A Year ago, nobody thought they’d ever see it again. A year later, everybody’s wondering how long it can last.
While rent hikes in 2013 probably won’t match the robust rates seen the past couple of years, rock-bottom debt pricing should continue unabated. Federal monetary policy combined with a more competitive debt market should help to keep interest rates low throughout 2013, multifamily finance professionals agree.
“Any concern we may have about higher [interest] rates or wider [lender] spreads would be beyond 2013,” relates Matthew Rocco, national production manager with Charlotte, N.C.–based Grandbridge Real Estate Capital. “So we may see one of the best years ever in terms of debt costs and availability.”
Conduit lenders, the federal agencies, life insurance companies, and even recovering commercial banks all appear bullish on the multifamily market, making for free-flowing debt in the permanent-, bridge-, and construction-finance spaces. Add it all up and 2013 promises a continuing borrower bonanza, with quotes for these three executions coming in below 4 percent.
Rocco and others do caution that certain underwriting policies may tighten up a bit as single-family homes—and the active construction pipeline—absorb some of the resilient renter demand. For instance, government-sponsored enterprise (GSE) stalwarts Freddie Mac and Fannie Mae are already becoming somewhat more restrictive with early-term interest-only periods than they were just a few months back, observes Phillip Wintner, CFO at Beverly Hills, Calif.–based Kennedy Wilson Multifamily.
Nonetheless, industry experts eagerly anticipate several borrower-friendly trends this year, including more capital becoming available in secondary and tertiary markets; more banks offering long-term fixed-rate debt; increasingly competitive bridge lending options; and leveraged returns on equity hovering at historic lows.
the lure of lower markets
Apartment buyers gravitating away from the prohibitively competitive first-tier cities should expect at least some permanent lenders to follow, says Jeffrey Erxleben, senior vice president with Bloomington, Minn.–based NorthMarq Capital.
The GSEs, not to mention regional banks, are certainly more willing than life insurance companies to fund outside the major metros—at least for quality properties with solid sponsorship. But it’s the conduits that appear particularly well-positioned to win business in secondary markets, where rents and values generally boast more upside potential in 2013, Erxleben and others suggest.
In top-tier markets, however, the conduits are unlikely to match the permanent-loan pricing of Fannie and Freddie, or the rates and flexibility offered by life insurance companies.
how do the various lenders compare?
So what does this all mean for borrowers? What will the various lenders offer in 2013, and how do those products compare with one another?
The GSEs. Fannie Mae and Freddie Mac certainly offer some advantages. Ten-year fixed-rate deals tend to be in the 3.5 percent vicinity at high leverage, with lower interest rates available at more conservative loan-to-value ratios (LTVs). And Fannie’s adjustable-rate program is proving particularly attractive, floating in the low–200 basis point (bp) range over LIBOR.
Life companies. As balance-sheet lenders (like banks, which hold loans on their books), life insurance companies can inherently be more flexible, customizing key terms such as prepayment-penalty schedules and term lengths. In contrast, the GSEs and conduit lenders, which sell their loans to investors, have much less wiggle room in structuring a deal.
Erxleben is seeing life company fixed-rate quotes in the high–2 and low–3 percent range for five- and 10-year transactions—“very competitive” with Fannie and Freddie at the 65 percent to 75 percent LTV level for high-quality collateral.
Conduits/CMBS. CMBS loans are priced based on what bond buyers are willing to pay for the security. And that leaves conduit lenders with a distinct pricing disadvantage relative to the GSEs and life insurance companies heading into 2013.
Interest rates are now generally in the mid–4 percent range, Erxleben says. Hence, in addition to their generally greater willingness to play in secondary and tertiary markets and loan against lesser-quality collateral, the conduits compete partly by offering higher leverage, often running to 85 percent LTV, along with faster closings.
Banks. Local, regional, and national banks can be quite competitive nowadays in the permanent multifamily mortgage arena, with five-year and even 10-year fixed-rate deals. But given how much they prefer shorter-term loans, banks rank among the leaders in bridge lending, typically quoting floating rates in the mid–200 bp range over LIBOR, Erxleben notes.
Others. Nonbank financial institutions will also be active in bridge loans, generally quoting floating-rate deals at 250 bps to 300 bps over LIBOR. Leverage limits typically amount to 80 percent of cost with an exit target of 75 percent of the post-improvement value, adds Rocco.
The year may also see some developers secure mezzanine capital yielding in the mid-teens rather than taking on equity partners to fill out their construction financing needs. Addison, Texas–based Behringer Harvard, for instance, is providing such debt to help fund construction via a $300 million investment program. Erxleben says the 14.5 percent coupon rate the Behringer team is charging developers of a large Dallas-area project can work well for all parties involved. That venture has several such fundings in its 2013 pipeline, he notes.
And NorthMarq’s pipeline of Federal Housing Administration (FHA) construction-to-permanent loans under the Sec. 221(d)(4) program likewise remains robust, even with more-nimble banks banging heads to fund attractive projects.
“We’ll never see one-month closings with FHA transactions,” Erxleben concludes, “but with ‘d4’ all-in rates in the high twos for 40 years, it’s a very compelling program.” MFE
Brad Berton is a freelance writer based in Portland, Ore.