I mentioned in the Mid Atlantic Real Estate Journal several months ago that at least one of our big regional lenders for the state of New Jersey no longer wanted to do multifamily construction and was pulling back on new multifamily lending and only lending to their premier existing clients.I can understand this rationale. Many of the industry reports indicate thousands of units coming online throughout the metropolitan region. In some places, it is truly amazing, however “the herd effect” has begun. This past week, I was promoting the financing of two B grade “bread and butter” multifamily properties in solid locations in NJ. I was amazed and shocked to hear that many smaller balance sheet lenders which I contacted have exited the multifamily market or severely cut back. B grade multifamily apartments are primarily leased by those who “need” to rent. Most of the new apartments that are coming online are rented by people who “want” to rent.
I can understand lenders want to pull back on new construction, but to pullback on fully leased, stable, low per unit values appears to be foolish at best. Occupancy rates are near 100% in B and C grade apartments throughout northern NJ. A reason received from lenders is that the market for multifamily is so competitive that they do not want to loan at extremely low spreads and low rates that have been in the market this past year. They would rather lend on commercial properties, such as office and industrial, where they could get greater spreads. In my humble opinion, those greater spreads come with greater risk.Refreshingly, not all lenders have exited the multifamily market. After a more exhaustive search than usual, we have been able to obtain several competitive bids on deals we have been shopping this week. But the market is tightening. Reasons: The election? End of year slowdown? Lender having reached or exceeded their 2016 allocations? Risk aversion? Time will tell. Mark Scott is principal of Commercial Mortgage Capital.