Owners With Urgency From Loans Coming Due Helping Deals Get Done

November 27, 2023 Bianca Barragán, Southern California 

Los Angeles’ multifamily market, like other sectors in the city and across the country, continues to feel the pain from high interest rates and their cascading repercussions, but transactions haven't totally ground to a halt.

Deals that are getting done, according to several multifamily executives, have a common thread running through them: distress. 

Waterford Property Co. co-founder and Head of Acquisitions and Development Sean Rawson said his company, which is active in California and Texas, has about 2,000 market-rate residential units in entitlement now. But given the lending environment, he doesn’t expect to close a construction loan within the next 18 months. 

Instead of planning new ground-up projects, Rawson’s attention is zeroing in on existing core assets in Orange and LA counties that are trading for less than replacement costs. Rawson — speaking at Bisnow's Multifamily Annual Conference West, which drew more than 450 attendees to the JW Marriott Los Angeles LA LIVE in Downtown LA — said he anticipates Waterford will be active on deals like those starting early next year. 

“We're talking to a couple family offices right now that want to buy what I would call generational, good, long-term product,” Rawson said. “In Orange County, there's a couple core deals that traded at, call it, $450K to $475K a unit. If you were to build that product today, you'd be close to $650K a door. We're starting to see some good opportunities like that.” 

Industry experts have pointed to family offices, sovereign wealth funds and private equity firms as the buyers and financing sources that stand to gain from the pain in the multifamily market now. 

Transaction volumes indicate many would-be buyers and sellers are still biding their time. In the third quarter, Los Angeles was second only to Dallas for total transactions, but it was down 50% year-over-year at $12.8B, according to MSCI.

The kinds of deals that are getting done seem to involve situations with distress or impending distress, according to panelists at BMAC West. 

Rawson gave an example of a distressed office deal that Waterford is pursuing: a property it had made an offer on previously, but the winning bidder won’t be closing the sale. He said ownership is in a time crunch, as it has debt coming due, and has to sell by the end of year.

“Effectively, I think we could come in and buy it for what their loan amount is just to save them from foreclosure, but it's a covered land play — well-located in the Southern California market, zoned residential land,” Rawson said. “We’re buying that just for land value.

“Those are the types of deals that I think are definitely getting done,” Rawson added. 

If distress is a key element of getting a deal done, there is a healthy pool of potential deals. The multifamily sector accounts for $7.5B of outstanding distress nationally, with $65.7B of potential distress on the way, third-quarter data from MSCI indicates. MSCI found the sector had the highest potential for imminent trouble, accounting for almost a third of all at-risk properties. 

Those dealing with owners and developers who have to sell are seeing signs of the pain in the market already.

“They're stuck in the pipeline, their carry costs have doubled, and these guys are running around going, ‘How do we make the next payment?’” Kidder Mathews Executive Vice President of Debt and Equity Finance Brad Kraus said. “There's a lot of pain out there under the surface for those types of guys.” 

There is a lot of capital sitting on the sidelines, waiting for the right opportunities to deploy. In October, Hodes Weill & Associates estimated that closed-end funds pursuing value-add and opportunistic strategies were sitting on $300B, with about $120B allocated to value-add and $116B directed toward opportunistic investments.

But some panelists questioned the usefulness of measuring how much money is stockpiled but not being put into action. 

“I'm always skeptical when I hear on CNBC about dry powder or money on the sidelines or anything like that,” Archway Capital Chief Operating Officer and Senior Vice President Tom Noble said. “It doesn't matter if there's a bunch of money on the sidelines if it's staying on the sidelines, right?

“People are calling us for rescue capital and to fill out [capital] stacks because there's not liquidity in the market,” Noble added. “Especially for us, we have a short-term time horizon, one to two years, so we're much more concerned about liquidity in the market versus liquidity outside the market.”