Category: Financing

Despite Fears of Overbuilding, Lenders Remain Willing to Fund Multifamily Development

Apartment developers are paying more interest on their construction loans—but that isn’t keeping developers from planning and financing new projects.

Despite rising interest rates and the nagging anxiety that developers are already building too many apartments in some markets, banks remain active lenders for multifamily construction projects.

“There is certainly no shortage of capital,” says Danny Kaufman, managing director in the Chicago office of HFF.

Interest rates rise

Apartment developers are paying more interest on their construction loans—but that isn’t keeping developers from planning and financing new projects.

“People have been predicting rates rising for 10 years—now it is finally happening,” says John Kelly, senior vice president and partner in the Boston office of CBRE. “But the cost of capital has not become an inhibitor of overall development.”

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Freddie Mac set all-time record for multifamily security issuance in 2018

GSE issued more multifamily securities than ever before

Freddie Mac continued its record-setting ways in the multifamily business in 2018, establishing a new record for multifamily security issuance for the second year in a row.

According to the government-sponsored enterprise, it issued $72.8 billion in multifamily securities in 2018, breaking its 2017 record of $68 billion.

“With our diverse array of securities, including our flagship K Deals, we continue pioneering efforts to meet private sector demand for investment products while shifting risk away from taxpayers,” said Debby Jenkins, executive vice president and head of Freddie Mac Multifamily.

“Our broad issuance platform had another outstanding year,” Jenkins said. “As we look to the future, we’re going to continue pushing for more innovations that can lower capital cost for borrowers, making rental housing more affordable.”

According to the GSE, it issued the following securities in 2018:

  • $61.6 billion in K Deal
  • $7 billion in SB Deals
  • $4.2 billion in KT Deals, PCs, Q Deals, M Deals, and ML Deals

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Multifamily Borrowers Will Continue to Have Access to Multiple Capital Sources in 2019

Capital sources ranging from banks to private equity funds still find multifamily lending attractive.

Multifamily borrowers will have lots of choices on where to get permanent loans in the new year—despite worries about rising interest rates, high property prices and overbuilding.

“There is nothing out there that is going to create a lack of liquidity,” says Gerard Sansosti, executive managing director with capital markets services provider HFF.

Multifamily investors can get permanent loans from a growing list of lenders, including Freddie Mac and Fannie Mae lenders, banks and life companies. Many private equity fund managers have also created debt funds to provide loans on apartment properties.

“Rising rates aside, 2019 should feel the same as 2018 in terms of liquidity,” says Peter Donovan, executive managing director with CBRE’s capital markets multifamily group.

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Fed Raises Rates, Trims Forecast for Hikes in 2019 to Two

The Fed unanimously raised the federal funds rate target to a range of 2.25 to 2.50 percent.

(Bloomberg)—The Federal Reserve raised borrowing costs for the fourth time this year, looking through a stock-market selloff and defying pressure from President Donald Trump, while dialing back projections for interest rates and economic growth in 2019.

By trimming the number of rate hikes they foresee in 2019, to two from three, policy makers signaled they may soon pause their monetary tightening campaign. Officials had a median projection of one move in 2020.

Following the decision, stocks erased gains and 10-year Treasury yields fell while the dollar bounced off its lows of the day. Investors may have been swayed by the Fed’s generally upbeat analysis and expectation of more rate increases than markets anticipate.

Chairman Jerome Powell and his colleagues said “economic activity has been rising at a strong rate’’ in a statement Wednesday following a two-day meeting in Washington. While officials said risks to their outlook “are roughly balanced,’’ they flagged threats from a softening world economy.

The Federal Open Market Committee “will continue to monitor global economic and financial developments and assess their implications for the economic outlook,” the statement said. The unanimous 10-0 decision lifted the federal funds rate target to a range of 2.25 percent to 2.5 percent.

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Bridge Lenders Try to Balance Strong Demand with Risk Awareness

Business volume for bridge lenders remains high, but they are feeling more cautious.

Evan Gentry, founder and CEO of Money360, believes 2019 will be the year the California bridge lender hits $1 billion annually in loan volume. Money360, which launched in 2014, has been doubling or tripling in size annually despite the entrance of Wall Street hedge funds into the bridge lending space, Gentry says.

“There’s a lot of opportunity in the market,” he notes. “Transaction volume was strong in ’18; we think it will continue to be strong in 2019.”

Money360 is one of hundreds of U.S. bridge lenders that still see plenty of runway at this stage of the real estate cycle, despite growing competition that has fostered a new level of aggressiveness, including higher leverage, lower pricing, no appraisal loans, innovative loan structures and originators willing to lend on non-cash-flowing assets.

This year “was one of our best years, even though it was very competitive,” says Marissa Wilbur, origination associate with Archway Fund, a Los Angeles-based bridge lender that doesn’t require appraisals and allows higher leverage than some of its competitors. “By the end of June, we had hit our (year-end) target goal.”

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Commercial Loan Originations Declined in the Third Quarter, But the Full-Year Activity Should Be on Par with 2017, MBA Predicts

Rising interest rates, concerns about cycle end contributed to a 7 percent year-over-year decline in commercial mortgage originations in the third quarter.

As commercial and multifamily originations appear likely to close out the year roughly on par with the record activity of 2017, capital markets experts are reading the tea leaves for 2019.

