Economic headwinds are causing volatility and uncertainty in the debt and equity markets—hampering multifamily deals.
“Trying to make deals work is difficult today,” Eric Silverman, co-founder and managing principal at Eastham Capital, told the audience during the “The Capital Perspective” panel at the Multifamily Executive Conference at the end of September.
Lisa Hurd, chief investment officer at The RADCO Cos., agreed, saying debt has gotten a lot tougher to get over the past couple of months.
“Debt is still there, but spreads are widening and credit terms are being upheld,” she said.
September was a challenging month on the debt side, added David Brickman, CEO of NewPoint Real Estate Capital. He said borrowers need to look at how low they can go on coverage ratios and still be comfortable as well as how much rent growth, after the past year’s highs, is anticipated for underwriting.
“Every deal, you have to think about how you want to think about income in this one instance,” he said. “You can’t have indefinite rent growth.”
Stephen Johnson, vice president and interim head of production and sales at Freddie Mac Multifamily, added that the agency is seeing deals coming in, but they are not penciling with a gap between buyers and sellers.
Hurd noted that buyers also have to feel a level of confidence in debt and that a lot of companies who don’t have to sell won’t.
A recent forecast from the Mortgage Bankers Association (MBA) in early October echoed these challenges, calling for multifamily lending to drop to $455 billion this year, a 7% decrease from 2021’s record of $487 billion. MBA anticipates $451 billion in multifamily lending next year.
“We continue to see significant changes, volatility, and uncertainty in the space, equity, and debt markets that drive commercial real estate values and transaction volumes,” said Jamie Woodwell, MBA’s vice president for commercial real estate research. “There was a record level of borrowing and lending during the first half of the year. Given market changes, we forecast a significant slowdown for the second half of the year—driven by rising interest rates and capitalization rates and uncertainty among buyers, sellers, and other stakeholders about where market values may lie.”
Woodwell added that most commercial real estate market fundamentals remain strong, with significant increases in the incomes and values of many properties in recent years. These factors are why the MBA expects loan demand to start to bounce back in the next two years. However, he said, “Should the economy enter a recession, which has become considerably more likely, commercial and multifamily borrowing and lending would likely be further constrained.”
During the panel discussion, Hurd added there’s still a lot of equity out there, but pricing needs to go down.
“It’s been seller-friendly for a long time, but it’s leveling out a little bit,” she added.
Brickman noted that a lot of dry powder is on the sidelines and pivoting into higher-yield debt opportunities.
“I believe pricing on deals has to come down. Sellers are having a hard time getting around that fact. In order for us to make deals work, we can be creative with equity, but pricing must become more rational,” said Silverman. “It’s a good time to be prudent, picky, and patient.”
