‘Fighting For Survival’: Houston Multifamily Market Expects More Pain Before It Gets Better

A year and a half ago, Matt Shafiezadeh looked into buying a yacht. But as the market began turning, the CEO of Houston-based multifamily developer Urban Genesis said he instead considered buying a fishing boat before deciding that renting jet skis would be more appropriate.

“It sucked, the last 18 months,” Shafiezadeh said at the Houston Bisnow Multifamily Annual Conference on Wednesday. “The reality is, it’s hard and transaction activity is down, everything is hard … Everyone is just fighting for survival.” 

Panelists at the event, held at the Omni Houston Hotel, said deal volume has screeched to a near halt, but they continue to see some movement by focusing on creative financing and diversified concepts like build-to-rent houses. 

“There’s gonna be more pain before things get better, which will create some opportunities, so be patient and do your homework,” Ascension President Jim Wood said. “I just think that we’ve got a lot to get through.”

The Federal Reserve could be finished raising rates, but it’s certainly nowhere near lowering rates, and the banks are nowhere near increasing loan-to-value ratios they are offering to borrowers, Wood said. 

“So that's what really needs to happen. When the leverage goes up, then we can make things pencil better,” he said.

Jeff Samples, president of International Bank of Commerce, said at the height of the market, the lender would do some deals at 30% equity. That is now hovering around 40% to 45%, he said. 

“I don't think our bank is any different from any other bank. We're just looking for deposits,” Samples said. “Every bank has to really work hard for their deposits.”

Construction loans have been hard to come by since few owners are selling properties, Northmarq Managing Director Warren Hitchcock said. That means banks’ balance sheets are full, so they are not issuing new construction loans, he said.

Financing deals right now can require getting creative, Marquette Cos. Director of Development and Acquisitions Chris Yuko said. Marquette broke ground on a 22-acre build-to-rent project in August that had about 55% leverage, he said.

“We went out and we struck a deal with the [municipal utility district] to get a subsidy deal to offset some of the infrastructure costs,” Yuko said. “So whether it's a MUD incentive or a [tax increment reinvestment zone] incentive or some kind of incentive like that, that can give you a little boost and create a value to your deal to push you over the hump.” 

Being persistent is important in this environment, Hitchcock said. He has helped clients work out deals with higher leverage using creative solutions like hybrid banks and mezzanine financing, he said.

“It’s not sexy. It’s just making a lot more phone calls today,” Hitchcock said.

It remains difficult to find deals that pencil, Casoro Group Chief Investment Officer Mehul Chavada said. 

“How are we making deals happen today?” Chavada said. “We are not making a lot of deals happen today. That’s the baseline. Our transaction volume has really dropped.” 

The pace at which rates increased didn’t give people much time to adjust and pivot, he said. Casoro is now finding opportunities in providing rescue capital for assets verging on distress, he said.

Greystar has done a few acquisitions with heavy equity placement on top of where it can assume debt, but the acquisition pipeline has “certainly been slowed down the last 18 months,” Greystar Executive Director Stacy Hunt said.

Greystar has diversified its development, shifting away from largely building mid-rises and high-rises inside the 610 Loop, he said.

“We're building a tremendous amount of BTR, an incredible amount of active adult,” Hunt said. “We're doing a significant amount of attainable workforce housing.” 

Development has slowed slightly for the firm, shifting from what Hunt estimated would be 50 construction starts across the U.S. in the next 18 months to now 40 starts.

“Some of those will include student housing,” he said. “There’s still equity for student housing. There’s still equity for BTR. There’s still equity for affordable, attainable. There's still equity for active adult and there's still equity for garden-style conventional projects across the country. But it's getting tougher, no question about it.”