Rising interest rates have been upending apartment deals all over the country, but that isn’t stopping Three Pillars Capital Group. In May, the vertically integrated private equity firm was able to sell three separate properties — comprising 460 units including the Ridge Point Apartment (pictured above) — in its hometown of Houston for a combined total of $56 million.

However, George Goyal, founding partner at Three Pillars — which specializes in class B and C multifamily communities with more than 3,000 apartments — sees a broader dislocation in the market that he attributes to the widening gap between buyer and seller expectations.

According to Goyal, as rates move up, buyers expect discounts, but some sellers haven’t lowered their prices. “Sellers are now going to have to come off their high horse in terms of expectations on pricing,” he said.

Here, Goyal talks with Multifamily Dive about interest rate pressures, the disconnect between buyers and sellers and apartment demand.

This interview has been edited for brevity and clarity.

MULTIFAMILY DIVE: How do you see interest rate increases affecting apartment owners? 

George Goyal:  Strong operators optimizing all of their income and expenses will fare better than operators who rode the high wave for the last two years and just bought at the right time. The companies that bought in the last six months are going to have to perform. We are hearing stories about companies struggling a bit because of interest rates on their variable-interest-rate loans. Their debt-service payments are going to ramp up and they need to replace that with incoming cash flow.

How does that play out for these borrowers?

I’m hearing stories of cash-in refis instead of cash-out refis. If you have a property with a variable-interest-rate loan and you want to lock in an interest rate today, you have to put cash in at the refi instead of pulling cash out, which is typically what you want to do. But owners want to put cash in to have some security that they're locked in at an interest rate that they can live with. 

Do you sense there's a disconnect in the market right now between buyer and seller expectations?

There definitely is. Deals are getting retraded — the lender will come back and say: “We have to lower the loan-to-value and lower the loan proceeds.” That means the buyer needs more equity. 

They either have to come up with the equity or they can go back to the seller and say: “I can't buy this property at this price anymore because I'm not getting the loan that I was expecting. So either we adjust the price to make the deal work or we fall out of contract and you can restart the marketing process all over again.” 

Sellers are not in a situation where they'll be able to get a similar price if they put the property back on the market.

Have you noticed any price sensitivity from your residents as prices for food and gas have increased?

No. It goes back to the supply and demand of housing. We're in a big affordable housing crunch, and class B and C are known to be recession-proof. With interest rates going up, home buyers are going to get priced out, and that only creates more demand for rentable units. 

Within the pool of available properties, the ones offering the best product and the best service will win. We've got a lot of competing class-B and -C assets. We were known for doing renovations that were over the top for class B and C, but we’re seeing retention and strong occupancy. In fact, we’ve adjusted our rents upward by 5% to 6% for all of our properties because the continuing demand is still there.

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