The pace of innovation in multifamily financing is encouraging. In recent years, old and new players have introduced products that address energy-efficiency upgrades, affordable and manufactured housing development, and mezzanine financing.
But is it enough? What more can be done to speed investor and developer response to the country’s escalating housing needs?
Patrick McAllister has some ideas. McAllister, director of multifamily originations for Red Capital Group’s San Francisco office, recently shared his thoughts on the sector’s continuing innovation needs.
How has multifamily financing evolved since the recession?
Since the Great Recession, traditional apartment lenders have seen a large number of new entrants to the multifamily lending space. Strong multifamily asset-class performance, especially relative to other, underperforming CRE asset classes, has attracted a variety of newer capital sources to the multifamily lending market, including a refined CMBS market, debt funds, and international capital in several forms. While the GSEs still dominate the market, there are numerous new alternatives available to multifamily owner–operators.
Has innovation in multifamily financing products kept pace with market demand?
There are many more nonbank options for bridge loans, due in part to the increased number of take-out options available in the market. Borrowers wanting to make property improvements to increase rents or enhance energy efficiency will have more financing options than in the past. Over the past few years, we’ve also seen the introduction of attractive new loan products for affordable housing, manufactured housing, small loans, and green developments, in addition to more mezzanine products to enhance leverage.
What current programs do you like to cite as examples of financing innovation?
Both GSEs have been very thoughtful about ways to fulfill their “Duty to Serve” mandates from the FHFA. The GSE green financing programs are a great example of providing a triple bottom line win-win-win.
Is enough being done to offer creative financing solutions for the multifamily developer and owner community?
Not enough is being done to bring creative public–private financing solutions to the affordable housing sector. While Freddie Mac and Fannie Mae continue to make every effort, more needs to be done to attract additional capital for affordable housing development and preservation.
Are the GSEs the only sources for innovation in multifamily financing? If not, what examples come to mind?
The emergence of a more diverse group of debt funds and debt REITS provide additional flexibility in loan terms. This flexibility includes a wider range of prepayment options, property variances, ARM options, and event-driven financing.
How are you advising clients? What programs do you recommend today?
I advise my clients to be cautious in their financial modeling as rates increase. It’s been 10 years since the Great Recession and, although the economy continues to show resilience, I advise my clients to consider the economic impact that rate increases would have on their projected returns, especially for new development projects. For stabilized properties, I advise my clients to lock in a longer term to take advantage of current rates, which are still low on a relative historical basis. Political concerns must also be considered, including initiatives to impose greater rent control.
Learn more about the growing array of market-rate financing options and how they can be applied to your next project at www.redcapitalgroup.com.
