Financial Modeling With Untrended Rents Protects The Bottom Line. But At What Cost?

Financial Modeling With Untrended Rents Protects The Bottom Line. But At What Cost?

February 17, 2023 Bianca Barragán, Southern California 

With roadblocks piling up for the recently high-flying multifamily industry, a bit of financial modeling that helps lenders predict an asset’s profitability is adding more fuel to a growing pileup that could hinder development pipelines — and new housing supply — for years to come.

As economic conditions worsen for real estate, developers are asked with increasing frequency to use a more conservative set of income assumptions in their pro formas that reflect the slowing demand for apartments, called untrended rents.

In other words, as one source put it, they’re being asked to build at tomorrow’s cost for today’s rents.

“If you’re not trending rents, you’ll have less proceeds,” Parkview Financial CEO Paul Rahimian said. “That’s going to cut developers in a way that some of them just can’t proceed to build — they don’t have enough equity. They were expecting more loan dollars.”

Using trended rents refers to the generally accepted practice among developers to assume a certain amount of rent growth, usually based on current market conditions and rental trends in the recent past, to forecast the profitability of a project. Accordingly, when economic conditions change, lenders want to see those changes reflected in modeling, meaning that developers must instead assume that rents will remain unchanged.

Developers have enjoyed years of consistent, reliable rental rate growth, with the average rent growing 13.5% in 2021 and another 6.2% last year, according to Yardi Matrix. That trend is moderating, with rents inching up just 0.4% year-over-year in January, according to Apartments.com.

When added to climbing interest rates, surging construction costs and cap rates that keep ticking up, untrended rents often mean that deals simply don’t get done, causing ripple effects.

Many of the CRE professionals who spoke to Bisnow agreed, especially in markets where supply is already low, a period of widespread use of untrended rents, along with other challenges to multifamily development, could have an impact a few years into the future, when projects that should or could have come online don’t open, further exacerbating the supply-demand divide. 

An estimate from the Mortgage Bankers Association predicts that nationwide multifamily mortgage lending will decline 16% this year, dropping to $384B from 2022’s $459B total. That’s not entirely attributable to conservative assumptions of rent growth, but it’s certainly an additional factor complicating the process of getting deals done, sources told Bisnow

Developers whose financing hopes were dashed would have seen their projects come online in two or three years, Rahimian said, so that’s the time the market will see the effects of what’s happening now. There won’t be an immediate impact, but something “we’re going to feel in a few years, when we’re past this recession.” 

A tamped-down development pipeline in a time of record low housing inventory also spells higher prices down the road when the market bounces back, Cityview CEO Sean Burton said.

“In supply-constrained markets, we need to be building more housing, not less,” Burton said. Cityview’s strategy is to develop in those supply-constrained markets, such as Southern California.

Though this has presented challenges to multifamily developers generally, Burton says that Cityview has been fortunate and has gotten all the financing it needs to keep its projects on track and moving forward.

For lenders, though, the use of a more conservative approach with untrended rents protects the bottom line — and investors.

A good manager is going to look at both trended and untrended rents when evaluating a project, Origin Investments principal Michael Episcope said.

Cityview’s 243-unit Belle on Bev project in Los Angeles’ Historic Filipinotown neighborhood, which is slated for completion by the end of this year.

Episcope said his firm’s cost of capital is based on untrended rents, but it also looks at trended rents “because they capture the long-term potential growth of an investment” and can help mitigate risk of a downside, as rental growth can be used if something goes awry, such as blowing through a budget or a rise in cap rates.

Episcope also emphasized that, as an investment manager, it’s his job to see the potential for things to go awry on a project, to anticipate that and to make moves that protect the money of investors.

Developers are optimistic by nature, they believe that the glass is half full and they want to present their project in the best light possible because they’re in the business of seeing their projects built, Episcope said. But investment managers are “trained to believe there’s doom and gloom coming down the pipeline,” and act accordingly. That includes anticipating that maybe rent growth isn’t a given.  

Some lenders that are still open to the idea of rent growth and are factoring in modest upticks when they lend, but certainly not at the levels seen during the last three years. They are applying greater scrutiny to the assumptions presented to them by would-be borrowers. 

