JPI Hosts Multifamily Experts Roundtable in Southern California
Irvine, California (August 31, 2023) – JPI, a leader in the development of Class A multi-family communities, hosted a roundtable with industry experts in Irvine, California last week. The panel included Payton Mayes, CEO of JPI; Jay Parsons, SVP of RealPage; Chris Porter, SVP of John Burns Research and Consulting; Rachel Parsons, Senior Managing Director of Berkadia; Jon Tarnow, Senior Client Executive of JP Morgan Chase; Dylan Feik, City Manager for the City of Monrovia; and Isabel Sami, Lead Real Estate Journalist at LA Business First, who served as the moderator.
In an effort to bring industry leaders together to share knowledge and learn from one another, the panel gathered to discuss the following topics as they relate to both national and Southern California multifamily markets:
- City Government
Key excerpts from the roundtable can be found below.
“Construction starts are way down across the country. It’s not just a regional issue. It’s a very challenging environment to get deals done anywhere. You have rates that have gone up and you have a lot more pressure on banks to preserve capital to limit allocations to new construction. Plus, you have a lot of starts that hit the ground last year and the year before that. So, there’s some desire to see how this first wave does to make sure that the environment is conducive to further investment. All that being said, we think that starts will be down 40-50% this year vs. last year, and we think that will be true in Southern California, as well.
Right now, we’ve hit an inflection point where incomes are growing faster than rents, and that’s really switched the tables from where it was, especially compared to 2021 and the first half of 2022. So, what’s happened is unprecedented. For at least the last 30 or 40 years, we’ve never had a moment like this where there’s a lot of demand for apartments, but there’s even more supply. And so now we’re at a point where nationally rents are growing less than 1%, and incomes are outpacing that. So that’s been a positive trend for renters, along with inflation cooling off, to see incomes outpace rents and many other costs.
With all this supply, plus cooling inflation and now rents coming down, it’s created a very favorable environment for renters. The balance of power has really shifted back to renters, and that’s triggering a good rebound in demand this year compared to last year.”
Jay Parsons, SVP of RealPage
“Speaking of the outflow of the population [from California]. You look at all the counties, most of them are decreasing in population and have been for some time. You certainly see that in coastal Southern California, but we’re not seeing huge vacancy numbers. If you expect to lose 100,000 people, you would see more vacancies. I’m just not seeing that because I think we’ve got this structural under-supply.
There is certainly a need for more attainable multifamily housing. And that would definitely help bring in, I think, some of the population outflow… these people who are leaving because housing costs are going so high. We’re now seeing developers more and more required or incentivized to include more affordable/attainable housing components on their projects, sometimes as much as 20 to 30 percent of total units in these new projects. And I really do think that is driving some of the income-restricted housing in Southern California.
We’ve got a million listings out there nationally. It should be closer to like two and a half, three million, under normal conditions. There are so few homes available for sale right now, I think, in large part due to people who have been refinancing or who bought in the last several years… And they’ve got a three percent [mortgage] rate. So, who’s going to want to trade that? That’s part of the equation. But I think that a low amount of supply that’s available for sale is going to provide a cushion for prices, and they’re not going to fall… as much as many people thought they would.”
Chris Porter, SVP of John Burns Research and Consulting
Development and Construction
“From a new deal perspective – land opportunities, etc., – I think we are seeing the same amount of deal flow that we usually do, but the bid – ask spreads are a little wider because some land sellers haven’t adjusted their expectations with the realities of today’s capital markets landscape. We’re seeing more deal flow from some developers that have land tied up, but they can’t get capitalized, so there are opportunities.
It’s harder to get deals done across the board right now, including in Southern California. The data from RealPage shows that last year all of Southern California had roughly 20,000 units that were started. Year to date through June, those starts are way down.
One of the things that we’ve focused on in our Texas operations is affordable/attainable housing. A lot of our pipeline in Texas is working with public-private partnerships where we’re restricting the rents for some residents to serve a population that we weren’t serving before.
Related to construction, I would say that most things in our supply chain have come back to a normal place. There are still a few things that are longer than normal, but the bigger focus these days is evaluating our trade partners’ financial strength and making sure they can be successful.”
Payton Mayes, CEO of JPI
“On our side, we’re still seeing significant tenant demand for lease-ups, with strong velocity and limited concessions. On existing assets, we’re still seeing positive lease trade-outs and renewals in pretty much all markets in Southern California. So overall, rental market fundamentals are very encouraging and are helping drive the market for new development projects.
