Q&A: West Coast Multifamily Finance Director

I don't see too many Real Estate Q&As so I thought I'd give it a go. Happy to answer any questions related to MF real estate, financing, path, etc.

My Background: Graduated from a semi target school and sort of fell into a real estate consulting role at a boutique consulting firm that advises state pension funds (CalPERS/CalSTRS, etc.). I spent 3 years there before hopping to a west coast focused multifamily PE firm focused on development/value-add where I moved from an associate to VP, to Director. The firm gets its money mainly from pension funds but has several strong JV relationships with insurance companies and top REPE firms. Ask Away!


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This is a bit dependent on what type of deal you're looking at. Overall I'm a net seller on California at the moment given the regulatory risk coupled with what I see as a longer recovery than most. Also I'm not seeing people run for to the hills as much as you would expect. The big players that are focused on headline risk have paired back, but there is still a ton of capital out there chasing deals. I put together some thoughts on the main product types we look at:

Core Urban: Rents at the properties we manage have fallen 25% or more, several assets are in forbearance as they can't pay debt, and likely won't be able to cover debt service for at least the next 6 months depending on how our trade outs look. This type of decline has not been reflected in pricing and until it does I think the risk/reward dynamic is more tilted towards risk as most sellers are well capitalized enough to just wait this out. I also think rents will take longer to come back than If you look at what happened with rents during the dot com boom it took over a decade for rents to come back. I don't think it takes that long, but most owners are patient and won't sell for pricing that would make sense based on asset performance. 

Value-Add: On the other hand, the competition on value-add/core+ multifamily deals is so strong right now that a lot of the competitors we were seeing on core deals have decided to go and buy core+ deals at core cap rates. We'll see how long that lasts with interest rates, but LIBOR is still low, and most banks were putting in 1% floors anyway. All of that means that the pricing on these deals is higher than ever. 

Development: The costs are too damn high. Pre-COVID rents barely justified construction, and construction costs haven't really changed. Until you see a major slowdown in projects starting (which is happening now, but will take some time to work through the system) you won't see costs come down. I see development tapering off over the next year (relatively, will still be happening, just enough of a slowdown for labor costs to come down) and you'll get a brief dearth in supply that will spike rents back up.

 

Cool, thanks for the response. As you point out CA is just so broad its hard to pin down into generalizations. I think if you're near the beach or within a 30-45 minute commute to major centers those prices will always hold, gradually declining thereafter based on distance. There i just a finite amount of space and its a depleting resource. That said there are tons of areas that are just expensive with horrible commutes that can fade away. 

 

Like you said, very firm/market dependent and depends on what type of firm you're talking about too. My two cents is that it'll be when on-campus schooling begins again, though the Blackstones of the world will probably have a normal recruiting cycle. For mid/lower tier firms you may see a pause until they've raised new capital. All of that said, we generally don't hire interns (though that's something I'm working to change), so take my opinion with a grain of salt. I'm actually a bit interested in this so I'll ping some colleagues to see what other firms are doing and let you know.

EDIT: PM'd some friends and there's been basically no slowdown in recruiting at the MF shops and mid/small shops are all over the place (small sample size so again, take with a grain of salt).

 

Thanks for doing it! I graduated with a degree in Finance and now have 5 years experience in RE. I've worked 2 years in my current role in Asset Management on the sponsor side focusing Multifamily. Although I like the strategic part of it, I also deal with property level issues daily and get into the weeds on delinquencies, leasing and budgeting. I am taking my CFA level 3 exam in May and hopefully to pass. Based on your experience, what would be a better career path in RE to leverage Finance knowledge? Thank you!

 

It sounds like you're well on your way, good look on the level 3 exam! I'd say a position at a debt fund, a capital markets position (especially on the sell side at institutional shops like Evercore, Park Hill, Eastdil, etc.), and potentially investor relations would be the three paths that use "finance" expertise the most. That's not to say that you can't do that as an asset manager or on the acquisitions side or whatever other position you find, every shop is their own little snowflake.

 

So many of our deals aren't penciling with normal debt/vanilla equity and we're getting eaten up by carrying costs, so we're getting into more and more complex pref/mezz structuring deals to at least get a project vertical. Do you see this becoming more normal as costs keep rising and developers are forced to do something with the land they own? 

 

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