Adam Parker of Gantry on the trends that will shape the remainder of an ever-brightening year for capital raising in the apartment industry.
The steady performance of multifamily properties amid the pandemic has kept both investors and financiers actively seeking opportunities in the asset class.
While the prognosticators will continue to focus on the timing for the Federal Reserve to begin raising rates in the future to hedge against recovery-driven inflation, we at Gantry are looking at the second half of 2021 as one of the healthiest periods on record for financing multifamily assets in preferred markets.
Interest rates are low, and lender competition is abundant. The range of favorable interest rates under reasonable terms is creating generationally relevant opportunities to establish value across a range of multifamily asset types, regional markets and ownership strategies.
Finding the right loan is key to taking advantage of this cycle, and competition is high among various sources, which bodes well for borrowers with clear, actionable strategies in place. Liquidity in the marketplace is creating an environment that allows investors and borrowers to tailor financing to their investment goals.
Agency lenders are becoming more competitive by eliminating or loosening their COVID-19 reserve requirements. Banks are active in the smaller-asset range with more flexible prepayment penalties, and life insurance company lenders are showing a vigorous appetite for longer-term permanent financing loan requests of more than $5 million. Debt funds and bridge lenders have also been more active in the last three to six months. That said, here are a few key dynamics at work in the market:
Agencies returning reserves
Early in the pandemic, agency lenders began requiring a debt service reserve on new loans, ranging from six months to 18 months, to hedge against the possibility of cash flow disruption. In recent weeks, Fannie Mae and Freddie Mac have loosened or eliminated the COVID-19 reserve requirements. It’s also worth noting that Fannie Mae has started the process of returning the previously collected COVID-19 debt service reserves to borrowers, and we expect that Freddie Mac will soon do the same. The reduction or elimination of the COVID-19 debt service reserves will make agency lending more attractive to borrowers.
Cap rates compress
While cap rates have compressed in some growth markets, favorable financing terms are being set that meet operative goals. The abundance of investors chasing acquisition opportunities has driven asset pricing higher, however, lenders are still interested in funding acquisition loans for experienced sponsors. In the face of compressing cap rates, permanent lenders are forced to constrain loans via a minimum debt service coverage ratio, but some of those same lenders are more willing to offer interest-only payments at the beginning of the loan term. The lower debt service payments are allowing borrowers the ability to take advantage of market dynamics, which is projected to push rental rates higher.
Bridge lenders arrive and thrive
After debt funds and bridge financing providers pulled back during much of 2020, many bridge lenders are back in the marketplace offering attractive structures to allow for value-add acquisition. These short-term lenders are targeting assets where the sponsor plans to invest in property renovations and increase rental rates. These lenders will often fund up to 70 percent to 80 percent of cost purchase and renovations at 3 percent to 4.50 percent depending on a range of variables. In some cases, these bridge lenders are also property owners, so they know the market forces intimately and can rely on their equity experience to size-up loan request opportunities. Gantry has had several clients take advantage of these shorter-term loans to minimize the up-front equity contribution while funding their renovation business plan, which directly correlates to increasing a property’s rental rates and NOI.