After shunning homebuilders for the last five years, investment capital is starting to find its way back into the new home market, according to a survey of funding sources released at the Pacific Coast Builders Conference in San Francisco.
Multifamily housing is “still at the top” of the investor food chain, researcher Jeff Myers told a standing-room-only crowd during the PCBC’s annual capital markets forum. “But single-family is moving up the ladder fast.”
PCBC is the nation’s largest regional home building trade show, second only to the annual National Association of Home Builders convention. About 8,000 builders and allied professionals attended the three-day conference.
Myers, a principal in the San Diego advisory firm that bears his name, said the fact that multifamily is doing so well actually bodes well for the for-sale sector. Because money is so plentiful, apartments are likely to become overbuilt in some markets, he explained. And because rent increases will become so severe—already “double digits in core markets,” he said—people can now buy for less than they can rent.
The capital markets have already recognized these facts, the researcher said, and “that’s good news for home builders.” But, while there is “lots of capital” floating around, he added, there’s “not a lot of conduits around” to distribute acquisition, development and construction money to builders.
And thanks to the greatest housing recession in decades, Myers said, there’s also a “shortage of grateful homebuilders” with which to place funding. “No one escaped unscathed” from the downturn, he said, but the builders who are still standing “are going to become very popular again, very quickly.”
Capital sources still “want nothing to do with risk,” according to the annual survey, which asks purveyors of capital what they are looking for when assessing deals. “They’re not ready for that,” Myers said.
But they are starting to offer nonrecourse financing again, and some are making loans of up to 80% loan-to-value ratios. However, there’s “still a tendency” on the part of sources of private and institutional debt to back projects where the houses are priced under the magical $750,000 price range. That, of course, is just above the conforming loan limit, at least for the time being.
Builders are up against all other property types, not just apartments, when it comes to equity funds, according to the survey. Generally, Myers said, equity partners want to be sure that if the single-family builders and developers they back fail for one reason or another, they will be able to “flip” their lots to one or more of the 14 well-capitalized public home building companies.
“The giants,” he said, “are now willing to overpay for lots” in order to hold or gain market share.
Equity funds are most interested in California because of supply constraints, and half of those surveyed now like Arizona, which Myers said has come back with a vengeance. But they want absolutely nothing to do with Las Vegas.
In the central part of the country, four of five equity providers polled for the PCBC survey like Texas and three of five also like Illinois. And in the East, everyone wants to be in the Washington market, while 40% are once again looking in Florida.
