Multifamily housing is in high demand right now and there has been little indication that the market will hit the brakes on this type of property. Commercial real estate services company CBRE expects 2022 to be a record year for the multifamily sector due to solid fundamentals and heightened investor interest, according to the firm’s U.S. market outlook report for the year.
“The growing economy is boosting household formation, which had been artificially suppressed by the pandemic,” the report stated. New households are the impetus for rental-housing demand, which was expected to match the pace of completed units in 2022. CBRE forecast multifamily occupancy levels to stay above 95% for the foreseeable future and for effective rent growth to reach nearly 7% this year. More than 300,000 units were set to be delivered, well above historic norms.
This high demand and hypercompetitive market can be intimidating for new players looking to dip their toes in the multifamily real estate pool. And fear can discourage first-timers from finding a mortgage to purchase a multifamily property.
Commercial mortgage brokers should do everything in their power to ensure that qualified first-time multifamily property buyers are not scared away by the current market. Newcomers can still find their place in this competitive climate, so they should be given the tools they need to get there.
Popular investment
The challenge for new players in this market is their ability to get a deal structured that works within the current economic environment. Experienced investors are paying a premium for properties right now and many of them have easier access to capital than newcomers do.
The problem is that apartments are extremely popular right now since they are high-quality and stable investments when compared to other commercial real estate sectors. The retail sector, for instance, is still an unstable environment due to changing demands on businesses and difficulties in maintaining a consistent customer base.
Office space also is proving to be risky as uncertainty dominates the sector. Offices are still recovering from the pandemic and many businesses are allowing their workers to continue working from home for at least part of the week. Industrial spaces have been very successful investments in recent years, but they tend to be sophisticated operations for which newcomers struggle to find loans.
Apartments, on the other hand, don’t come with a lot of discretionary expenses. And in the current market, owners are more than likely to be able to lease units. The increased likelihood of success means that newcomers are more likely to qualify for a loan, but the high success rate also means there will be more players in the market.
Competitive climate
Low interest rates are a double-edged sword for new investors. While rates have gone up over the past two years, they are still near historic low points. Although new apartment investors can afford to borrow more, so can established investors.
Everyone’s debt-service-coverage ratio is higher since the cost of debt is lower, which means more people will remain in the game. At present, market participants are dealing with rising interest rates, so this will continue to affect purchasing power.
Also, keep in mind that demand for apartments is increasing due to the high cost of housing. This is pushing people out of the home-purchase market and turning them into renters. Rent prices have gone up dramatically (and they will continue to go up), making it increasingly attractive to buy apartments.
People will continue to throw money into this space. Mortgage brokers working with new investors are competing against people who want to offer lower rates. And brokers will find more lenders that want to lend against this asset type. The challenge is, how do brokers position their clients at the table as investors who are unique and distinctive? Brokers will have to answer this question to put new multifamily investors in competitive positions to capture apartment complexes.
Prepare the client
No matter what type of loan a client is seeking, mortgage brokers will have to do some legwork to ensure that a novice borrower isn’t automatically disqualified. Anyone new to the market is going to have a hard time obtaining a competitive loan, so brokers need to do everything in their power to put clients in the best possible position.
To accomplish this, they need to ask the right questions and gather the right information. This will tell them what their clients are trying to achieve in the apartment market by obtaining a loan. What is their current financial condition, how quickly are they trying to get a mortgage and what is their long-term goal for the transaction?
Brokers must ask clients these questions and clients should have good answers. If they don’t, their chances of obtaining the loan they desire are low. For inexperienced real estate investors to be competitive in the current market, they must have a clear plan.
Investor assessment
Brokers also should be realistic assessors. They should understand what the market will accept and be experts at navigating the expectations of their clients. Hard and honest conversations about a client’s limitations and expectations are the best ways for brokers to help clients find competitive mortgages.
Brokers must ensure that clients are conducting proper market research. They must determine whether a borrower knows the market well, understands the options that are out there, and if their goals are realistic or not. Someone new to multifamily probably will not qualify for a construction loan on a massive and new luxury apartment complex. But they may qualify to buy an older 25-unit property.
When brokers ask their clients the right questions, this should help the borrower to understand the market and help them manage their expectations. This will help to set up success in qualifying for a competitive loan.
Loan options
There are a variety of financing options for newcomers to the multifamily market. The following are some of the best options to consider.
Agency financing through Fannie Mae or Freddie Mac includes a longer amortization period, and it allows the broker to underwrite for better cash flow, which is one of the reasons these loans have better interest rates. They also are nonrecourse loans, which are helpful to new borrowers since the lender can only seize the collateral offered.
Mezzanine financing is a great space to push the envelope on leverage. If your client can only get to 70% loan to value (LTV), a mezzanine lender could add another 10% and get them up to 80%. This type of LTV offering will help a broker stand out from the crowd.
Commercial mortgage-backed securities (CMBS) are a good lending option for new investors. They are commonly used for multifamily properties. CMBS loans don’t have interest rates that are as competitive as Fannie Mae and Freddie Mac, so your client will have to find a way to compensate for the higher cost of borrowing. Fortunately, these loans can be underwritten in a more aggressive way than others since they can be sold off to a secondary investor. This allows a CMBS loan to be more competitive.
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The apartment market is incredibly competitive right now, which can make this type of investment seem unfriendly to novice clients. Commercial mortgage brokers should do everything they can to help qualified investors find financing for apartments. These borrowers can overcome challenges and establish realistic expectations that will guide them to an attainable and competitive loan. ●