The Mortgage Bankers Association (MBA) reported a 7 percent year-over-year decline in commercial/multifamily lending activity in the third quarter, based on its quarterly survey results, but predicts commercial and multifamily mortgage originations to total $532 billion for 2018, similar to last year’s record volume of $530 billion.

For 2019, the MBA forecasts total commercial/multifamily originations of $541 billion, a 2 percent increase over 2018.

Capital should keep flowing next year, according to Jim Cope, head of production for capital markets at Walker & Dunlop, a commercial real estate services and finance firm. “As long as interest rates don’t get out of control, capital flows will continue to be strong in 2019,” Cope says. Bethesda, Md-based Walker & Dunlop was the nation’s 10th largest commercial real estate lender during the first half of 2018, according to data from Real Capital Analytics (RCA), a New York City-based research firm. “We are not hearing that anybody is pulling back in allocations for 2019,” Cope notes.

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Where Do You Turn for Capital When Rates Rise?

When rates rise, apartment building lenders are really concerned with two things: (1) Will rising rates depress the future value of the subject collateral? (2) How do I take advantage of higher future rates to increase my return on the loans I make?

As interest rates rise, property cap rates should rise with them. All things being equal, this will cause the value of an apartment building to go down. In an effort to mitigate the risk of a property’s value declining and ending up over-leveraged if NOI does not increase, many lenders are dialing back how much loan dollars they will give on any investment. If they were willing to give out 75 percent loan-to-value on acquisitions when rates were stable, now maybe they have moved down to 70 percent loan to value. Ultimately what this means for an investor is coming to the table with more upfront dollars and a lower return on the dollars invested. Coming in with an extra 5–10 percent may not be the end of the world, but for many properties that were being sold for top dollars and tight margins, that could make a big difference in whether or not the investment makes sense.

Shorter Terms Prevail

Many apartment building lenders are also looking at rising rates as an opportunity for them to capture more yield on their loans. This can be a difficult task, however, since most investors are going to demand a fixed rate. If a lender can offer a swap, it can be an attractive way for them to see upside as rates rise. But many borrowers do not qualify for them and some that do push back on doing swaps. What many lenders do instead is simply hold off on offering long-term fixed rates and instead offer short-term fixed rates in an effort to see short- to medium-term rate adjustments on their loans. What this means for investors is that they are going to find many more short-term fixed-rate options in the market as opposed to long-term, 10-year fixed products.

The lenders most likely to get conservative in a rising-rate environment are going to be banks and other depositories. They are heavily regulated and often need to be ahead of the curve in risk management or they can end up explaining themselves to the FDIC later down the road. Investors should be aware of this when looking for loans today and be certain to explore non-bank lending options, especially through government agencies. Investors with small property loans under $1 million may not have many loan options with these types of non-bank lenders, but investors with loan amounts over $1 million per property will be able to take advantage of much more competitive options.

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Less Is More for Apartment Brokers

Having been in the residential real estate business for almost 15 years now, I have been surprised to see the change in many brokers’ approaches to leasing and sales. Numerous brokers today often sell themselves and the properties in an overly aggressive fashion rather than just being congenial and friendly in the hopes of developing client relationships that way. Many newer agents don’t realize that it’s typically more effective to let the residence sell itself than to be pushy about closing the deal.

It’s important to recognize that if people don’t have the need for what you’re offering, then there is no way to make them have that need. Thus, brokers should never employ begging as a strategy. When hiring potential agents, I always ask them whether they have the ability to make people rent or buy a listing. If they believe themselves capable of such a feat, then I know they are probably much more aggressive than I prefer my agents to be.

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World Trade Center Builder Silverstein Expands Into Real Estate Lending

(Bloomberg)—Silverstein Properties Inc., the developer of prominent New York City buildings such as 3 World Trade Center, launched a real estate lending venture to profit from what it sees as a financing gap left by banks.

Silverstein Capital Partners will provide loans for the full gamut of projects, from office and industrial to residential and retail, the company said. Silverstein has partnered with a sovereign wealth fund and a pension fund that together will provide most of the capital for the venture, Chief Executive Officer Marty Burger said in an interview, declining to name them.

Burger wouldn’t say how much money the venture has to lend but said the partners have deep pockets and that there is no maximum loan. The minimum loan will be $25 million. The venture, which is prepared to start lending immediately, already has a pipeline of deals, he said, and he expects annual returns of 10 to 15 percent. This is Silverstein’s first foray into lending.

“There were a lot of banks that couldn’t handle the loans,” Burger said. “We’re a developer at heart, and we usually do very large projects, and we found that there was just a gap in the financing markets where there were large loans needed for complicated projects.”

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Subprime Sneaking Back

Subprime financing is on the upswing, and for a lot of people that’s a problem. The mortgage meltdown is widely identified with subprime lending so why should the return of such loans be welcomed?

“Riskier U.S. mortgages are creeping back into the bond market again,” reported Bloomberg in May. “The loans in question are nowhere near the toxic mortgages that brought down the financial system last decade. But they’re being made to people with lower credit scores and with more debt relative to their income.”

Average wage earners purchasing a home at the U.S. median sales price of $245,000 in Q2 2018 would need to spend 31.2 percent of their gross income on the monthly house payment for that home — assuming 3 percent down and including mortgage, property taxes, and insurance, according to the ATTOM Data Solutions Q2 2018 U.S. Home Affordability Report.

That 31.2 percent of average wages needed to purchase a median-priced home in the second quarter of 2018 is the highest in nearly 10 years. Back in 2008 the share of income needed to buy was 34.3 percent.

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