According to a recent piece on National Real Estate Investor (NREI) online, the current climate is good for multifamily investors; lenders are competing even in secondary markets and asset classes they’d previously avoided to some degree. The competition is working to borrowers’ benefit, as multifamily investors can score low interest rates on permanent loans with lenders competing for market share. BAM looks at how lenders are enticing multifamily borrowers with appealing low-interest rate loans, and straying further from city centers as investors seek deals in secondary markets.

Rising Rents & Secondary Markets Matter

Thanks to rents that keep rising (at least on a national basis), NREI reports that lenders continue to fight to make these loans. While some rent growth is slowing down, the article cites experts who note that they don’t expect to see much rent moderation until 2019 and 2020. The rent growth that is experiencing a slowed pace is largely due to areas in which multifamily construction inventory is being delivered.

With larger investors seeking out good deals in secondary markets and cities on the outskirts of larger urban centers, lenders are following and have become more open to financing these deals than in previous years. NREI quotes Brandon Harrington of JLL Capital Markets as saying that institutional investors entering both secondary markets and class-B assets has prompted lenders to act aggressively in these areas; Harrington notes this has paid off for all borrowers in those categories.

Good for the Borrower

The NREI data points out that although interest rates like the 10-year Treasury bond have gone up by half a percentage point since last year, the interest rates on multifamily permanent loans have remained fairly stable. The article also notes that in order to make more loans, lenders are cutting the extra they typically add to interest rates (what’s known as the “spread” – their cost of capital and the interest rate they charge).

Agency Lenders Still Lead, But Other Lenders Also Keeping Rates Low

The NREI piece ranks lenders Freddie Mac and Fannie Mae at the top for providing the most multifamily permanent loan to apartment properties. Both Freddie and Fannie have decreased their spread from a year ago, according to NREI source Harrington, with lenders especially favoring the “strongest borrowers.” Both of these large lenders currently offer all-in interest rates around 4.0 for permanent loans that cover close to 50% of the property. According to NREI data, although these loans can technically go as high as covering 80% of the property, they will rarely ever go beyond 65% of the property’s value due to debt service coverage ratio becoming a “limiting factor.” For those borrowers wanting higher leverage, mezzanine loans are an option, beyond the permanent loan. Freddie Mac has mezzanine loan programs for those properties qualifying for workforce housing: one such loan could result in 10-15 percentage points of leverage.

It’s not just all agency lenders in the game: NREI notes that life companies have been involved for several years offering lower interest rates for lower-leverage, class-A asset loans. In order to keep rates low, the life companies have cut their spread similar to Freddie and Fannie. Even banks are staying competitive, although not with the dependability of the life companies or the agency lenders. NREI adds that lenders are even offering interest-only loans for multifamily properties. The size of the loan compared to the value of the property will determine how much of the loan is interest-only, according to the data. One source is quoted as saying that for a property at 50% loan-to-value, a lot of lenders will offer full-term interest-only.

Our take-away is that just as there are good deals still out there, likewise there is good financing available. The current climate is creating competitive lenders, which can be a real win/win for the borrower. Although eventual rental growth may factor in, today’s landscape appears to show favorable financing ahead.