Multifamily debt originations, at $33.1 billion, declined to their lowest levels since 2015 in the first quarter, according to recent data from Newmark. In addition, the Mortgage Bankers Association reported a 7% year-over-year decrease for originations for multifamily properties in the first quarter.
However, Newmark’s 1Q24 U.S. Multifamily Capital Markets Report noted a positive sign. “While recent activity has been anemic compared to pre-pandemic levels—let alone the recent peak—there is a silver lining that [first quarter] originations were down just 7% year over year, suggesting that activity may be close to bottoming.”
“The most accurate description of the market for the first half of the year is it was lousy,” says David Brickman, CEO of NewPoint Real Estate Capital. “Volume was down, activity was curtailed, and few deals worked. As a lender, it was four times the amount of work and a quarter of the deals done.”
While there’s a greater realization that it’ll take a little longer than expected, according to Brickman, borrowers and lenders will likely get there at some point.
“Life must go on, transactions need to happen, deals need to be financed,” he says. “Multifamily is still a healthy asset class. We’re starting to see some of those green shoots potentially materialize, and people are coming out of their hiding holes and looking around. I am optimistic we will see more activity in the second half of the year.”
The high interest rate environment is the biggest culprit. While inflation has eased, it is still elevated, causing the Federal Reserve to hold interest rates steady at its June meeting. The Fed also signaled that only one cut is expected by the end of this year, with a more aggressive cutting approach for 2025.
“With an elevated interest rate environment, people are only transacting when they have to, such as a maturity or an event that is requiring them to be in the market,” says Kelli Carhart, executive managing director at CBRE.
Pamela LeVault, senior vice president of agency production at Greystone, agrees. “Borrowers are sitting on the sidelines waiting to see if there will be a stabilization or a reduction of rates,” she says. “The majority of our production is refinances with loans maturing. Acquisition activity has been very slow; however, we have seen some larger portfolio sales activity recently.”
Broadly speaking, Jason Scott, managing director and head of conventional loan production for Regions Real Estate Capital Markets, says the industry is in a season where construction lending has fallen due to higher interest rates and construction costs paired with the general lack of institutional equity. “That makes it difficult for developers to achieve their yield requirements,” he notes.
Lument CEO James Flynn adds that as the “higher for longer” mantra begins to sink in and the industry adjusts to the new market conditions, deal activity will pick up.
Flynn points to other headwinds impacting the industry, such as rising capital and operating costs as well as insurance premiums keeping the bid-ask gap from closing. He also notes, that in certain markets with a high-supply pipeline in the Sun Belt and Mountain West, the overbuilding has caused softening occupancy and rent growth. However, he expects the new supply to be absorbed by early 2025.
Finding Financing Solutions
The lenders share they are working with borrowers to find options.
“Lenders are leaning in to support long-standing client relationships and, in some cases, large new client opportunities,” says Flynn. “They are finding creative solutions that allow these clients to maximize cash flow while the market stabilizes.”
LeVault adds that borrowers are interested in short-term loan options, shorter-term prepayments, and interest rate buydowns.
“We are working with our borrowers on all possible solutions and being prepared to rate-lock, such as an early rate-lock option once rates dip,” she adds.
Scott notes one common option many sponsors are choosing is a short-term fixed-rate loan with prepayment optionality and a rate buydown.
“This loan option was virtually nonexistent two-and-a-half years ago in a lower interest rate environment; however, it can be ideal for clients’ needs today,” he says. “Our goal is to help our borrowers navigate the best possible solutions that will carry them through until rates improve, and they can then refinance with a longer-term loan.”
Industry Debt Players
While some lenders have slowed down activity this year, Scott notes Fannie Mae and Freddie Mac as well as the Federal Housing Administration have remained committed to providing multifamily borrowers with a range of loan options.
Flynn agrees. “The agencies continue to play an active role, which is particularly important given that some national and regional banks have pulled back in certain markets,” he says. “Many borrowers have shown a willingness to be more creative, securing their financing from debt funds, life companies, and conduits—sources that they may not have used before.”
Brickman adds the big standout this year so far has been commercial mortgage-backed securities (CMBS).
“CMBS is having a good year, and that’s a very interesting development. I think there are some legs to it, and it is looking like the CMBS market will be the most competitive it has been since the Great Financial Crisis (GFC),” Brickman says. “The government-sponsored enterprises also are doing what they do, supporting a larger market share. Yet relative to volume caps and what they could be doing, it’s a fraction of their capacity, leaving ample room for activity in the second half of the year. However, it creates opportunities for others.”
Multifamily Distress Isolated
Lenders agree that the amount of distress anticipated for the multifamily industry is less than what has been predicted.
Distress is certainly out there, but it’s isolated, according to Carhart. “The longer we’re in this environment, where fed funds hold at current levels, more of it will come to the surface,” she says.
However, she notes that industry fundamentals are strong and lenders are willing to work with borrowers to figure out a solution as long as they operate well as an owner and manager.
Flynn says Lument has seen isolated instances of distress but doesn’t expect it to emerge as a significant issue. “On the whole, the vast majority of owners are hanging in there. Those with pending maturities are turning to loan extensions, recapitalizations, and, in some cases, asset sales to manage their portfolios.”
Scott reminds today’s challenges are different than what was seen during the GFC. “Most of today’s stress is related to higher-leverage, floating-rate bridge debt,” he notes. “Within the industry we have witnessed several factors contributing to the distress certain borrowers are facing, including insufficient hedges and failure to hit underwritten rent growth levels, as well as higher operating expenses, including insurance, payroll, and repairs.”
Brickman says, in terms of distress, it will probably be the less-experienced, more thinly capitalized, and smaller-scale operators that will take the biggest hit, as well as Class C properties that are the hardest to finance.
“As a matter of public policy, that concerns me. This is multifamily stock that needs investment,” he says. “I don’t see as much stress as you move up the scale to A and B properties and the more institutional class of real estate. You have enough capital on the sidelines for an orderly cycling of new capital entering and old capital exiting as we go through the process of resetting values. It’s going to happen deal by deal and not so much in a big wave. It should be a manageable process and handled with refinancing and recapitalization than with distress or note sales.”
