How Does Mixed-Use Stack Up on the Capital Side?

Article originally posted on Globe St. on February 6, 2019

Equity investors continued to seek out multifamily in 2018 and lenders had plenty of capacity to place debt, but will the trend continue into 2019? Panelists took on that issue during the 2019 NMHC Apartment Strategies Outlook Conference here in San Diego.

For Waterton, Philip Martin, SVP of market research, said that the most important point is to do the market analysis on each and every property. “We look at the sustainability, and the long term of growth and demand. We look at the underlying asset value through cycles.”

While Martin said that the near term might be volatile, if an asset has some sustainability long term that they can point to, then that is what they look at.

Speaker Katie Bloom, managing director of Goldman Sachs, said that Goldman Sachs looks at real estate as a good option because it somewhat behaves like a bond. “We are long housing because there is a good risk adjusted return.”

The supply demand backdrop is continuing to look healthy and is driving a lot of capital in the sector, added Mike McRoberts, managing director of PGIM Real Estate Finance.

In looking specifically at mixed-use properties, McRoberts said that there is plenty of debt capital available. One worry though, for mixed-use, according to Bloom, is the retail.

“You would always love a deal that is walkable in the middle of retail, but a lot of it is not well thought out retail isn’t a great idea. For the most part, the retail is vacant and you don’t get paid for it. If you have a great project you have a great project and the retail isn’t going to define that.

Steve Fried, principal of Mesa West, said that mixed-use projects either work really well or the jury is still out whether the retail will lease up. “It is a better question for equity of whether you have the upside. Whenever we hear mixed-use, we almost ignore the retail or we hit the rents so hard that it is a no-brainer that the retail will lease up.”

As a lender, Fried said, “we aren’t going to guess whether interest rates go up or down, but we are aggressive on multifamily. Last year, we originated close to $3 billion and half of that was multifamily. We think it is more resilient than other property types.”

Borrowers are willing to hang on to assets longer when they don’t get the price they wanted to get, Fried added.