Multifamily market conditions continued to weaken at the start of the second quarter as interest rates have remained elevated, according to the National Multifamily Housing Council’s Quarterly Survey of Apartment Conditions. The survey’s debt financing index came in below the break-even level. While 59% of respondents cited unchanged conditions, 24% said it was a worse time to borrow than the prior three months and 13% reported improved conditions, down from 45% in January.
With the uncertainty expected to continue for the short term, industry lenders provided several key pieces of advice for borrowers in the current environment.
1. Build Deep Relationships
A strong client-lender partnership could benefit borrowers beyond getting financing.
“This is a time when lenders can really distinguish themselves among their client base and even new prospects,” says Jason Scott, managing director and head of conventional loan production for Regions Real Estate Capital Markets. “Lenders should not only provide financing but also advice and guidance through all economic cycles. When a lender has built a deeper relationship with a client, the lender can then look at additional services, whether it’s helping with cash flow, treasury management solutions, or other services, that can help the client remain well positioned to continue accomplishing their goals.”
2. Prioritize Properties and People
Lument CEO James Flynn says borrowers can take two steps that will serve them well now and help them sustain valuations as the market picks up.
First, while repairs are more expensive than in the past, keeping properties in top shape should be a priority for owners and operators. “In addition, it’s important to ensure a stable tenant base and reliable collections, even if that means minimizing rent this year,” he adds. “You can catch up when rates come down.”
3. Get Multiple Quotes
Scott notes that borrowers should ask their lender to deliver multiple quotes from various other lending channels like life companies, debt funds, agency loans, banks, and, in some cases, commercial mortgage-backed securities (CMBS).
“Depending on the sponsor’s strategy, it is possible one of the alternative sources might be a better fit for them,” he notes.
Pamela LeVault, senior vice president of agency production at Greystone, agrees, saying it’s important to look at all the options. Greystone, for example, has many financing options, such as debt placement, bridge, CMBS, Department of Housing and Urban Development, and preferred equity. Its strategic partner, Cushman & Wakefield, also has an investment sales platform as well as a property management and appraisal group.
“Discussing options sooner and preparing the property for refinance/sale can yield the best result,” she says.
4. Start the Conversation Early
When it comes to a maturing loan, LeVault advises to start talking with lending relationships as soon as possible, even as far out as 24 to 36 months.
“The key is to be ready to lock when we see a dip in interest rates,” she says. “There are many options for Freddie Mac and Fannie loans, such as interest rate buydowns. Starting the conversations sooner than later will help a borrower position the property for the best execution.”
Flynn agrees that starting early on a maturing loan is essential. “It gives borrowers time to survey the spectrum of loan options available and find the best fit for their objectives.”
5. Be Prudent
While there are reasons for optimism that things going forward might get better, David Brickman, CEO of NewPoint Real Estate Capital, says that could also mean a borrower’s current lender might get tougher.
“I wouldn’t count on getting that second or third extension or that the workout will be as generous as you think it might be,” he says. “Lenders might be more aggressive, especially if they have already provided some degree of accommodation.”
