Category: Financing

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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Popular Mortgage-Bond Trade Losing Appeal as Rates Keep Rising

(Bloomberg)—One of the most popular mortgage-bond trades since the financial crisis is going out of fashion as rising rates punish down-on-their-luck borrowers.

So-called “scratch and dent” mortgages — which are tied to borrowers that fell behind or began repaying their debts after a default — accounted for the largest piece of the U.S. residential mortgage-backed securities market without government backing over the last decade.

But rising rates make it harder for homeowners to refinance their mortgages, potentially lengthening how long it will take them to pay off that loan. This means bond buyers could get stuck with these non-performing loan and re-performing loan mortgage securities for more time than they anticipated. And investors are taking a step back, pushing yields higher.

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The Top Countries Investing in U.S. Commercial Real Estate

Canadian investors have been the most active buyers of U.S. real estate in the last 12 months, securing $19.63 billion in assets, according to a recent report from Real Capital Analytics (RCA). It’s a familiar spot for the Great White North, which was also the top source of capital into the U.S. in 2017 and number two in 2016. China, which topped the list in 2016, sits fourth in volume for the past 12 months, at $5.48 billion. Singapore ($9.05 billion) and France ($8.66 billion) edged out China for second and third on RCA’s list. Germany, with $4.33 billion in capital invested in the U.S., rounded out the top five.

Cross-border investment has continued at a strong clip despite an increase in protectionist measures, such as tariffs and tensions in trade agreement negotiations. According to RCA’s report “These fears are genuine but sometimes also taken to extremes. This too shall pass…. Cross-border investors are, with some exceptions, focused on longer-term objectives and temporary roadblocks can be overlooked. Clearly these investors overlooked trade concerns in the first half of 2018.

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Attracting Institutional Capital to Affordable Housing Debt Markets

Impact investing as a category is attracting institutional investors with diverse goals to seriously consider adding impact to their portfolios. In the ESG landscape, there is an opportunity today to expand beyond the plentiful array of “environmental” funds to explore “social” impact—specifically, affordable housing as an investable asset class.

The question is, how can affordable housing lenders attract institutions to multifamily, affordable rental housing in a way that reflects fundamental requirements of institutional investors (from risk profile to financial performance)? Below are several criteria to consider.

CONSISTENCY AND TRANSPARENCY

Investors want to know what they are buying. To dedicate resources to an investment opportunity, institutions need scale and that means, more than big dollar amounts, replicability. It means that they look for assets with similar economic returns and risks. This allows the assets to be considered “similar” and allows investors to apply a consistent investment analysis to them.

Additionally, potential investments should have defined parameters that drive risk and return. This reduces uncertainty and provides a framework for evaluating the investment opportunity. For example, low-income housing tax credit (LIHTC) properties perform in similar ways to each other because, despite the geographic and property type diversity, the tax credit program provisions are a key driver of performance. This helped facilitate institutional investment as investors could apply consistent framework across investments and get comparable results.

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Attracting Institutional Capital to Affordable Housing Debt Markets

Impact investing as a category is attracting institutional investors with diverse goals to seriously consider adding impact to their portfolios. In the ESG landscape, there is an opportunity today to expand beyond the plentiful array of “environmental” funds to explore “social” impact—specifically, affordable housing as an investable asset class.

The question is, how can affordable housing lenders attract institutions to multifamily, affordable rental housing in a way that reflects fundamental requirements of institutional investors (from risk profile to financial performance)? Below are several criteria to consider.

CONSISTENCY AND TRANSPARENCY

Investors want to know what they are buying. To dedicate resources to an investment opportunity, institutions need scale and that means, more than big dollar amounts, replicability. It means that they look for assets with similar economic returns and risks. This allows the assets to be considered “similar” and allows investors to apply a consistent investment analysis to them.

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Richard is our resident social media expert. He researches and writes about; the economy, marketing trends and all aspects of real estate investing.

Wall Street Investors Increase “Big Short” Bets on CMBS Retail Loans

In 2015, “The Big Short” movie based on the Michael Lewis book chronicled a handful of investors who struck it rich by betting on the failure of subprime residential mortgages. Some investors are making a gamble that retail-backed CMBS loans could be the next “big short.”

Hedge fund company Alder Hill Management is one high-profile player shorting CMBS with high concentrations of retail loans. The Wall Street Journal first reported on the hedge fund’s short 18 months ago, followed by a more recent story in early August that said the hedge fund made an additional short investment on 2012 and 2013 era loans. Earlier this spring, Bloomberg also reported that Deutsche Bank and Morgan Stanley had both recommended buying credit protection against, or shorting, segments of CMBS with heavy concentrations of retail loans.

Some people are looking at retail loans as the next “big short”, says Manus Clancy, senior managing director and the leader of applied data, research, and pricing departments at Trepp. “There are some similarities, but there are a lot of differences,” he notes. One difference from the subprime short is that there were very few investors taking those short positions. “In this case, you have a pretty good amount of people on either side, meaning longs and shorts,” says Clancy. In addition to Alder Hill there are about two dozen investors that have either already taken a short position or are looking at the opportunity, he adds.

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Fannie-Freddie Overseer Scraps Program for Rental-Home Investors

(Bloomberg)—The U.S. regulator for Fannie Mae and Freddie Mac is shutting down a controversial program that subsidizes loans for firms investing in single-family rental homes, saying the market can function well without the support.

The Federal Housing Finance Agency said Tuesday that the two mortgage giants will dial back their participation after a two-year “test and learn” pilot program designed to gather information on the market and best practices. The agency said in a statement that it also sought industry feedback on market challenges and opportunities, and conducted its own impact analysis during the pilot period.

“What we learned as a result of the pilots is that the larger single-family rental investor market continues to perform successfully without the liquidity provided by the enterprises,” FHFA Director Mel Watt said in a statement.

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