Despite expectations that multifamily mortgage rates will move up at least moderately in 2014, borrowers should nevertheless encounter exceptional liquidity in the coming year as they look to finance current holdings, acquisitions and development.
Responding to healthy fundamentals in resident demand and product supply in most markets, the four primary lender types serving conventional multifamily properties should be, well, firing on all four cylinders in 2014.
“There’s definitely no shortage of capital out there for apartments, at every level of the capital stack,” observes Jason Koehn, chief investment officer at Farmington Hills, Mich.-based developer/operator Village Green Cos. That goes for permanent mortgages as well as shorter-term construction and bridge financing, he adds.
Given the competitive lending environment, it’s a pretty solid bet that Freddie Mac and Fannie Mae, commercial banks, Wall Street conduits and life insurance companies will all seriously consider one particularly meaningful feature to many borrowers: extensive interest-only (IO) periods.
Even as rates rise somewhat from historically low levels, lenders will generally aim to win deals more with structural features—such as IO periods—rather than pricing strategies, says veteran finance and investment pro Tim Koltermann.
“Interest-only periods will be necessary in order to get business done,” adds Koltermann, who just joined Bethesda, Md.-based Walker & Dunlop to head its new Commercial Property Funding unit, a New York-based joint venture with Fortress Investment Group that offers permanent loans for securitization as well as mezzanine capital and preferred equity.
It’s not unusual to see any of the primary lender types offer IO periods running three or five years—and in select cases even for entire 10-year terms.
The government-sponsored enterprises (GSEs) Fannie and Freddie will stick to their underwriting discipline in 2014, which may well push some less-creditworthy borrowers and collateral toward banks and conduit lenders. But stronger borrowers looking to finance quality properties in markets seeing above-average cap rates may be able to tap GSE lenders for leverage of up to 80 percent.
One key GSE-related variable to watch in early-2014: whether just-appointed new chief regulator Mel Watt will eliminate the 10 percent annual originations reduction mandate his predecessor imposed.
As for commercial banks’ and thrifts’ likely multifamily competitive strategies in 2014, look for somewhat longer loan terms and at least modestly higher loan-to-value ratios (LTV) occasionally stretching to 80 percent. Banks will also demonstrate even more willingness to stretch toward the seven- and 10-year terms so many multifamily borrowers prefer.
While more constrained by debt-yields limits CMBS bond-buyer sentiments impose, conduit lenders will nevertheless look to compete by offering greater loan proceeds when they’re able. And that’s clearly happening more regularly as big late-year bond issues pooled considerably higher ratios of apartment mortgages than had been the case earlier in 2013, says Walker & Dunlop’s Tim Koltermann.
And while life companies have followed in fourth place in terms of apartment lending volume by sticking with quality collateral and modest leverage in major markets, rising mortgage rates are clearly prompting their originations correspondents to quote more aggressively.
In fact some life companies are targeting record apartment allocations for 2014, which could ultimately prompt some of them to stray somewhat from their focus on Class A product in 24-hour cities—and perhaps selectively green-light higher LTVs.
“In this competitive environment, we might see some changes in the dynamics of risks they’re willing to take,” says Jeff Day, CEO of Bethesda, Md.-based Berkeley Point Capital.