Unfortunately, on the sales front, purely based on cap rates increasing, we are selling deals for 20+% below replacement cost in many cases. The few comps that do trade will also represent values at a discount to 2021’s peak pricing.
There are so many variables such as construction costs and land values that need to change before we will see a lot of new multifamily development starts in Southern California specifically, and I’m sure that holds true throughout the country. For the developers with actionable equity partners willing to stretch for the right site and development opportunity, even in a challenging time to make proformas work based on the cost of debt, those that can find a way will be extremely successful long-term. Anything that you can get done today has the potential to be a very profitable project, since there are going to be very few moving forward.”
Rachel Parsons – Senior Managing Director, Berkadia
[Speaking about the capitalization of projects or assets] “It’s definitely changed over, we’ll call it, six to twelve to eighteen months. I think it’s important to start with where we were and where we are now. So, say twelve months ago, the Fed funds rate or SOFR was basically zero. Now it’s 5.25-5.3. and spreads have gone up on top of that. So, what first mortgage lenders were willing to do twelve months ago at 60 to 70 percent of loan-to-cost and in some cases, debt service coverage ratios down to 1.10, sometimes even lower, is very different. Now with SOFR where it is, plus that increased spread, most of the requests that we’re seeing are probably in that 50 to 55 percent range and a much higher debt cover.
You know, as rates rise, it becomes problematic from the bank’s willingness to lend, as things just don’t make sense. The big discussion right now is about negative leverage and how much negative leverage investors are willing to accept. So, what’s happening is we’re getting a lot of requests where clients are trying to bridge the gap on top of the first mortgage position and looking to put in mezz or preferred equity, and then that gets frankly complicated on how it’s structured. At JP Morgan we’re very fortunate that we can do those kinds of transactions, but we’re just seeing alternative sources frankly come into the capital stack.”
Jon Tarnow, Senior Client Executive – JP Morgan Chase
“Statewide and even locally, zoning codes are changing to make building housing easier while, at the same time, the building codes are making it more difficult, and more costly. And I think that’s just something even the legislature hasn’t responded to yet.
Everybody is saying we need more housing. I think where we disagree is on what kind of housing, and how we’re going to do it.
One of the big barriers is the second you touch a dollar of any public funding, it triggers prevailing wages in California. Now you’re getting into all the different building requirements, standards reporting, 55-year covenant agreements and making the projects in general more expensive. It just changes the kind of project you have.
I think residents will remain focused on affordable housing. When you look at the affordability indices for LA County, I think “low income” is up to something like $100,000 for a family of four. I mean, there was a time when $100,000 was considered a pretty high wage, even here in California. You have to ask, ” What’s affordable anymore?” That’s now very subjective to the individual.
Monrovia has 250 full-time staff and it’s still hard to keep on top of the legislative changes, so we’re always working, always refreshing, always trying to update to keep relevant. Generally speaking, we have tried to eliminate hurdles. You all have followed the RHNA discussions across the state and how cities are tasked with zoning for a certain number of housing units. There’s a bifurcation between cities that are going to fight and push back versus cities that are just going to say, we don’t like it, but we’re going to figure it out. And that’s the bucket that Monrovia is in. We’ve spent a lot of time and a lot of money trying to look at the different hurdles and obstacles, the different zoning standards, and the entitlement process to eliminate the barriers and make it more beneficial to do housing.
Dylan Feik, City Manager for the City of Monrovia, CA
For more information or to be a part of the next roundtable, please reach out to the media contact listed below.
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JPI is a national developer, builder, and investment manager of Class A multifamily assets across the U.S., with over 9,300 apartment homes under development. Recognized by NMHC as the 8th largest and fastest growing developer in the U.S., JPI is headquartered in Irving, Texas, and has two offices in Southern California. With a 34-year history of successful developments throughout major U.S. markets and an unparalleled depth of industry-specific experience, JPI stands among the most active privately held real estate companies in the country. JPI’s leadership team has comprehensive experience in multifamily developments – ranging from low-density garden apartments and mid- to high-density wrap and podium projects to senior-living communities and mixed-use high-rise developments. The firm offers investment management, predevelopment, underwriting, marketing, and asset management services as well as construction, financial, and administrative services. To learn more about JPI, please visit JPI.com.
Jody Lee, JPI