Multifamily lending sees steep drop in volume 

Multifamily lending volume saw a sharp drop in volume in the third quarter, with a new report from Newmark tracking a 13.5 percent year-over-year decline in new originations for acquisitions, refinancings and construction in the sector. 

Newmark, a New York-based advisory company, tracked total third quarter multifamily lending volume of $228.8 billion from the first to the third quarters of 2022. By comparison, there were $264.7 billion of new originations during the same period in 2021.  

The reasons behind the drop are easy to understand: a combination of lower transaction volume, higher interest rates and the steepest inflation in 40 years have had a significant impact on the investment sales and lending market, said John Beacham, chief executive officer and founder of Summit, New Jersey-based manager Toorak Capital Partners.

Toorak, via a network of lender partners in the US and the UK, has a unique business model that mirrors the way in which Fannie Mae and Freddie Mac work with lenders to bolster single-family and multifamily housing. “We partner with lenders across the country who originate loans which we acquire according to our credit standards, and, like Fannie Mae or Freddie Mac, we sit one step behind the lender and buy these loans on a flow basis,” Beacham added.

The firm, which was launched in 2016, recently reached the $10 billion milestone in whole loans funded since inception. Toorak has now funded more than 26,000 small-balance business-purpose loans backed by residential, multifamily, and mixed-use properties across the US and the UK, enabling the construction, renovation, or purchase of over 50,000 rental and owner-occupied units.

The housing paradox 

Despite the slowdown in the investment sales and lending markets, rising interest rates are bolstering the fundamentals of the multifamily market by leading more potential homeowners to continue renting.  

Multifamily lenders and investors are anticipating even higher demand for apartment properties as the average rate for a 30-year, fixed-rate mortgage on a single-family home averaging 6.7 percent in the third quarter, Newmark reported. This is a 122.6 percent increase in year-over-year costs, a level which has helped mortgage applications to drop by 65.3% year-over-year as of the end of September. 

This phenomenon will further accelerate demand for multifamily units, exacerbating the well-documented supply problem, noted Al Otero, a REIT portfolio manager at New York-based manager Armada ETF Advisors.  

A potential homeowner who, a year ago, could have gotten mortgage for about 3 percent is less likely to sign up for a mortgage with a rate of 7 percent. “Additionally, their purchasing power is lower than it was a year ago,” Otero said. 

But despite this demand for multifamily units, Otero said he believes rental rates will moderate going forward after a year of exceptional growth. 

“We saw some major job cuts from big tech in September and October and that, combined with the impact of inflation, means that consumers are not feeling as flush with cash as they have in the past,” Otero said. “We saw things really hit a wall in September after landlords had been pushing rents and working to upgrade the financial profile of renters. These landlords may now be finding that they kept a foot on the accelerator for too long.” 

The fundamentals of the sector on a national basis are at near-historic lows of 3.1 percent on a trailing 12-month basis, with quarter-over-quarter vacancies rising 90 basis points. The biggest impact has been seen in the Class A and Class B segments of the market, Newmark found.  

“Things have taken a pause, which is not surprising. This business doesn’t operate in a vacuum. We knew things would slow and, given that trajectory we were on earlier in the year, we will start to get to a more normalized environment in 2023. I don’t think it is a sky-is-falling kind of things,” Otero added. 

Outlook 

Multifamily market participants who spoke to Real Estate Capital USA concurred there is unlikely to be a fourth quarter surge in lending or investment sales activity, with Otero noting what comes next will depend on the Federal Reserve’s next steps to combat inflation. After a series of 75-basis point rate hikes, there is a sense that the Federal Reserve might start thinking about a pivot. 

In the interim, lenders such as Toorak are still active in the market. But they are taking a more cautious approach, especially as there is some softening in the single-family and multifamily markets, Beacham said.  

“Key questions are how much will rates go up, how long will they remain high, and what will happen to housing prices,” Beacham said. “We are seeing certain markets soften much more rapidly than others and our view is there will probably be some kind of decline nationally across the housing market. It is important to be conservative when lending in a market where housing prices will soften.”

For Toorak, that means the manager is reducing its credit appetite and LTVs while still funding new loans.

“A lot of people are starting to change their expectations for December. Maybe the next rate hike will only be 50 basis points and maybe, in the New Year, the next hike will be 25 basis points. If that were to happen, it would be a different ballgame,” Otero said.