After two years of extraordinary liquidity, multi-family loans are on track for a record year that will offer multi-family investors and sponsors a full menu of competitive options.
“Much of the uncertainty that reigned in 2020 around the multi-family market, much of that fog, has lifted,” said Woodwell. “So lenders and investors feel pretty confident in their ability to understand a property, understand its current operations and where it will be in the quarters and years to come. “
Even worries about interest rate hikes, tax changes, inflation and rising construction costs are not dampening expectations. Multi-family loans are expected to reach about $ 421 billion in 2022, up from the record high of $ 409 billion forecast for 2021 and a 13% increase from 2020, according to MBA.
“When you look at how you expect to see 2022 versus 2021, I think there is still a lot of room to operate in the market,” said Brian Hirsh, vice president of Mesa West Capital Partners. “There is a lot of equity that has not yet been deployed. “
Mesa West, which specializes in variable rate bridging loans for sponsors seeking capital and flexible structures, made more than $ 600 million in loans in the third quarter alone. Transactions varied from coast to coast and included acquisitions, refinances and recapitalizations. Among the transactions was a five-year, $ 77 million adjustable rate first mortgage for the acquisition of Alta Congress, a 369-unit multi-family property in Delray Beach, Florida.
Foreign investment is expected to increase with the lifting of restrictions on overseas travel. Capital will flow to conventional multi-family assets as well as affordable and labor-intensive segments, but lenders also expect deals for student and senior housing to resume in 2022. Single-family rentals, which increased significantly during the pandemic, often with institutional investors, is also expected to continue to grow.
A big increase will come from government sponsored companies. The Federal Housing Finance Agency has increased the 2022 multi-family loan purchase limits for Fannie Mae and Freddie Mac by $ 8 billion each. This will raise the caps to $ 78 billion between the two agencies.
“It’s huge for us because it’s more capacity,” said Pamela van Os, senior vice president and head of West Coast branch loan production at Greystone. “More capacity means more availability to get us into debt. “
The FHFA has also changed several key definitions. Loans are considered mission-oriented if the units involved are affordable to cost-overburdened tenants with incomes of up to 100% of the median income of the area and, in some cases, up to 120% of the FRIEND. Units affordable to residents with incomes at 60% of the MAI will be eligible for loans with energy and water improvements. Changes to the FHFA for cost-overrun tenant markets could mean more competitive prices for borrowers in high-cost areas, but lenders are waiting for clarifications on the markets that will be included.
The FHFA has also changed several key definitions. Loans will be considered mission-oriented if the units involved are affordable to high-cost tenants with incomes of up to 100% of the median income in the area and, in some cases, up to 120% of the FRIEND. Units affordable to residents with incomes at 60% of the MAI will be eligible for loans with energy and water improvements. Changes to the FHFA for cost-overrun tenant markets could mean more competitive prices for borrowers in high-cost areas, but lenders are waiting for clarifications on the markets that will be included.
Yet the change is seen as positive. “It allows (GSEs) and us to compete for this truly affordable business in those markets and it puts these deals in the bucket of mission capital and out of the bucket of non-mission capital,” noted Don King, vice-president. executive chairman of multi-family finance at Walker & Dunlop.
The changes are expected to result in a more consistent transaction flow than in 2020 and 2021, when lower caps slowed GSE creations. It also indicates that Fannie Mae and Freddie Mac may be more aggressive on market rate deals in 2022.
“Agencies always have very good options for long-term debt. We’ve seen really aggressive pricing from them this year, ”said Scott Modelski, Managing Director of Black Bear Capital Partners, which specializes in structured debt and equity advice. “Our company was able to close a handful of deals below 3%. I think the best deal we could get was a 2.88%, 10 year, 10 year interest only loan (loan).
