn’t like with ridiculous deposit requirements. I probably get four or five cold calls a week from bankers now.”
Block’s comments came during the development panel at InterFace Carolinas Multifamily, an annual networking and information conference held on May 21 at the Hilton Charlotte Uptown. Kevin Kempf, executive vice president of institutional multifamily properties at CBRE, moderated the discussion.
Other panelists agreed with Block that lenders have changed their tune in terms of financing multifamily development deals.
“Lenders are back,” said Wyatt Dixon, founding partner of Proffitt Dixon Partners.
Dixon told a quick anecdote about a happy hour he attended with a group of lenders, most of whom were worried about how their business activity was going to “get worse later.”
“What I’ve realized is ‘worse’ for them is more non-recourse loans, higher leverage and things like that that we as developers might push for,” he said.
Alex Eyssen, senior managing director of the Carolinas at Mill Creek Residential, noted how leverage is changing in recent months for construction financing.
“We were dealing with 52 percent loan-to-cost underwriting last year, but it’s now around 57 percent,” said Eyssen. “We would love to get back to 65 percent LTC soon, and I think we probably will.”
Michael Tubridy, senior managing director of Crescent Communities, said that lenders are showing favorable leverage underwriting to established developers that are working with experienced general contractors and architects.
“But the big difference is that there’s still debt out there for those groups that aren’t experienced,” said Tubridy. “Last year that was impossible.”
Equity is Selective
The development panelists said that borrowers have come to terms with interest rates being “higher for longer.” The secured overnight financing rate (SOFR) is currently at 4.39 percent, which is almost 100 basis points below where the short-term rate stood a year ago (5.33 percent) but well above early 2022 levels when SOFR was basically zero.
The developers noted that equity providers are hopeful that interest rates will come down more in the next six months or so, which Tubridy noted is exactly the same sentiment as a year prior, only last year it “seemed like a certainty” that interest rates would fall over the ensuing 12 months.
“I’d say the overall tone of equity providers today is hopeful, but not active,” said Tubridy.
The panelists said that their equity partners have been skittish due to rising costs stemming from tariffs of certain construction materials and with U.S. trade partners like China and Canada. Tubridy said that with higher costs of capital and construction costs, equity groups are being very selective in terms of the development deals they’ll capitalize.
“We’re essentially out there unicorn hunting,” said Tubridy. “The equity groups have 40 to 50 deals stacked on their desk, and to rise to the top, your deal has to check every single box.”
Block said that Olympus Development specializes in developing in tertiary markets, which limits the pool of equity providers already. He added that his firm has found success in forming joint venture partnerships with groups that are new to the multifamily sector.
“They have a need to deploy capital so they are looking at deals that will pencil out,” said Block. “They’re looking at deals I begged them to look at three years ago.”
Tubridy said that developers are having to get very creative in forming their capital stack to capitalize developments that aren’t cookie cutter. He gave an example of a development in Chapel Hill, N.C., that Crescent Communities recently developed.
“We did 30 percent of the equity on our balance sheet and another 35 percent came from a Japanese equity partner, with the remaining equity coming from another Japanese partner,” said Tubridy. “Then we sourced our debt from a bank in Spain. It’s a global effort to get a deal done outside of that perfect box.”
Entitlement and Rezoning Headaches
The development panel shifted its focus in the latter half of the discussion to entitlements and working with municipalities on rezoning sites for multifamily developments. CBRE’s Kempf said that seemingly the cities or submarkets that need the most housing are the ones that are most challenging to get projects approved.
Eyssen said that Matthews, N.C., was notorious in its resistance to approving multifamily housing. He said that in a 10-year period, the municipality only approved three communities totaling 900 units.
“That sentiment hasn’t really changed,” said Eyssen. “In some markets it’s very challenging to get the entitlements. There are de facto moratoriums in certain markets where we need to be building.”
Jay Schaefer, vice president of Flournoy Development Group, said that even markets that have historically welcomed apartment developments are now pushing back.
“There is obviously a need for housing in a lot of these communities,” said Schaefer. “It’s just not that popular to approve a development without any caveats that go with it,” referring to affordable housing components.
Schaefer said that Flournoy Development had a rezoning request for a project in Charlotte recently that was pretty straightforward, but the entitlement took 14 months to approve.
Tubridy said that the entitlement process is very time consuming and thus expensive, which is another hurdle for equity partners to jump through. He added that municipalities are putting in more gray area with their language in their planning ordinances as well, which adds to the uncertainty that developers are facing.
“It makes it almost impossible for us to go through an expensive, long entitlement process right now, when we really can’t get an LP equity partner on board to share in costs with us and commit to the deal,” said Tubridy. “We have no idea at the end of the entitlement process where the world is going to be.”
Block said that with all the development in the Carolinas in recent years, any new development is going to have a lot of problems to work through.
“Every deal is a headache,” said Block.
— John Nelson