Breck Hanson, executive vice president and head of commercial real estate at the Chicago office of Associated Bank, and Dan Hampton, managing director and head of commercial real estate for BMO Harris Bank, have some good news for anyone hoping to develop a multi-family project: Demand for multi-family projects remains high and financing is easier to get today. The caveat? You need the right project with the right fundamentals if you want to attract both tenants and financing.
Midwest Real Estate News recently spoke with Hampton and Hanson about the multi-family market in the Midwest. Here is some of what they had to say.
Midwest Real Estate News: The multi-family sector has been a strong one for several years now. What are some of the reasons for the strong activity in this sector that continues today? Breck Hanson: Many factors appear to have fueled the demand in the apartment market. High unemployment, people’s anticipation of unexpected relocation or job loss, lack of meaningful appreciation in single family home and residential condos, and the lag and uncertainty of the economy in general have all created a demand for apartment living. Dan Hampton: Yes, the multi-family market has been quite strong for several years. In our view there are several reasons for this activity in the BMO Harris Bank footprint, which includes Chicago, Milwaukee, Madison, Minneapolis, St. Louis, Kansas City, Indianapolis, Phoenix and Orlando. First of all, the current level of development is approximately on par with where it was prior to the real estate market collapse a few years ago. The current wave of class-A developments are replacing older properties that are not meeting the demands of current renters. Also, an increasing population of young adults, including college graduates, are absorbing the apartments. Furthermore, due to the level of residential foreclosures, there has been an increased demand for housing from this sector. In other words, homeownership has declined but apartment rentals have increased.
MWREN: When you look across the Midwest, do you see any cities that are experiencing especially strong multi-family development and sales activity? Hanson: Columbus, Ohio; Indianapolis, Louisville, Nashville, to name a few.
MWREN: When it comes to new multi-family developments, what amenities are developers including today? What amenities do renters increasingly want to see in these developments? Hampton: Project attributes include proximity to transportation routes for automobile use, public bus and train use, as well as walking distances to employment and entertainment centers. Property amenities include pools and state-of-the- art exercise areas with dedicated floor space for yoga, Pilates or such other activities. We are seeing developers provide the latest technological innovations but also have the infrastructure to allow for improvements in the future. Ceiling heights and large windows allowing a great deal of light penetration, floor plans, security and parking are among the many features we investigate to determine whether a property may be well-received in the marketplace. Hanson: If location is considered an amenity, certainly city living is desirable. Being close to restaurants, entertainment, work and sporting and cultural events is an attractive formula. Further, hardwood floors, granite counter tops, indoor and/or outdoor pools and extensive workout facilities have all but become the norm.
MWREN: What do developers need to show you to qualify for financing for multi-family projects? Hanson: No question, the right project, in the right location with the right developer will attract financing. Competition is as fierce as it’s been in the past several years, especially for quality. Hampton: First of all, we are a relationship lender that values a developer that has been with BMO Harris for some time. We will continue to lend to that developer and follow that developer to other parts of the continental United States. Secondly, we have targeted potential developers that have significant experience and a strong capital base. As to the latter point, the capital can include another source that would complement that of the sponsoring developer. Thirdly, the developer must be able to demonstrate the capability to manage the construction of the project and deliver the project on time and within budget. This includes the actual construction budget and the type of construction contract being provided by the general contractor. Fourth, project economics must be supported by the demographics of the proposed project. Fifth, we need guarantor personal financial statements that include a global cash flow schedule detailing each real estate asset owned including property performance information. Lastly, but certainly equally as important, is the project strategy that provides sufficient justification about the reasons why this project should be undertaken and how the construction loan will be repaid from either a sale or refinancing.
MWREN: Is it getting easier for developers with strong fundamentals to qualify for multi-family financing? Hampton: A developer may never say that it is easy to qualify for multi-family financing because every deal is different. It may be more appropriate to say that if a developer and a bank have had a good working relationship then financing may be obtained. Each is very interested in deepening strong business ties that are further demonstrated when a new transaction closes.
MWREN: I know it’s not easy to predict the future, but do you think multi-family will remain a thriving sector for the next two to three years or longer? Hanson: We should anticipate that lenders will begin to be selective. Overbuilding in some markets will be a consideration as well as overall multi-family exposure in an institution’s portfolio. Hampton: Maintaining a sense of balance between the demand for apartments and the supply will be a critical factor in the success of multi-family development and lending. In our view, repaying the construction loan is critical.
