ING Real Estate Finance believes that the multifamily market will continue to outperform, with the lender focusing the lion’s share of its activity on the sector.
“We are seeing a lot of opportunities in multifamily, which has been a lynchpin of what we’ve been doing over the past 18 months,” Craig Bender, a managing director at ING Real Estate Finance, told Real Estate Capital USA. “Some of these are stabilized acquisitions, some are new assets that are in the lease-up phase and some are assets in need of light renovation. We see a lot of opportunities where we can refinance construction loans, which allow our clients to get properties fully leased or stabilized as part of a longer-term strategy.”
Prior to the pandemic, about 75 percent of ING’s lending activity was in the office sector and the remainder was allocated among apartment, logistics and retail. Post-pandemic, however, that’s turned around. About 75 percent of lending is in multifamily, with 25 percent in logistics, according to Bender. “We are very selective on office deals. We haven’t done one since the pandemic started, apart from refinancing a couple of existing transactions. We aren’t closed to office, but we are also taking a wait-and-see approach on transitional office assets.”
Bender detailed the firm’s multifamily lending strategy, noting that it will originate both loans on stabilized properties as well as some value-added situations in which it can finance light renovations. In these situations, the borrower is usually putting in around $5,000 to $15,000 per unit as leases roll over. It can even finance more comprehensive renovations where large blocks of units will go offline.
“We also will do some construction lending in multifamily, and in some cases, we will partner with mezzanine lenders to put together a more structured debt proposal,” Bender added. “In the apartment sector, we are also quite comfortable going to secondary or tertiary markets or suburban markets.”
The office sector continues to be problematic, with Bender noting that well-located, high-quality class A office space that is up to date in terms of technology and health standards is attractive but there is a lack of visibility on where rents will be in three to five years.
“We’ve seen reports and heard from some clients that there are positive signs that leasing activity will pick up in the near term, but this is largely anecdotal and focused on some of the marquee projects around the city, some of which ING is involved in,” Bender said. “But there are still a lot of unanswered questions. We would have hoped that there would be a strong push to the office after Labor Day but that’s been delayed some.”
The risk analysis between a multifamily and office asset is completely different.
“If you put yourself in the shoes of a multifamily equity owner, you have leases that roll over every 12 months and very low acquisition costs for tenants,” Bender said. “As an equity owner, if the market deteriorates materially, you can still put tenants in your building at an unattractive rate for a year or two to maintain some level of cashflow, with the hope that it will turn around.”
But in the office sector, lease terms are five to 10 years and acquisition costs tend to be very high in terms of tenant inducements and commissions – so owners are faced with a large cash outlay and in return receive an unattractive rental rate that is locked in for a long period of time.
“It may be too low to pay expenses or debt service, plus you may have to give tenants about $120 [per square foot] in tenant improvement costs and 12 months of free rent,” Bender said. “In a bad market, you can sign a lease, spend significant money and not cover your expenses or you can sit with an empty building. You should never have that with a multifamily building and especially if it’s decent quality in a good location. We, along with most banks, would consider multifamily to be the safest asset class and that’s why you see a lot of liquidity on the debt side for this asset class.”
The firm originates loans of up to seven years, although most are in the five-year range. It tends to finance assets that are less than 10 years old.
“A good loan starts with a good client,” Bender said. “We look at clients from a global perspective and have a lot of success with clients that we are doing business with across multiple sectors, products and regions around the world. It’s a good time to be a borrower in today’s market. As a borrower, financing is available today across all asset classes, leverage levels and asset strategies. There are plenty of options now from a variety of different lenders including debt funds, the insurance companies and banks. There are just plenty of options now.”
Globally, ING Real Estate Finance has about $30 billion of real estate debt, with about $3 billion of that concentrated in the US. The remainder is split between Europe and Asia.
“We are an international lender and tend to think about things globally,” Bender said. “This global network underpins a large part of our strategy and our presence in the US, where we tend to focus on international clients. We believe we can add value to those relationships.”