Multifamily Lending Outlook Remains Positive
The first quarter of the year tends to be slower in the world of multifamily lending, but 2019 started off busy – with sales volume totaling $36.4 billion in the first quarter – and has continued through the first half with no signs of letting up.
Driving the strong activity is considerable buyer demand in the sector, plentiful capital and the 10-year Treasury rate which has dropped to near-record lows the market has not seen in many years.
“There’s so much capital chasing deals right now that there’s a lot of competition,” says Don King, executive vice president of commercial real estate finance provider Walker & Dunlop. “The demand is high, and it’s a bigger market than anyone thought it would be at the beginning of 2019. We are in a great groove right now, and I don’t see that changing too much in the near future.”
Investors haven’t lost their appetite for apartment properties, with investment sales up 15.1% to $167.5 billion in 2018 compared with the previous year. Macro-industry trends in multifamily have remained consistent, such as strong rent growth year-over-year, low cap rates and solid renter demand.
According to Reis, the average asking rent in the U.S. was up 4.9% in 2018 with continued growth anticipated over the next three years and cap rates at the end of 2018 remained at historic lows finishing the year at a 5.6% average.
But the biggest factor is the low interest rate environment, especially in the fixed-income market where attractive, long-term, fixed-rate financing has generated considerable opportunities not only for acquisition scenarios, but also refinances.
Agency lenders – Fannie Mae, Freddie Mac and HUD – continue to dominate the multifamily lending landscape, however smaller regional and community bank lenders also offer very competitive options.
According to Jay Shaw, owner of the Columbus, Ohio mortgage banking firm Inland Financial, such smaller lenders fill a very important niche in multifamily lending.
“There are many sponsors who seek flexible, fixed-rate loans in the Columbus market”, says Shaw. “Most often, this is for acquisition and rehabilitation or new construction deals, where the sponsor seeks higher leverage, a period of interest-only payments during the build-out phase and flexible prepayment terms upon sale. In the current low interest rate environment, we are seeing considerable demand for such loans. And in situations where the sponsor intends to sell the asset upon stabilization, regional and community bank lenders offer product types that are a perfect fit.”
Shaw points out that banks also have the ability to finance properties that aren’t a good fit for agency lenders at terms that are very competitive.
“Certain multifamily deals can be a challenge for agency lenders, such as scattered site transactions or smaller properties with low unit counts. We have seen a recent trend of regional and community bank lenders not only being able to finance these deals, but being very aggressive with their rates, amortization and other terms, sometimes nearing those of agency lenders on deals of the right size with strong sponsorship. In my opinion, this speaks to the strength of the multifamily segment and the amount of capital chasing deals.”
Contact Brown Multifamily Advisors to learn more about financing multifamily real estate through some of our trusted partners.