In a year of immense uncertainty and volatility, the multifamily sector has remained one bright spot for commercial real estate investors. Multifamily property fundamentals have held up well, with rents deceasing by only .3 percent in September year-over-year, according to a Yardi Matrix report.
While the outlook for hospitality, retail and even office remains cloudy, a recent CBRE report projects that multifamily will make a full recovery within two years, becoming one of the fastest asset classes to recover from the pandemic downturn. Yet despite the positive outlook, investors may still encounter obstacles when it comes to financing multifamily assets in the near term, primarily because there remains so much volatility in the market overall.
Following are three questions being asked about the current multifamily lending environment—and some answers to guide your capital strategy.
What factors are lenders evaluating when underwriting multifamily assets in this new environment?
With high unemployment, lenders are carefully watching rent collection rates at the property level. This metric is increasingly important to consider during the underwriting process, and lenders are also carefully watching macrotrends to understand long-term COVID-19 impacts on the housing market.
It remains to be seen how large an impact the pandemic will have on the desirability of dense, urban neighborhoods. When the economy fully opens up again, downtown areas will inevitably remain attractive places to live for some people, but it’s also likely that more people will continue working from home at least part of the time—changing the dynamics of what people seek in a home.
Make no mistake: apartment living isn’t going away. But it is changing. Many residents today are more open to moving farther from the downtown core to get into bigger units. And apartments with direct access from the outside—without the need to trek down long corridors possibly filled with contagion—are becoming more popular. This increases the value of garden-style apartments and mid-rises compared to high-rises, at least while virus transmission remains a top concern.
Secondary markets and suburbs are benefiting from pandemic-driven preferences, too. Recent research from Moody’s Analytics REIS listed the top five markets for multifamily investment as Lexington, Knoxville, Phoenix, Nashville and Minneapolis. In contrast to national rent trends, these five metro areas have all experienced rent growth throughout the pandemic.
In addition to location, lenders are examining what amenities multifamily owners offer to residents who are spending more time at home. Coworking spaces within apartment buildings, for example, will be increasingly attractive. Despite being shared spaces, they allow people to work from an extended version of their home, without commuting on public transportation or working alongside others in a traditional office set-up.
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Which lenders are actively financing multifamily today?
While some lenders have been open for business for the right deals, others have reined in financing as they adjust to the new realities of today’s market. Lending for commercial and multifamily properties dropped 48 percent in the second quarter compared to a year ago, according to the Mortgage Bankers Association. The market has picked up, but Freddie Mac research indicates that banks, life companies, conduit lenders and others are expected to make 20 to 40 percent fewer loans in 2020 compared to 2019.
The government-sponsored enterprises (GSEs), Fannie May and Freddie Mac, have remained active, providing much needed liquidity in the market. However, agency financing isn’t always an option for all borrowers, such as when acquiring a value-add asset or a mixed-use property that has too large of a commercial component to qualify for GSE financing.
As the market becomes more complex, borrowers need more options to secure the financing they need. Non-traditional lenders such as credit unions can often offer more flexibility to get a deal done amid market uncertainty.
What options are available for borrowers who need flexibility?
Agency financing remains a strong option for borrowers with straightforward financing needs, but the market is anything but straightforward today. For investors who are seeking alternative financing solutions with flexibility or looking at value-add opportunities that have upside return potential, it’s worth exploring non-traditional deal partners.
Savvy commercial real estate borrowers know to look beyond the obvious deal partners to ensure they are getting the best terms. And they know that the best terms don’t simply mean the lowest interest rate; deal structure and flexibility are major considerations.
Borrowers should evaluate how flexible a lender can be to meet their needs. For example, portfolio lenders like credit unions may be better able to offer tailor-made yield maintenance and structuring such as interest-only, short-term bridge, flexible yield maintenance penalties or bridge-to-permanent capital. They may also be more receptive to discussing additional capital requirements or other unique challenges that a sponsor is facing.
Uncertain times call for more creativity and flexibility to get deals done. Working with a capital provider that can provide tailored structures helps remove some anxiety in today’s volatile environment.