Rising Interest Rates Affecting Multifamily Borrowers

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For multifamily investors, the loan climate isn't quite as sunny and favorable as it has been in the last few years. A recent article in National Real Estate Investor (NREI) online showed that rising interest rates are affecting loan size, factors, and also determining who can get the best deals. BAM looked at how the changing interest rates are hitting real estate loans and how it may make it tougher for smaller players to get into the game.

 

Rising Rates Equal Big Changes

 

According to NREI data, only three years ago in 2015 most large deals were “clean” to underwrite but cut to now and it isn't as easy to underwrite these deals. Coming through with full-leverage loans is becoming more of a challenge and borrowers aren't able to nail down the large permanent loans they could in the past thanks to the rising interest rates. What this means now, according to the NREI piece, is that borrowers have to put up their own equity – often from their balance sheets or by bringing in new equity partners. The good news is that it's currently still doable; however, the concern is that as interest rates are expected to continue rising, eventually they'll simply get in the way of these deals.

 

...And Rates Are Going Up

 

Per the NREI data, lenders benchmark charged interest rates on long-term commercial mortgages “against the rising yield on 10-year U.S. Treasury Bonds.” Those yields are already up 55 basis points when compared to six months ago, which while still relatively low when looked at historically, definitely point to a significant increase. Of course interest rates will be passed on to the borrower as well, with the increase rolling down hill. As of now, not all the increase has been spread to borrowers. Lenders' all-in rates are increasing, while credit spreads are compressing – but not enough to keep interest rates as low as they have been. These rates will cut into the income created by a property, since by and large rents aren't rising fast enough to keep up with the increase and since property costs are also rising at the same time.

 

Hitting Smaller Borrowers Harder

 

Since interest rates are up, property costs are up, and rents aren't rising as quickly, those factors combine in a perfect storm to make it tougher to get a full-size loan to buy or refinance a property. Typically, the lender will want the property income to support a certain debt income ratio – all of which is difficult to do under current circumstances and which limits loan size. This favors groups with ready equity, REITS, and private equity fund managers over smaller borrowers and regional buyers who now have to pony up more equity than in previous years thanks to limited loan size.

 

The Bottom Line

 

While the current climate favors borrowers with available equity due to loan-limiting factors, climbing interest rates may eventually get in the way of deals altogether – so difficult still isn't impossible and deals are still out there to be had.

Elizabeth Wheeler