Multi-Family Finance: The Landscape Ahead
As we enter the second half of 2015, and with the impending move of interest rates upward, we have started to see “caution and change” on the lending landscape for multi-family owners in the Mid-Atlantic Region looking to acquire, refinance or develop a multifamily project.
The availability of 10-year fixed rate product is starting to contract given lender’s uncertainty over long-term rates. Agencies such as Fannie Mae and Freddie Mac are still an option but have been pricing intentionally “wide”. Bank balance sheet lenders are slowly but surely moving out of the 10-year fixed rate business and pricing 3, 5 and 7-year product more competitively.
Those Lenders offering 5 and 7-year fixed rates as their core product are now stress testing their underwriting at higher interest rate levels (i.e. 5.25% to 6.25%) to test for refinance risk. Lenders offering floating rate debt on “value-add” projects are performing the exact same exercise.
On fixed rate debt, lenders are offering loan terms of 10 to 12 years in duration. The term starts with the initial 5 or 7 year fixed rate. Extensions are then offered at a predetermined interest rate spread over a base index shifting the interest rate risk back to the borrower.
Today, borrowers are keenly aware of what the future holds for rates, and most look to lock in their rate as soon as possible. On the lending side of that equation, we have seen lenders discontinue their early rate lock programs. The overwhelming majority will not formally lock the rate until all third party reports are completed, signed off on, and the commitment is issued and accepted.
Through the “recovery-expansion” phase of the apartment segment, lenders have generally maintained their discipline on leverage where 75% LTV remains the norm. There are a handful of bank balance sheet options available at 80% LTV, but typically reserved for acquisition deals. That aggressive leverage is typically offset with more stringent underwriting (i.e., T12) or some level of recourse.
CMBS lenders are getting more multi-family deals done picking off lower quality assets and assets in secondary-tertiary markets. Higher leverage is also an option via CMBS in conjunction with mezzanine debt. Maximum proceeds will largely be determined on underwriting to a “debt yield” threshold.
On the development side, expect the pace of new projects to taper off significantly. The multi-family cycle in the Mid-Atlantic is in late stage “expansion”. This, coupled with soon to be rising interest rates, the recent additions to the supply side and the noose put around the neck of the banks vis-à-vis “Basil III”, development money will be harder to come by.
None of this is unusual in this stage of the cycle and there are lenders out there making exceptions on pricing, leverage, rate lock and other loan terms. There is an ample supply of equity in the market as well, for the right deals. It just takes a more concerted effort to find the perfect combination on the ever-changing landscape of multi-family finance.
George D. Johnson, Jr. is president & CEO of Rittenhouse Capital Advisors. He has been in the commercial real estate financing industry for over 30 years. Throughout his career, he has been directly responsible for loan production approaching $1B.