Multi-family investors adjust to tighter financial markets

Rising interest rates and the general state of the financial markets are the main concerns of the respondents of WMRE‘s ninth annual multifamily research report. (This year’s report is brought to you by ThinkWood).

Respondents are more pessimistic about the availability of capital. Although 41% see no change in the availability of equity compared to 12 months ago, 37% believe it is less available and 16% said it is more available. On the debt side, 38% said there had been no change in availability, compared to 42% who see it as less available and 15% who think it is more available than there is. 12 months. With the exception of 2020, respondents have the most negative view of the availability of capital in the history of the survey.

The survey was conducted just before the July 26 Fed meeting, which led to a 75 basis point rate hike. So it’s no surprise that 91% thought interest rates would rise over the next 12 months. Rising interest rates translate into higher capital costs. As of mid-August, 10- and 7-year fixed rate loans were priced identically due to the yield curve with an overall rate of around 4.25-4.50% depending on the individual transaction. This is a significant change from 12 months ago, when borrowers could finance at around 3%, notes Jeff Erxleben, president of debt and equity at Northmarq.



“Rising interest rates and disruptions in some segments of the credit markets have led to a shift in funding activity,” Erxleben adds. Last year, it was in the CLO market and the bridge loan market that most transactions took place. This still happens to some extent, but the real trend in which the finance business is today is with Fannie Mae, Freddie Mac and the banks. Life insurance companies are still active, but very selectively, he adds.

“Freddie and Fannie are really the go-to source for refinancing activity and for some acquisition activity,” Erxleben says. Refinancing activity is conducted by investors seeking to convert shorter term bridge loans into longer term fixed or floating rate options with agencies. On the acquisition side, Fannie and Freddie continue to compound their lending and underwriting proceeds to find accretive loan-to-value ratios for acquisitions. This is also offset by acquisitions that have adjusted to current market dynamics in terms of higher capitalization rates, Erxleben notes.

Respondents ranked local/regional banks as the top source of loan capital for multi-family housing with an average score of 6.4 out of 10, followed closely by national banks at 6.2 and Fannie Mae/Freddie Mac at 6.0.

Survey results related to LTV prospects were mixed. Thirty-nine percent predict no change, while 36% think they will go down and 25% think LTVs could go up. Opinions on DSCRs are also split with 41% believing they will remain stable and 45% believing they will increase. Those who expect DSCRs to fall are in the minority at 14%.

The reality is that DSCRs and LTVs have increased as values ​​have fallen, Erxleben notes. According to Erxleben, loans that capped at 50% 12 months ago LTV are now in the 60s or even moving close to 75% on agency loans. The good news is that fundamentals remain very strong with good cash flow from properties, and lenders continue to underwrite aggressively. “Lenders continue to be bullish on the sector itself and the performance of properties remains strong. So they’ve dialed in their assumptions and they’re ready to lean a little more,” he says.

Multi-family loans performed very well with delinquencies below 0.5%. However, three-quarters of respondents believe that delinquencies will increase over the coming year, reflecting a considerable jump from the 57% who shared this view a year ago. Probably, this answer is related to the fact that the delinquencies have been incredibly low. “Any spike that does occur is likely to occur in some cases where the business plan didn’t work or where other forces were at play, but across a wide range of multi-family housing, we don’t see the delinquencies. increase significantly,” says Erxleben.

The full version of WMRE’s Multi-Family Market Study (presented by ThinkWood) will be released later this month.

Survey Methodology: The WMRE Multi-Family Research Study was conducted via an online survey distributed to WMRE readers in July 2022. The survey results are based on responses from 289 participants. Respondents represent a cross section of different roles in the multifamily sector, including investors, property owners and managers, developers, lenders and brokers. Nearly three-quarters hold a senior management position within their company, including 50% who identified themselves as owner, partner, president, president, chief executive officer or chief financial officer.