For its part, Fannie Mae has expanded its variable rate products and has been more aggressive this year. This should create additional opportunities for homeowners to refinance three-year variable rate construction loans into permanent debt – likely with GSEs – and for new buyers to acquire stabilized assets, predicted Hilary Provinse, vice-president. Executive Chairman of Berkadia and Head of Mortgage Banking Services.
With Fannie Mae and Freddie Mac expected to generate around 40% of multi-family loans in 2022, borrowers will have a variety of additional options including banks, debt funds, REITs, private lenders, Wall Street conduits and life insurance companies. Life insurance companies, for example, increased the number of multi-family arrangements, adding $ 2.5 billion in mortgages in the second quarter alone, Woodwell said.
Banks often prefer to lend on smaller assets, and life insurance companies tend to like “higher quality assets, at market rates and low LTVs,” said King of Walker & Dunlop. “This is where they like to play, and they compete on price.”
The cap rate factor
Compression of the capitalization rate is also more common. Formerly present primarily in coastal entry markets, the trend now encompasses popular secondary and tertiary markets. Faced with ceiling rate constraints, Berkadia aims to structure agency agreements more competitively in markets where rents are rising and to use interest only as a tool to compensate for a lower LTV for the borrower, reports Provinse.
At Comerica Bank, which focuses on short-term multi-family construction and value-added loans, multi-family clients will find LTVs of between 50% and 60% on new development loans due to low cap rates, the vice said. -Executive Chairman Jeffrey Bloom. With a higher LTV, borrowers may want amortization while interest-only payments may make more sense for a low LTV.
Comerica doesn’t buy into today’s low interest rates, and even when rates rise, there would be a long way to go before an increase had a significant impact on their underwriting, Bloom noted. He cited Texas and California as examples of markets where the lender plans to remain active in 2022, as well as Arizona, Florida, Georgia, Colorado, Nevada and Washington.
Borrowers looking for a higher LTV and more years of interest-only interest may consider loan funds, noted Mitchell Kiffe, senior managing director of CBRE and co-head of domestic production. For CBRE sponsors looking for acquisition loans with a combination of product, price and structure, debt funds have been the most competitive option in recent times, he said.
With interest rates typically between 3 and 3.5 percent for fixed and variable rate loans, “the big advantage of debt funds is that they are not limited by the income guarantee in place.” Kiffe said. “They are prepared to look into underwriting some of the rental growth that we are seeing.”
Debt funds can generally offer a loan-to-cost ratio of 75% on most multi-family acquisition loans with term interest only. Other lenders, including GSEs, life insurance companies and banks, which tend to guarantee income in place, cap income in a 60% range.
Bonds and new products
Single-asset, single-borrower CMBS operations for large individual loans and loan portfolios were also very strong execution for multi-family and are expected to continue due to excellent multi-family market fundamentals and low rates for the business. bond.
“While bond buyers have demanded an increase in spreads on recent transactions due to the increase in bond supply, we expect CMBS-SASB execution to be competitive through 2022. “said Kiffe.
The student housing category is attracting increased lending activity, said Josh Zegen, founder and CEO of Madison Realty Capital. In July, the company provided a $ 62 million bridge and construction loan for the refinancing and development of University Pointe, an 877-bed student residence in Davie, Florida. Hybrid financing was provided at a rate of 4.5% with a mortgage of $ 58 million and a mezzanine loan of $ 4 million. Most of the proceeds will refinance a 2019 loan with $ 8 million allocated to develop a new 96-bed facility.
Madison Realty Capital closed some $ 1.8 billion in deals in 2020 and is expected to exceed that figure three or four times in 2021, Zegen reported. He attributes some of that growth to a new $ 1.5 billion debt investment vehicle that he describes as a “lighter bridging loan product.”
Other lenders are also creating additional products and van Os of Greystone expects this to be a trend next year as well. For affordable housing, this includes Greystone’s tax-exempt bond financing and the option to build 100% LTC through its subsidiary ATAX. “We are all looking for other products to have in our arsenal,” she said.