Pace of Apartment Construction Slows Due to Growing Supply, Cautious Bankers, Say InterFace Panelists

Press Release

By John Nelson, REBusiness Online

The multifamily industry has entered a phase in the development cycle where the velocity of starts and completions is decreasing. Through the first 10 months of 2016, multifamily starts nationally are down 1.8 percent year-over-year, according to the U.S. Census Bureau and the Department of Housing and Urban Development. Completions are down 3.1 percent during the same period.

One of the governors on construction today is the ample supply of existing multifamily product in the top markets nationally, according to the development panel at the seventh-annual InterFace Multifamily Southeast conference. Alan Dean, region president of multifamily development firm Terwilliger Pappas Multifamily Partners, cited Nashville as an example of an overheated market.

“Nashville delivered a record 5,300 units in the past 12 months. Next year, they’re going to deliver 10,000 units,” said Dean at the conference, which was held on Thursday, Dec. 1 at the Westin Buckhead in Atlanta. “Nashville in large part has been redlined by the financing community because of those supply numbers. Looking at it, it’s probably a healthy thing that the pipeline is slowing down and banks are pulling back.”

Michael Blair, managing director of development at Atlanta-based Pollack Shores Real Estate Group, doesn’t believe overbuilding is the main culprit for the slowdown in starts and completions.

“Existing supply is definitely a factor in the slowdown of apartment construction, but I’m not sure if it’s the smoking gun on why development won’t continue its pace,” said Blair. “Supply is a little more of an indirect governor; directly it’s more about the lending climate.”

The panel agreed that obtaining construction financing from banks has become a major hurdle to clear and that developers are having to adapt to the current lending atmosphere. Jennings Glenn, chief financial officer of mixed-use development firm Kane Realty Corp., joked during the conference’s Carolinas Market Update panel that it’s become obvious to him that the banks have pulled back in recent months.

“We have a stable of 10 to 15 banks, and I could tell things slowed down by the number of lunch invites I got from the bankers,” said Glenn. “I’ve lost a few pounds in the last few months because I haven’t gone out to eat as much with the bankers.”

Partnering with other capital sources early on is one way developers have been able to get deals done. The financing component of development has become much more collaborative in the multifamily space as banks seek out other capital contributors to help minimize their risk and exposure.

Bennett Sands, development director of Atlanta-based Wood Partners, said that his firm has developed relationships with smaller banks that are seizing the opportunity to underwrite a $5 million to $10 million piece of a construction loan.

“Bigger banks are building in syndications in their term sheets. They’ll do the deal, but they need to syndicate a piece of it,” said Sands. “We’ve been meeting with smaller banks so that when the big banks come in and indicate that they need to do a syndication, we can have those smaller banks lined up.”

Sands said some banks will only do one or two deals at a time with developers, making it difficult to get multiple developments off the ground. If those banks changed those policies, the multifamily industry could see a swift increase in starts, according to Sands.

“A lot of these artificial governors could go away quickly. With institutional banks, it’s a dollar amount. They can arbitrarily change it overnight, and we could see our production ramp back up accordingly,” said Sands. “All it takes is for one or two of these banks to loosen the strings, and all of the sudden our production is back to where we’d like it to be.”

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