Before the first interest rate increases last year, too many investors and owners assumed that just holding on to an apartment building would end up making a profit because the property type was in such high demand, said Brian Good, CEO at iBorrow, a national private lender of short-term bridge financing for existing multifamily properties. Now, he’s changed the way he scrutinizes deals.

“Before, we were relying more on the asset, now we’re relying more on the borrower: Can they pull the right levers to get the value up on the property?” 

In the hierarchy of factors complicating the lives of multifamily developers, owners and lenders, Parkview’s Rahimian said the use of untrended rents is high on the scale but high interest rates still get top billing as they increase the cost of capital and pose the threat of making the exit cap rate higher. 

“At the end of the day, you can’t trend rents more than a few percent a year,” Rahimian said, adding that the double-digit rent increases of the pandemic were never the norm. 

When rents, the economy and wages are growing, Burton said, developers can weather other impacts on the marketplace, such as rising costs of construction and materials or higher interest rates. But when there’s economic uncertainty and rent growth isn’t a given, everything becomes more challenging. 

And as the challenges pile up, the deals fall apart.

Construction costs, cap rates and rental rates “make up the value equation, and one or two moving in the wrong direction will negatively impact supply. When deals no longer pencil out, the shovels stop digging,” Episcope said.

Read more: https://www.bisnow.com/national/news/multifamily/untrended-rents-multifamily-effects-lending-pipeline-117710

Sarah Hunt

Senior Associate, Business Development & Capital Relations

Ms. Hunt joined Cityview in 2021 and is a Senior Associate on the Business Development & Capital Relations team.  She is primarily responsible for relationship management, investor communications, and marketing collateral.  Additionally, she works closely with internal functional teams on due diligence efforts and supports investor reporting and special projects.  She is also a member of Cityview’s Sustainability Committee focused on communication of ESG initiatives to investors.

Ms. Hunt has over six years of real estate investment, capital formation, and investor relations experience.  Prior to joining Cityview, she was an Associate with Chicago-based Magnolia Capital.  During her tenure, she worked on equity capital raises for numerous real estate investment vehicles.  Prior to Magnolia, Ms. Hunt was a Financial Analyst with LaSalle Investment Management where she oversaw the financial performance of assets with over $1 billion in value.

Ms. Hunt received her Bachelor of Business Administration degree in Finance, Investment, and Banking from the University of Wisconsin-Madison.

Ramtin Esfandiari

Director, Acquisitions

Ramtin Esfandiari joined Cityview in 2018 and is responsible for managing acquisitions, including sourcing, underwriting and closing multifamily development deals. Prior to joining Cityview, Ramtin was on the Acquisitions team at The Bascom Group where he underwrote over $9 billion in multifamily acquisitions across the U.S. and supported all aspects of the acquisition process. Ramtin holds a Bachelor’s Degree in Business Economics from the University of California, Irvine, and is an active member of Urban Land Institute.

Jonathan Anderson

Controller

Jonathan Anderson is the Controller of Cityview and provides leadership and oversight over the finance, accounting, and shared services departments.  Prior to joining the Cityview team, Jonathan worked at CIM Group where he held several finance and accounting roles during his tenure, most recently as head of private fund reporting and prior to that as director of SEC reporting for one of CIM Group’s publicly traded REITs.  Jonathan began his career in Ernst & Young’s assurance practice where he served both public and private clients in the real estate and asset management industries.  Jonathan graduated from the University of Southern California with both a bachelor’s degree in accounting and a bachelor’s degree in business administration with an emphasis in real estate finance.

Tina O’ Brien

HR Director

Tina O’Brien, HR Director, is a senior national and state-certified HR Professional (SPHR, SHRM-SCP, PHRca), managing the HR team overseeing all aspects of Human Resources for both Cityview and its affiliate, Westhome. Her experience spans the spectrum of the HR field, including recruitment, employee relations, performance management, benefits, compliance and employee development. She joined Cityview in summer 2021 from a telecom technology firm in Van Nuys, and previously worked for a private real estate investment and property management company in Beverly Hills. Tina is an LA native and she’s committed to helping grow our vibrant, healthy corporate culture here at Cityview.

