Has San Antonio's Multifamily Investment Market Peaked?

The forecast for renters in San Antonio this year may be great, but a mix of economic factors already is making it tougher to invest in multifamily properties.

The moniker for San Antonio’s apartment market is typically slow and steady, with some sparks of optimism emerging for downtown redevelopment. San Antonio, unlike other markets in Texas, does not have to fight the fear of oversupply or the challenge of concessions.  

The market is fairly good for renters. Income continues to rise, pushing renters out of affordable housing into Class-B and Class-C apartments. That is good for the market overall because it takes the stress off the affordable housing sector. And it is good for Hunt Mortgage Group, which invests in the Class-B and Class-C market.

"I don’t do much Class-A, but with B and C, there’s always been healthy demand,” said Hunt Vice President Tony Talamas, who leverages Freddie Mac’s small balance multifamily loans. “There’s a very strong demand over the last couple of years. Some people are having a hard time finding the right property.”

But a combination of factors — changes to the tax code, higher interest rates and a tightening lending environment — could spell the beginning of a more challenging investment picture. At Bisnow’s Multifamily Explosion event Tuesday, those on both the finance and development side of the multifamily equation agreed the climate is changing.

“Just over the past several months, Treasurys are increasing, spreads are slower to come in. It’s affecting our leverage,” Westmount Realty Capital Managing Director Michael Anderson said. “It’s forced Westmount to explore other avenues to finance our deals. There’s a lot of bridge product out there right now.”

That has some clients considering commercial mortgage-backed securities, Anderson said. CMBS loans, which are more volatile and have higher interest rates than other financing options, have typically been a tool of last resort for most multifamily investors. But for those with longer-term goals who need additional leverage, CMBS might be a viable option, he said.

Westmount has always been a lower-leverage group, so interest rates are an issue, Anderson said. Lately, in some markets, the 10-year fixed rate is bumping up against cap rates. That provides no delta at all in Westmount’s deals.

CFH Investment Partners Vice President Benoit Rochard said he has begun to see deals with higher interest rates that are cash-flow constrained or debt-coverage constrained. Rochard has promised a client 80% financing, only to scrub the numbers and see it was only going to be 70% or 75% financing.

“This is just within the last four to six weeks,” Rochard said. “And it’s all due to interest rates.”

Bridge lenders like Pender Capital are less concerned with interest rates since they tend to fill a gap in financing a proposed project. Co-founder Zach Murphy is more concerned with overly optimistic underwriting for returns, especially out of equity lenders.

Debt structuring is fine, but equity lending is unrealistic, Murphy said.

“You start seeing ‘blue sky’ underwriting from equity over and over and over again,” Murphy said. “The concept looks great on paper, in black and white, as long as you can underwrite 5% rent growth for the next 10 years. That sounds familiar — 2006, 2007 — but it’s probably not smart.”

San Antonio has had some amazing population growth, but it will not last forever, Murphy said. Suggesting the city is going to have 100% growth in rent is simply untenable.

If the investment cycle was a baseball game, multifamily would be in the 14th inning, San Antonio-based GrayStreet Partners Managing Partner Kevin Covey said. The game is tied, and it looks like the outcome will be similar for the coming year, if not years.

What Covey, who deals with larger mixed-use projects at or near The Pearl, finds different is the growing complexity of deal structures and capital stacks. New deals have layers of financing, from mezzanine capital to EB5 to preferred equity.

“There’s like 15 different flavors,” Covey said.

Current deals appear to be structured to guarantee that return on investment fills the return on the various tranches of financing, Covey said.

“I haven’t seen them this complicated, ever,” Covey said. “It seems like there’s a new product every month.”