by Dan Rafter
The apartment market remains red-hot across the Midwest. DJ Effler, senior vice president in the Columbus office of Bellwether Enterprise Real Estate Capital, sees this up close. His thoughts? He cites this as a golden age in the multifamily market, one that we won’t likely see again.
Midwest Real Estate News: I’m sure you’re getting plenty of requests for apartment financing today. How strong does the multifamily market remain today, and are you worried at all that some markets are going to see too many new apartment buildings?
DJ Effler: The apartment market is still the most active part of the commercial real estate finance market today. Are there any concerns about overbuilding? New supply is obviously the first thing that lenders and capital sources point to as far as questioning the longevity of this cycle, as far as determining the sustainability of rent increases and lower vacancy rates.
There are going to be some pockets that get overbuilt. It is naturally what people do. If the capital is there to continue to build and the market continues to look tight, there is always going to be product that will be delivered that will cause the growth cycle to slow down a little bit and the vacancy rate to pop up.
MREN: Should we be worried about the possibility of overbuilding in the multifamily market?
Effler: I’m not one who thinks that this is the biggest concern out there, that we are coming into a big slowdown of the multifamily market. I have a macro view. The first thing I ask is, ‘Where is the capital flowing and why?’ The stock market has fatigued many different investors. Commercial real estate investments in general, though, are in a sweet spot from a returns perspective. Commercial real estate is a tangible asset that generates real cash flow that people can understand. There is more capital today flowing toward these tangible assets.
The real estate world and multifamily is the big beneficiary of that. It is really about the scarcity of other income-producing assets being available. So do we get overbuilt a little bit in specific submarkets? Sure. Do I think that this will cause a huge correction in the multifamily market? Absolutely not. The fundamentals of capital flow and people’s search for yield outweigh the threat of overbuilding in specific submarkets. We are in the middle of the strongest golden age multifamily cycle that we will ever experience as investors. I don’t see it ending anytime soon.
MREN: You work out of the Columbus market. That seems to be a particularly strong market for multifamily right now.
Effler: Columbus is adding 25,000-plus jobs a year right now. We have a quarter of our population between the ages of 20 and 34. We are popping up on lists like Forbes’ top 10 cities for young professionals. National Geographic is writing articles about why all the cool kids love Columbus. After New York and Los Angeles, Columbus is home to the third-most fashion designers in the country. We are under 4 percent unemployment here. So it’s no surprise to me that the multifamily market is so strong here.
MREN: How much of Bellwether’s business these days is made up of multifamily financing deals?
Effler: In 2015, 50 percent of our $4.5 billion in financing was multifamily. I think it will be an even higher percentage this year.
MREN: What do you look for from borrowers when they do approach you for financing?
Effler: I like to tell our clients that we are painful to deal with on the front end from a due-diligence-gathering perspective because I want the process to move as smoothly as possible once we take the applications and move toward closing. We do a little more front-end work that provides a tremendous amount of benefits at the back end.
We are requesting all the things that a typical lender will request upfront: rent roll, operating statements, cost of the project. We do due diligence on the borrower. But what we really work hard to understand is the borrower’s investment thesis and the story behind the deal. That way, we can properly articulate the opportunity to all of the different capital sources and eliminate the surprises at the back end.