Noah Watts-Russell

Director Asset Management
Noah Watts-Russell is Director, Asset Management of Cityview. As Director of Asset Management, he oversees Cityview’s value-add portfolio and is responsible for establishing and driving the portfolio business plans to maximize performance and value. Prior to joining Cityview, Noah was an Associate in the Real Estate division at The Blackstone Group where he oversaw over $15bn in multifamily real estate (>70,000 units, covering market rate, affordable and rent-controlled) and worked on over $2bn in total sales and $1bn in refinancing. Prior to Blackstone, Noah managed the FP&A team at LivCor, Blackstone’s multifamily asset management company. Noah holds a Bachelor’s degree in Finance and Economics from Washington University in St. Louis.

Denise Katz

Director Asset Management

Denise Katz manages Cityview’s core and development assets across multiple investment vehicles and is responsible for maximizing the operational and financial performance of the assets.  Denise has over twelve years of experience in real estate. Prior to joining Cityview, Denise was Regional Vice President at CIM Group of a $2.4 billion portfolio in the Western US and Latin American markets. During her time at CIM, she managed end-to-end transitions of development projects, acquisitions, and dispositions of office, multifamily, retail, parking, condominium, and mixed-use projects. She holds a double major Bachelor of Arts degree in International Studies and Psychology from Wilkes University in Wilkes-Barre, PA.

Steve Roberts

Director, Development and Construction
Steve Roberts is responsible for the development of several of Cityview’s ground-up multi-family assets, including due diligence, design, entitlement, permitting, construction, and market delivery. Prior to joining Cityview, Steve managed several nationally award-winning projects as Vice President of Development for Community Dynamics, a Santa Monica based developer of residential and mixed-use communities. Steve has built his career on creating exceptional communities that deliver high-quality housing to residents, first-rate design for neighbors and municipalities, as well as strong financial returns to investors. Steve holds a BA in Urban Studies and Planning from UCSD and earned an MBA and Master of Real Estate Development from the University of Southern California.

Anh Le

Director, Development

After 8 years in the construction industry managed complex multi-use development projects, Anh Le joined Cityview in 2018 as Director of Development. Le manages ground-up developments in Northern and Southern California and leads consultant teams through entitlement, design, permitting, budgeting, contracting, construction management and project turnover. She works closely with designers, neighborhood groups and Cityview’s in-house Asset Management team to deliver best-in-class multifamily projects. Prior to Cityview, Le worked as a project engineer and project manager at Cobalt Construction. Le holds a Bachelor’s of Science in Civil Engineering from the University of California, Irvine.

Kyle Naye

Senior Director, Acquisitions

Kyle Naye is Senior Director, Acquisitions of Cityview.  As Senior Director of Acquisitions, he is responsible for managing acquisitions, including sourcing, underwriting, closing and developing comprehensive business plans for investors.  Naye primarily focuses on non-California markets across the Western U.S., including Seattle, Portland, Denver, Phoenix, Salt Lake City, Dallas, and Austin.  In his role, Naye works closely with the Cityview team to manage and expand strategic acquisitions across the firm’s vertically integrated platform.

Prior to joining Cityview, Naye was a vice president of originations at PGIM Real Estate, where he provided transactions and underwriting oversight for core-plus and high-yield debt vehicles. He also held a prior role at PGIM managing the underwriting, investment committee preparation and closing of $992 million in multifamily, retail and office assets across the Bay Area and Pacific Northwest. At earlier stages of his career, Naye was a senior associate of acquisitions at Clarion Partners, senior real estate analyst at Northmarq and an officer in the United States Navy.

Zory Grigoryan

Director, Development

As Director of Development, Zory Grigoryan is responsible for the full cycle development of several of Cityview’s projects, which includes managing the due diligence, underwriting, entitlement, design engineering, construction processes and turnover to asset management. Prior to joining Cityview, Grigoryan worked for Oakmont Capital as a Project Manager overseeing the development and construction of several multifamily projects. Prior to that, he worked at Cobalt Construction as a Project Manager on the construction of numerous mixed use and multifamily projects. During his career, Grigoryan has been responsible for the development, preconstruction and construction of over 1,500 units.

