The high interest-rate environment continues to challenge multifamily borrowers. According to the Mortgage Bankers Association, in the first quarter, originations for multifamily properties decreased 7% year over year and 29% compared with the fourth quarter. Multifamily Executive caught up with Brian Good, managing partner of iBorrow, a nationwide direct lender that provides short-term bridge financing to commercial and multifamily property owners, to discuss what’s on the horizon for multifamily lending and when volume might start to increase.

How is 2024 shaping up for multifamily lending, and what do you expect for the remainder of the year?

The lending environment is really a mixed bag right now. There is understandably a marked hesitation in the market as we approach the middle of the year—according to research from JLL and Mortgage Bankers Association, approximately $55 billion of multifamily loans are maturing this year, and about $21 billion of those are underwater. Many borrowers—and lenders—are feeling the pain of the decisions they made two or three years ago, as well as the angst of the current rate environment.

However, seasoned buyers who are well-capitalized and are looking for value-add assets can still find opportunities right now, especially in resilient markets, such as certain areas of California.

Right now, it’s all about the quality of the borrower and their track record. The industry expected that acquisition activity would have picked up more by this point in the year, but now it looks like volume may increase more significantly at the end of the year.

How have underwriting guidelines changed this year?

There are factors we are no longer taking for granted anymore. For the first time in 30 years, the multifamily market has to take a harder look at the assumptions we have held onto as certainties for decades. We can no longer assume that rent is going to grow steadily over time anymore.

Now, we have to approach multifamily deals with more intense scrutiny, especially those in oversupplied markets—particularly ones already seeing rising vacancies, such as Phoenix; Fort Worth, Texas; and parts of Atlanta and Florida. We have to give more studied forethought to what our potential exit would look like. If there’s a possibility that the lender might have to pay us off with agency debt, we need to ensure they wouldn’t need to raise additional capital just to get out. These are just some of the considerations we have to examine more closely in today’s market, even for the deals that initially look viable on paper.

Even when we give borrowers the benefit of the doubt and we forecast conservatively over what could potentially happen, in the end, we’re still taking a significant risk in this market. We are here to help borrowers, especially entrepreneurs, so we are willing to move forward when the deal makes good sense—especially for high-quality borrowers who have a solid plan for their investment. Now more than ever, it’s crucial to come to lenders as a responsible borrower with an excellent track record and a well-thought-out plan.

What concerns do you have about the multifamily loans maturing this year? Are you starting to see distress?

Certainly, there is distress in the multifamily market—more than we have ever seen before. After the pandemic, some owners took for granted that people could pay more for rent; the acceptable rate of rent as a percentage of income jumped up from between 30% and 35% to between 50% and 55%, and that is not sustainable. As rate growth flattens out or diminishes, cash flow and exit net operating income are affected, and that makes those properties even less viable for the owners, not to mention the banks they are trying to refinance those loans with. Additionally, just as we have experienced in other sectors, there is a creep toward quality as tenants seek out better amenities for the higher rents they are being asked to pay. Owners who executed value-add strategies at multifamily communities built in the 1980s and 1990s are having a harder time filling vacancies because their tenants can find newer, more modern options for the same prices.

What types of capital will be available to owners as these loans mature?

Debt and equity will still be available to borrowers, the same as they have always been—they will just be harder to come by as underwriting guidelines have become so much more stringent. According to the Q1 2024 US Capital Market report by Avison Young, debt origination is down -48.54% over the first quarter last year, and equity is equally challenged with a decrease of -54.86% so far this year. Borrowers will need to get more creative in filling capital stacks and to consider flexible, alternative solutions in order to get deals done. Private lenders like iBorrow, as well as private equity firms, remain non-bank, alternative sources of capital for quality borrowers.

How can opportunistic buyers take advantage of these opportunities presented by distressed debt?

In any cycle of distress, lenders can actually be a great source for opportunities. If owners are looking to buy, they should approach lenders to find out what they’re selling. Many lenders currently have portfolios riddled with problematic loans—that is where the real opportunities lie right now. Well-positioned buyers who are willing to take on a bit more risk can consider buying the note and not the property itself. Of course, there are risks and legal ramifications to consider, but savvy buyers who are willing to act in those circumstances can benefit greatly in the end.

How does iBorrow set itself apart from other commercial real estate lenders?

In this environment, where traditional lenders are finding themselves frozen or unwilling to take on more risk, alternative lenders like iBorrow can step in and step up. Unlike banks and other traditional lenders, we have the flexibility to look at the risks we’re willing to take from an entrepreneurial perspective. We can provide creative solutions to help fill borrowers’ capital stacks, for those who are looking to refinance or even acquire new assets right now. As a private lender, there aren’t layers of red tape to go through, and we have garnered a reputation for streamlined approvals and fast, reliable closings.