REAL ESTATE NEWS

Multifamily investors are prioritizing durable income over projected returns as they navigate higher costs, difficult equity raises and an unsettled financing market. Some are seeking longer-term debt rather than waiting for rates to improve. Others are paying more for dependable cash flow or shifting capital from acquisitions and recapitalizations into development.

Those choices are steering investment toward select coastal markets, including the Bay Area, where TruAmerica Multifamily is pursuing several development projects and Brixton Capital is looking for buying opportunities. The common concern is whether a property's income and financing can support the returns its investors expect.

At GlobeSt.'s Multifamily Owners Forum, lenders and investors outlined how they are making those decisions during the "From Rates to Returns: Decoding the Multifamily Capital Markets Landscape" panel. John Manning, senior managing director and head of production at Marcus & Millichap Capital Corp., moderated the discussion.

Cash Flow Drives Market Selection

For Brixton, the source of equity helps determine where and how the firm invests. Mark Mandala, vice president of investments, said deals funded through the firm's balance sheet or by friends-and-family investors seeking cash-on-cash returns require markets where net operating income can hold up.

"You pay for that NOI durability," Mandala said.

That emphasis also shapes how Brixton evaluates returns. For investors expecting distributions, cash flow matters—not just a projected internal rate of return.

The firm screens markets and submarkets using supply-and-demand variables and other multifamily investment criteria. Mandala identified the Bay Area, Seattle, Lakewood, Colorado and Las Colinas, Texas, as places where Brixton is looking for opportunities.

Its approach is not fixed. Mandala said the strategy can change from quarter to quarter as conditions evolve. When acquisitions do not make sense, Brixton looks for other ways to generate returns.

TruAmerica Shifts Toward Development

TruAmerica is also adjusting where it puts capital to work. After being active in recapitalizations earlier in the year, the firm has shifted its focus toward development, said Ash Baraghoush, senior managing director of structured finance.

TruAmerica is active on three and potentially four development projects in the Bay Area. Baraghoush said the firm remains bullish on coastal locations, particularly the Northeast and West Coast and has seen conditions turn in several markets.

Its national ownership and operating experience help inform those judgments at the market, submarket and micro-market levels.

Still, identifying an opportunity and securing the equity to pursue it are separate challenges. Baraghoush said raising equity remains difficult, with uncertainty complicating both business decisions and fundraising.

Borrowers Take Different Paths On Debt

Financing strategies are diverging as well. Laurie Morfin, senior managing director at NewPoint Real Estate Capital, described the past three years as a "roller coaster" and said her clients have not been particularly active in acquisitions. Much of the activity she had seen over the preceding 30 days involved bridge debt.

TJ Spaeth, director at Greystone, described a different approach: favoring longer-term financing over the short-term bridge loans some borrowers are using while they wait for market conditions to improve.

"We are going the exact opposite direction and going heavier into long-term debt," Spaeth said.

The contrast reflects different responses to the same uncertainty. Some borrowers are using short-term financing while they wait for better conditions; Spaeth is moving toward longer-term debt instead.

Lenders Look More Closely At Sponsors

Whatever financing borrowers pursue, lenders are taking a harder look at the people and operations behind the deal.

Morfin said lenders are scrutinizing borrowers and their schedules while weighing the effects of higher interest rates and operating expenses. Agencies, life insurance companies and bridge lenders are seeking strong sponsors and finding creative ways to make transactions work. Borrowers, in turn, need to do more to demonstrate their strengths.

"Expenses went up, insurance went up, rates went up," Morfin said.

Those increases have strained even operators with solid track records, making it harder to recover financially. For investors seeking dependable distributions, that puts operating performance at the center of the investment decision: a property's income durability matters as much as the opportunity to acquire it.

Check back with GlobeSt.com for more from the Multifamily Owners Summit.

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Multifamily Discounts Draw Buyers, But Return Targets Hold Back Capital
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Institutional Buyers Want Multifamily Deals But Struggle to Make Them Work
Fund Deadlines Keep Multifamily Properties Coming to Market
Multifamily Owners Pursue Portfolio Savings While Taking a Harder Look at New Deals
Multifamily Owners Target Property Income and Cleaner Deals
Underwrite to Today's Rates, Kinne Tells Multifamily Investors
Rising Multifamily Loan Distress Gives Investors a Lower Basis

Source: GlobeSt/ALM