by Dan Rafter
It’s no secret that a multifamily building boom is taking place across the country. At the same time, a growing number of people are choosing the rental lifestyle, especially targeting multifamily units located in the center of busy urban areas.
But what do developers, owners and investors need to show commercial lenders to earn the financing they need to build new apartment towers, renovate older ones and acquire new properties for their portfolios?
Not surprisingly, it comes down to the basics: Lenders still prefer financing apartment projects located in the middle of thriving communities. They prefer working with developers and owners who have a long track record of success. And, of course, they’ll take a good look at the actual plans that developers and owners have for the properties they are building, acquiring or renovating.
Consider what Allan Edelson, managing director with Walker & Dunlop, considers when faced with multifamily financing requests.
“When we look at an acquisition, we want to know what the new owners plan to do with the property,” he said. “Where do they plan to make upgrades? Are they upgrading the units? Are they putting in new kitchens, new clubhouses? We also look at what impact they think their plans will have on in-place rents. If they plan to invest $10,000 a year into their property, what impact will that have on the monthly rents?”
Edelson said that Walker & Dunlop is most likely to provide financing to owners and investors whose renovation plans will take a property that is at one level and move it up a full or half notch to the next. For instance, Walker & Dunlop likes working with investors who plan to take a Class-B apartment property and make the improvements that will turn it into a Class-A building.
What Edelson doesn’t like to see, though, are owners who, after making their improvements, try to raise their rents by too much. Walker & Dunlop doesn’t provide financing if they think owners or investors want to charge rents that are too high for a building’s amenities or services.
“We don’t like it when owners tell us that even though no one is paying as high a rent for what they’re providing that they think people will be willing to do it after their changes,” Edelson said. “We don’t like taking that kind of chance.”
Walker & Dunlop today is providing plenty of financing dollars to owners and investors who are planning large rehabs of existing apartment properties.
But to qualify for this financing, these borrowers need to prove to Walker & Dunlop that they have the experience necessary to successfully complete the renovation and, once the improvements have been made, effectively operate their newly rehabbed properties.
Too much luxury, not enough affordable?
Edelson said that he is seeing an interesting dichotomy in today’s apartment market. A majority of new projects, especially in big cities, are targeted toward the high-end, luxury buyer.
“Renters who can afford the luxury projects are getting a lot of choice today,” Edelson said. “But the majority of renters can’t afford these units. And even the rents that they can afford have been rising steadily.”
This dichotomy is especially prevalent in downtowns, Edelson said. A growing number of renters want to live in the center of cities where they can walk to public transportation, restaurants, grocery stores and entertainment options.
The shift toward high-end multifamily hasn’t been as pronounced in suburban areas, Edelson said. That’s because renters in the suburbs are often looking for better value for their dollar when choosing an apartment unit.
“I do worry a bit that we are getting too much Class-A new product,” Edelson said. “The Class-B and Class-C apartment market is not yet overbuilt, though. I worry most that rents have gone up so much since the recession while the income of the average person has not. I worry about at what point you can no longer raise rents because you are taking in a disproportionate share of people’s income. The best thing that could happen in the multifamily world is for people to get real wage growth on an inflation-adjusted basis. We haven’t seen that in a very long time.”