A Q&A Session with Ivan Kaufman and Sam Chandan on multifamily construction, lending and the small balance apartment sector.
For over 20 years, Arbor has helped multifamily real estate investors achieve their financial goals. In March 2017, Ivan Kaufman, Chairman, President & CEO of Arbor, sat down with Sam Chandan, Silverstein Chair of the New York University SPS Schack Institute and Founder of Chandan Economics, for an in-depth conversation on the state of the multifamily market. Here is the second part of that conversation.
(The following is excerpted from the March 10, 2017 episode of The Real Estate Hour, a weekly SiriusXM Business Radio show powered by the Wharton School of Business. The text below is edited for clarity and brevity. You can listen to the full show by clicking here, or read the first part of the Q&A by clicking here.)
One of the things that I’ve been hearing from colleagues is a sense that some of the major construction lenders — particularly regional banks and larger community banks — are beginning to tighten up on standards. Have you seen real change in the availability of construction loans?
The appetite for construction lending has changed dramatically. There are very few lenders who are active in that space, and the advance rates for construction loans have gone down significantly. You used to be able to borrow at 70%, perhaps sometimes 80% of value — that’s now down to the 50% to 65% range.
The number of lenders went from around 15 active lenders down to 3 to 5 lenders. So there’s clearly a shortage of construction lending from the commercial banking industry. A lot of that is being made up by the private sector now. You have many private firms such as Arbor who are now more actively engaged in the construction lending business.
With loan to cost numbers down to the 50% range and data showing meaningful increases in underlying construction costs, it’s got to be getting a little bit tougher to build. That has to be acting as a headwind to the pipeline.
Add in rising land prices as well. It is much more difficult to build and deliver in today’s climate.
We’ve talked about the national level, but when we’re looking at the apartment market on a local basis, where are you seeing the strongest gains in property income?
The gateway cities — whether it be New York, Los Angeles or San Francisco — have shown tremendous demand. There has also been a lot of building. Still, there are great fundamentals.
It’s interesting because everybody is waiting for the shoe to drop, to see that perhaps there is too much unit delivery. But these markets are still consistently tight. We’ve been reading that there are now rental concessions for the first time this cycle in New York and some other gateway markets due to supply. But the absorption is still strong overall.