By Katie Peters
As multifamily remains one of the healthiest sectors of the commercial real estate market, investors and developers continue to look for opportunities that will generate the best return on their investments in multifamily projects. Heading into the second half of 2013, the continued demand for rental units resulting in high occupancies nationwide and some level of rent growth are affording investors exactly the types of opportunities they are looking for. Multifamily offers owners, in many instances, the opportunity to make unit improvements and receive almost an immediate return on investment via higher rent. Due to the continued declining trend in home ownership and the country’s poise for employment growth, the activity in the multifamily sector shows no signs of slowing.
Because of this, financing of multifamily projects is on the upswing as well and no one understands this better than Rocco Mandala, executive vice president and top-producing mortgage banker for CBRE Capital Markets, Debt & Equity Finance. Mandala’s 29 years of experience in real estate financing includes completed debt and equity transactions totaling more than $3 billion. Operating out of Phoenix, his team is dedicated to delivering market-leading debt and equity financing on a national scale.
“The current demand in multifamily has resulted in much more competitive debt and equity capital participants, especially when compared to the dynamics of other market sectors,” says Mandala. “This has resulted in many more multifamily transactions over the past five years versus other property types.”
When asked why he thinks that may be, Mandala points to the decline of homeownership as a contributing factor.
“Consider, at the top of the economic expansion, home ownership peaked out around 69 to 70 percent. With the overall economic decline since late 2007, the percentage of home ownership has also declined and is hovering around 65 percent of all households where it will likely remain,” he says. “With each 1 percent decline in home ownership, there are approximately 1 million new renters. These rapid expansions in broad rental demand coupled with job growth in some areas of the country are the drivers in the growth for new development of multifamily units. From a financing perspective, this demand has brought a lot more players to the game. Multifamily properties offer more demand and stability with immediate revenue realization than other property types, resulting in greater overall returns.”
As 2013 zips along, the first half of the year revealed multifamily’s strong market position continues to mean “business as usual” in terms of production. These production levels combined with changing Federal Housing Finance Agency mandates have encouraged other lending sources to enter the multifamily market. Mandala says this trend can be seen in current loan activity.
“In terms of production volume, the performance during the first half of 2013 is a sign of business as usual,” says Mandala. “Our loan volume for the first six months of 2013 is on pace to meet or exceed our production volume of $8.5 billion in 2012. The first half of 2013 is also consistent with 2012 in that the predominant lending sources were Freddie Mac and Fannie Mae. However, with the mandate of the Federal Housing Finance Agency (FHFA) to reduce multifamily loan production by 10 percent in 2013 from 2012, we expect these agency lenders to be more selective and less competitive for the remainder of the year as they manage to set levels of about $30 billion for Fannie Mae and about $26 billion for Freddie Mac.
“Our current loan activity supports this change as other lending sources such as life insurance companies and CMBS lenders are much more competitive with the agency lenders,” Mandala says. “With the increase in treasury and SWAP rates, and the widening of agency spreads, these other lending sources are, in many cases, offering higher loan proceeds, and longer periods of interest-only with competitive pricing. We expect this trend of numerous multifamily lending sources to continue offering borrowers competitive financing terms.”
Mandala points to recently secured financing proposals for a newly completed multifamily development that is now stabilized in occupancy and NOI as an example.
“All lending sources including the agencies, life insurance companies and CMBS lenders are very interested in providing the permanent financing for this project in order to pay off the construction loan. The request is for maximum leverage, three years interest only and prepayment flexibility during the last two years of the seven-year loan term of 1 percent. Very competitive proposals are provided by the agencies, life companies and CMBS lenders affording the borrower thoughtful options.”
When asked which type of lender he thinks is most likely the best fit for the deal, he says, “A life company is currently best positioned for this business to meet the borrower’s request of maximum leverage, interest-only, prepayment flexibility at a competitive price.”
Mandala also points to increased competition resulting in lenders being more competitive on cash-out refinances offering a debt coverage ratio commensurate with that of cash-in or acquisition financing.
“We are currently arranging the refinance of a 350+ unit property,” he says. “The resurgence of the CMBS market is resulting in a maximum leverage underwriting allowing the borrower to recapture 20+/- percent equity by reducing the debt coverage ratio to 1.20x. In the past, a cash-out refinance would be limited to a debt coverage ratio of say 1.30x.”
Looking forward, Mandala points out that Government-Sponsored Entities (GSE’s) will continue to be strong and viable lending source for multifamily properties; however, the FHFA mandate to reduce GSE production volume combined with the improvement in the capital markets will make traditional debt sources more competitive. Life insurance companies, banks, CMBS lenders and debt funds/mortgage REITs are all becoming more competitive with GSEs and will have a bigger market share in the future.
The bottom line? The current landscape of multiple lending sources is resulting in a variety of options for multifamily owners with this trend expected to last for the foreseeable future.