The benefit of being in the Multifamily space is there is always lending. The market is dynamic, and change is constant, but the Government Sponsored Enterprises (GSEs) or agencies are always online to provide liquidity.
At a lunch a couple of weeks ago we were talking to someone in commercial real estate who specializes in office. He said it is hard to get deals done because there is no debt or equity right now for office.
The Wall Street Journal reported: Pension Funds Are Selling Their Office Buildings
Luckily, in Multifamily there is still plenty of loan options and the asset class attracts a lot of capital.
Fannie Mae
Fannie Mae is one of the GSEs that is always open for business. We are getting regular quotes on deals from Fannie Mae and the terms look favorable for the current situation. As someone who underwrites a lot of deals in DFW, I notice the leverage moving up.
At the beginning of the year prices were moving up so fast that agency leverage did not make sense. Fed Funds rates were still near zero and agency leverage averaged 50% or less on most deals. Today we are seeing that leverage move into the 60’s in terms of percentage.
Some lenders are also offering mezzanine financing to help take out an existing bridge loan to go with a Fannie Mae loan. Interest rates are tied to the 10-year treasury, so the fixed rate is around 5% plus or minus.
A couple of weeks ago we were getting quotes below 5% but today they might be slightly above 5%. This affects loan proceeds as well since they must underwrite to a 1.25 Debt Service Coverage Ratio (DSCR).
Freddie Mac
Like Fannie Mae, Freddie Mac is a GSE that provides fixed and floating rate loans that size to a 1.25 DSCR. The Freddie Mac floating rate loans are popular because they offer flexibility. Once multifamily pricing took off and investors were hit with hefty yield maintenance penalties, floating rate became the go to option.
The Freddie Mac conventional floating rate product offers a spread as low as 2% to 3%. It requires a rate cap, but the prepayment penalty is only 1%. With spreads that low it is a good multifamily loan.
The leverage is starting to come up as previously mentioned. The buyer pool for multifamily took a pause this summer so we are starting to see prices come down.
Freddie SBL
This loan product is good for someone with no multifamily experience. The interest rate might be a little bit higher than a Fannie Mae loan in some cases. The SBL stands for Small Balance Loan, so the maximum loan amount is $7.5MM.
Bridge Loans
The most popular loan right now in Multifamily is a Bridge Loan. Bridge loans last year allowed up to 80% leverage and 100% of rehab. Bridge loans are meant to buy multifamily that do not qualify for agency debt. However, with the popularity and competition of multifamily, investors are using them to bid up prices.
The bridge lenders started to pull back once interest rates started increasing. This reduced leverage let a little air out of the market. Investors cannot reach as high on price since they must raise a significantly higher amount of equity. That is coupled with reduced returns. The result is deals falling apart and prices being reduced.
Each deal is different but on average we are still seeing lenders willing to do bridge loans at a reduced leverage. They are requiring the going in Debt Yield to be higher. The spreads are also higher. A typical quote for a bridge loan these days might look like this:
Loan Amount: $20,000,000
Term: 3 years with 2, one-year extensions
Amortization: 30 Years
Interest Only: Full Term
Interest Rate: SOFR + 425 bps to 450 bps
Prepayment: 1%
Right now, we are seeing the bridge loans size to 65% to 70% leverage depending on the price. If the prices continue to go down, then the leverage will increase.
Read More: The Cash Management Dilemma for Multifamily
Bank Loans
Bank loans are readily available as well. The problem with bank loans is that recourse is required. This allows banks to offer competitive loans on deals because they have that personal guaranty. Typically, we see a bank loan at 75% leverage and a fixed interest rate. Sometimes it will include rehab.
The interest only period is shorter as well as the amortization. Bank loans are usually amortized on a 25-year schedule for commercial multifamily. The standard term is 5 years although there are some bank bridge loans with shorter terms and a lower interest rate.
Like Freddie SBL, they are good for new multifamily investors. You do not need experience if you have a strong balance sheet to back up the collateral.
Conclusion
Multifamily is a great commercial real estate vehicle. People need a place to live. There is also lending readily available throughout the market cycles. The market changes quickly so be sure to stay up do date with the state of lending in multifamily.
