Borrower view: Waypoint reviews development pipeline amid rising rates

Scott Lawlor’s Waypoint Residential recently completed a review of its 2023 multifamily development pipeline as the Boca Raton–based developer factors in a higher interest rate environment.

The exercise allowed Waypoint to get a better understanding of the impact of higher interest rates on its ability to arrange financing and make sure the cost of land dovetailed with the returns it is trying to achieve, said Scott Lawlor, founder and CEO.

“When we went back to the sellers, we found that some of them worked with us and others did not,” Lawlor said. “Currently, we are looking ahead to the second half of the year. We have a very robust pipeline, although we’ll have to see how the world looks then.”

Waypoint, which develops conventional apartments in Sunbelt markets, is bullish on the sector for the long-term and will continue to evaluate deals. “We entered this cycle as a sector with overwhelmingly favorable fundamentals and, for the most part, reasonable leverage,” Lawlor said.

The firm is talking with both national lenders and smaller, localized banks that are more willing to lend into the market today. “The debt funds are out there, but frankly I do not see how anyone takes a debt fund loan and makes a deal underwrite in this market. It’s just too expensive,” he said.

The construction markets continue to be open, albeit more difficult.

“We’re dealing with some choppiness as it relates to financing construction. It is doable, but we are fortunate because we have long-term relationships,” Lawlor said. “If you were a newcomer right now, it’d be awfully difficult to get a construction loan done.”

While Lawlor is keeping his eyes open for potential acquisitions, he is taking the idea there might be substantial distress with a grain of salt.

“We will see some select opportunities because multifamily is a big asset class and there is always a needle that slips through the haystack,” Lawlor said. “We will hear stories, and some will brag about it so you will think it happened a thousand times, but I do not think it will be a systemic opportunity that is coming my way. In my space, there are too many factors that make it unlikely.”

Lawlor does not believe the market will see the dislocation in the same way the market saw in the Resolution Trust Company days.

“The way we understand the real estate capital markets today largely got invented coming out of what happened with the RTC in 1991 and 1992. At that time, there was no such thing as an opportunity fund and, as a practical matter, REITS or CMBS. That was real estate taking capital markets techniques from corporate America and using those to finance out of the crash,” he said.

The amount of capital raised today is the major clear difference between then and now.

“There is a massive amount of dry powder waiting to pounce if an opportunity comes up. But will we be hearing about a massive amount of trades where people buy good properties at steep discounts to replacement costs for Class A assets in good suburbs of Dallas and Atlanta? I’m not sure that is in the cards,” he said.

Lawlor recently attended the NMHC conference during which he spoke with roughly 30 brokers to get a gauge on sentiment.

“I asked, ‘Do you feel like we’ve bounced off the trough as it relates to sentiment?’ And the answer was uniformly ‘yes.’ And while brokers are frequently optimistic, I do think that is the case, that the world does feel differently now than it did in the early fall,” he said. “I think there’s a little bit less fear that the sky is falling, maybe than there was 120 days ago. Hopefully it’s well founded.”

While the multifamily market is not likely to see the same rapid increase in rents that it saw in 2021, Lawlor believes the market is in a good place. “We won’t be charging forward like in 2021, with a 20 percent rental growth and three or three and half percent cap rates,” he said. “But if we’re just moving forward, normally with four or 5 percent rent growth, and four and a half to 5 percent cap rates, both of those numbers are still way better than 35 of my 37 years in the business, so not so bad.”