A series of newly launched multifamily-focused credit funds and similarly dedicated efforts from commercial banks are highlighting a potential short-term lending opportunity in a sector with a pending wall of more than $23 billion in near-term maturities in a rising rate environment.
Over the past two months, Real Estate Capital USA has tracked more than a half-dozen new multifamily-focused credit initiatives. The most recent of these include a $1.6 billion fund from Harbor Group International, a $50 million fund from Northwind Group and a $250 million fund from Miami-based multifamily investor CARROLL. Further, M&T Bank earlier this month launched a dedicated multifamily bridge loan division.
Main drivers behind this activity include a continued gap between lenders and borrowers on pricing and proceeds. Additionally, there is a wall of multifamily-specific maturities coming due in 2023 and 2024 as loans originated at lower interest rates are coming due in a market where interest rates are substantially higher, according to Trepp, a New York-based data and analytics provider.
Trepp is projecting multifamily maturities of $30.4 billion in 2023 and $55.7 billion in 2024 in the securitized markets. This number goes beyond conduit and SASB deals and encompasses large loan, commercial real estate collateralized loan obligations and agency CMBS.
It is into this environment that managers like Patrick Carroll, founder and CEO of CARROLL, are launching credit-focused strategies. A confluence of factors include lending and equity investing in the sector grinding to a halt due to uncertainty over the direction of interest and valuations, two metrics that have led to lenders offering lower loan-to-value ratios for new originations.
“Borrowers are used to getting 60-70 percent leverage on development deals and that is now down to around 40-50 percent,” Carroll said. “We will be looking at getting into these deals in a preferred position, just to bridge that gap in proceeds.”
The story is the same for Northwind Financial, a Chicago-based commercial real estate manager which last month launched the $50 million Northwind Income Opportunity Fund to provide short-term financing on existing multifamily properties. The fund will provide intermediate funding for high-quality, cash-flowing US multifamily projects and then sell the financings to larger financial institutions, said Chip Cummings, CEO.
The firm launched the fund in response to the tightening credit markets. “Lenders have shifted their strategies as interest rates have increased, and that has changed the dynamics of how portfolios are being constructed,” Cummings said. “Banks have also tightened their underwriting requirements and, as a result, there are properties out there that are slipping through the cracks.”
Northwind’s fund will largely target properties in pre-stabilization mode, which Cummings said presents a greater opportunity for the firm and its investors.
There is a specific niche in small-balance loans for institutional investors which do not have the infrastructure in place to originate and aggregate loans but want to access the wider credit spreads available in the market today, with Cummings estimating yields have risen from around seven to more than nine or so. “We can take on, turn around and sell those loans,” he added.
Investing in volatile times
Hudson Valley Property Group, a New York-based company which focuses on affordable housing, has been somewhat shielded from today’s volatile lending markets because of its singular focus. The firm focuses on the preservation of affordable housing, working with public and private partners and relying in part on financing from Freddie Mac and Fannie Mae.
“What is unique about our space is that the GSEs and the FHA have goals and mandates of how many units that want to preserve within affordable housing and that is really motivating to get capital out of the door,” said Jason Bordainick, co-founder. “We have a very willing lender pool and the limiting factor is not the lack of interest from lenders. It is finding opportunities that are transacting at the right price.”
The liquidity is important at a time when the firm is seeing substantial demand drivers, including a paucity of affordable units in its target markets and beyond. Additionally, there is what co-founder sees as a fertile potential pipeline that is a bit different than some of the situations arising in today’s market.
“This is an extremely fragmented space with a large portion of ownership that has an aging demographic that is looking to exit the space, which means we see deal opportunities that are not correlated with the markets,” Bordainick said.
That is not to say that HVPG has been immune from the larger market turmoil. “When the markets change on rates, this did impact us because debt financing is an important component of our deals,” Bordainick said. “We have seen a bit of settling of where rates are, but I don’t think there are expectations that we will get back to the 2 percent Treasury range. I think a lot of people are getting comfortable with where we are today and that it could be a range where we will be for some time.”
The new opportunity set
CP Capital, a New York-based multifamily investment manager which allocates capital to developers focused on the sector, in January released a whitepaper that aimed to make sense of the noise in the sector’s investment and financing market. Despite a slowdown in transaction activity and clogged debt markets, the firm believes there is a strong outlook for the sector in part because of the ongoing supply-demand imbalance of an estimated 1.7 million units.
The report, written by Jay Remillard, managing director, underscores a dip in valuations and points to anecdotal evidence of how cap rates on multifamily properties have risen by as much as 50 basis points in markets where a handful of transactions have been completed. At the same time, rents and net operating incomes are higher than they were expected to be when sponsors executed on acquisitions over the past few years.
In his analysis, Remillard took a hard look at one of the most often cited statistics in the sector, the 13.5 percent national increase in asking rents for multifamily properties during 2021. That level is about eight percent higher than the previous peak hit in 2015. Additionally, sales volumes in 2021 reached $335.8 billion, a 74 percent increase over the previous watermark set in 2019.
Kristi Nootens, co-head of CP Capital, said while the firm has observed some pullback in the market, it remains confident about the sector’s long-term health. She also noted that the current slowdown in the development pipeline for the sector could mean even more demand for properties that recently started construction.
Moreover, while rent growth is not expected to hit the highs seen in 2021, it likely will moderate back to more normal levels. “It is important to note that while rent growth is falling from the unsustainable highs of 2021, the market is projecting that rent growth over the next two to three years will be in-line with historical norms,” Nootens explained.
Nootens believes once the debt markets are more stable and valuations are more clear, transaction activity will return. “Even if rates are not coming down immediately, they are stabilizing, and we will start to see investors come back to the market in earnest,” she added.
There is a final factor to consider: the amount of dry powder that has been raised, even as transaction activity has slowed. “The sheer amount of capital, or dry powder, that has been raised specifically for investment in multifamily and is waiting to be deployed is estimated to exceed $250 billion,” Remillard wrote. “The general industry sentiment is that this considerable war chest will be unleashed once investors are able to comfortably predict when interest rate increases will end, rewarding those sellers who are not under pressure to take their assets to market beforehand.”