Grigoryan holds a Bachelor’s of Science Degree in Construction Management from the California State University of Northridge, where he was the top ranked graduate of his year. During his time at Cobalt Construction, Grigoryan was also selected as distinguished alumni by the CSUN department faculty and appointed as ambassador for alumni recruitment by CSUN construction management department’s board of governors committee.

Chris Brown

Director, Capital Relations

Chris Brown is responsible for capital raising and investor relations at Cityview. Chris has over seven years of real estate investment and capital raising experience. Prior to joining Cityview, he was a member of the Fund Advisory team at JLL working on equity capital raises for private real estate investment vehicles. Prior to JLL, Chris worked on the Portfolio Management team at Clarion Partners and the Asset Management team at LaSalle Investment Management. Chris graduated from Florida State University with a Bachelor’s Degrees in Finance and Real Estate. He is a general securities representative.

Dana Gomez-Gayne

Vice President and Associate General Counsel

Dana Gomez-Gayne manages the legal aspects of all project-related matters, including acquisition, development, management and disposition, and advises Cityview on corporate formation and maintenance, insurance, risk management and other legal matters. She was previously an Associate at O’Melveny & Myers LLP and Manatt, Phelps & Phillips, LLP where she represented a variety of clients in real estate, project development and finance transactions. Gomez-Gayne also has a background in fundraising development and worked at Teach For America raising philanthropic funds from regional and national corporations and foundations. She is a graduate of Pomona College and Pepperdine University School of Law.

Chase Ballard

Vice President, Construction Management
Chase Ballard is Vice President of Construction Management at Cityview. He is responsible for overseeing the Construction Management team and their daily operations. Chase and his team are involved in every stage of our value add renovation opportunities, from pre-acquisition through project completion, executing projects that include interior renovations, common area improvements and deferred maintenance. Prior to joining Cityview, Chase was a Director of Capital Projects with Greystar Real Estate Partners.​

Rob Lester

Managing Director, Business Development & Capital Relations
Rob Lester is responsible for business development and capital formation efforts for the Firm’s investment platforms, developing strategic growth initiatives, and creating long-term relationships with investors and partners. He has nearly 25 years of investment banking and private capital formation experience. Prior to joining Cityview, he was Managing Director with Macquarie Capital, and a Managing Principal with Blackstone. ​

Con Howe

Managing Director

Con Howe leads Cityview’s partnerships to finance, assemble and entitle land for development in the greater Los Angeles area. With over 40 years of experience in planning, entitlements and development, he assists all Cityview funds with acquisitions and development strategies. Prior to coming to Cityview he was the Director of Planning for the City of Los Angeles responsible for the Adaptive Reuse Ordinance and zoning to encourage infill housing. Previously he was the Executive Director of the New York City Planning Department.

Shane Robinson

SENIOR VICE PRESIDENT OF ASSET MANAGEMENT

Shane Robinson is responsible for managing all aspects of Cityview’s stabilized, value add and new development assets. With more than 22 years of experience managing multifamily assets, he is a seasoned real estate professional experienced in a range of investment strategies that drive growth and efficiency for investors.

Prior to this role, Shane held pivotal positions at various organizations in the real estate industry. As Vice President of Property Management at Westhome, Robinson played a vital role in implementing the operational infrastructure that facilitated market expansion.

During his tenure at Sunrise Management, his leadership established and solidified the company’s operational foothold in new markets, contributing to the growth and success of the firm. His early asset management career was at GHP Management, where he specialized in lease-ups and effectively managed a substantial core portfolio of over 5,000 units.

Melissa B. Delgado

VP, Asset Management
Melissa Delgado is responsible for overseeing Cityview’s asset management and portfolio operations. Prior to joining Cityview, Melissa was a Senior Director at TruAmerica Multifamily LLC where she was responsible for achieving the investment objectives of an $800 million portfolio. Earlier in her career, Melissa was an asset manager for Kennedy Wilson’s Southern California portfolio. Prior to that, she was a Vice President and Head of Marketing at Kepler Capital Markets, an investment bank in New York. ​

Devang Shah

Managing Director, Acquisitions

Devang Shah is co-head of Cityview’s acquisitions activities on the West Coast. He has 25 years of experience in real estate investment, development, design, construction and asset management. Previously, Devang was the principal of Marketcents Inc., an independent project management firm, serving as an owner’s representative to investment firms, builders and developers. Prior to that, he worked was Vice-President at RCLCo, LLC, a national independent real estate consulting firm. ​

Adam Perry

Senior Vice President, Development and Construction
Adam Perry oversees all aspects of the commercial real estate development process from acquisition due diligence and entitlement processing through design budgeting, contracting, construction management, closeout and turnover. Prior to joining Cityview, Adam worked at CIM group as an Associate Vice President of Development overseeing ground up retail, office and mixed-use developments. ​ Adam holds a BA Degree in Political Science and History from UCLA and an MBA from the UCLA Anderson School of Management.

Matthew Falley

General Counsel & Chief Compliance Officer
Matt Falley oversees and directs the company’s legal affairs and is the firm’s Chief Compliance Officer. Matt was previously a partner at Greenberg Glusker Fields Claman & Machtinger LLP, where he represented numerous clients in the real estate industry, including Cityview. Matt holds a B.A. from the University of California, Santa Barbara and a JD from the University of California, Berkeley School of Law (Boalt Hall), where he was a member of “California Law Review” and Order of the Coif.​

Tony Cardoza

Managing Director, Acquisitions
Tony Cardoza is responsible for Cityview’s acquisition activities throughout the West Coast. He has 21 years of experience in real estate investment and management. Previously, Tony ran the investment group for Real Estate Capital Partners in the Western U.S., which developed and acquired over 5,000 multifamily units. Prior to that, he worked for Prometheus Real Estate Group in a land and multifamily acquisitions role on the West Coast. Tony holds a B.A. in Economics from Middlebury College and an MBA from the Haas School of Business at UC Berkeley.​

Jennifer Halvas

Managing Director, Investor Relations
Jennifer Halvas leads the firm’s investor relations team, where she is responsible for maintaining relationships with the investor community, bolstering infrastructure for new and existing investors and helping to develop investment strategies and initiatives. She has been instrumental in securing capital needs for several Cityview funds across a broad base of institutional investors, insurance companies, foundations and endowments, family offices and high-net-worth investors. A 12-year veteran of Cityview, she uses her deep institutional knowledge to create value for investors and the communities in which Cityview works.
 
She was previously at O’Melveny & Myers LLP, where she represented a variety of clients in real estate, project development and finance transactions. Jennifer holds a B.A. with honors from the University of Southern California and a JD from Vanderbilt Law School.

Damian Gancman

Chief Operating Officer and Chief Financial Officer

Damian Gancman oversees the operations of Cityview and its investments while supporting the strategic growth of its finance, acquisition, asset management and property management functions. An 18-year veteran of the firm, Damian is also a partner at Cityview and a member of its investment committee. As CFO, he helped build out Cityview’s best-in-class finance department, including the implementation of strategic process, accounting, reporting and technology improvements that enhance the investor experience.

In addition to his role at Cityview, Damian is a guest lecturer for the University of Southern California’s Master of Real Estate Development program and is a key contributor to the Cityview Leadership Academy. Damian earned a master’s degree in real estate development from the University of Southern California and a dual bachelor’s degree in business administration and psychology from the University of California, Berkeley.

Sean Burton

Chief Executive Officer
Sean Burton has been with Cityview since 2003. Prior to joining Cityview, Sean was vice president of corporate business development and strategy at Warner Bros. Before that, he was an attorney in the real estate and corporate groups at O’Melveny & Myers, LLP and also served in the White House during the Clinton Administration. From 2013 to 2021, Sean served as President of the Board of Airport Commissioners which oversees the LAX and Van Nuys airports. Sean holds a B.A. from the University of California, Irvine and a JD from New York University School of Law.