Exclusive WMRE research shows how rising interest rates and macroeconomic concerns are affecting multifamily investors’ ability access to capital.
Rising interest rates and the overall state of capital markets are top of mind for respondents in WMRE’s ninth annual multifamily research report.
Respondents are more pessimistic on the availability of capital. Although 41 percent see no change in the availability of equity compared to 12 months ago, 37 percent think it is less available and 16 percent said it is more available. On the debt side, 38 percent said there was no change in availability compared to 42 percent who consider it to be less available and 15 percent who believe it is more available than 12 months ago. With the exception of 2020, respondents have the most negative view on the availability of capital in the history of the survey.
The survey was taken just ahead of the July 26th Fed meeting, which resulted in a 75 basis point rate hike. So, it is no surprise that 91 percent thought interest rates would rise over the next 12 months. Rising interest rates is translating to higher capital costs. As of mid-August, 10-year and seven-year fixed rate loans were pricing identically due to the yield curve with an all-in rate around 4.25 to 4.50 percent depending on the individual transaction. That is a sizable move compared to 12 months ago when borrowers could finance at around 3 percent, notes Jeff Erxleben, president of debt and equity at Northmarq.
“Rising interest rates and disruptions in certain segments of the credit markets has resulted in a shift in where financing activity is happening,” adds Erxleben. Last year, the CLO market and bridge loan market is where most of the transactions were happening. That is still happening to some extent, but the real trend in where financing activity sits today is with Fannie Mae, Freddie Mac and the banks. Life companies are still active, but on a very select basis, he adds.
“Freddie and Fannie are really the go to source for refinance activity and for select acquisition activity,” says Erxleben. Refinance activity is being driven by investors looking to convert shorter-term bridge loans into longer-term fixed or floating rate options from the agencies. On the acquisition side, Fannie and Freddie continue to dial in their loan proceeds and underwriting to find loan-to-values that are accreditive for acquisitions. That also is balanced with acquisitions that have adjusted to the current market dynamics in terms of higher cap rates, notes Erxleben.
Respondents rated local/regional banks as the most significant source of debt capital for multifamily with a mean score of 6.4 out of 10, followed closely by national banks at 6.2 and Fannie Mae/Freddie Mac at 6.0.
Survey results related to the outlook for LTVs were mixed. Thirty-nine percent predict no change, while 36 percent believe they will decline, and 25 percent think LTVs could increase. Views on DSCRs also are split with 41 percent who think they will remain stable and 45 percent who think they will rise. Those who expect a decline in DSCRs are in the minority at 14 percent.
The reality is that DSCRs and LTVs have gone up as values have gone down, notes Erxleben. According to Erxleben, loans that were maxing out at 50 percent LTV 12 months ago are now in the 60s or even moving close to 75 percent on agency loans. The good news is that the fundamentals remain very strong with good cash flow coming out of properties, and lenders are still underwriting aggressively. “Lenders continue to be bullish on the sector itself and the performance of the properties remains strong. So, they’ve dialed in their assumptions, and they are willing to lean in a little bit more,” he says.
Multifamily loans have been performing very well with delinquencies below 0.5 percent. However, three-fourths of respondents think delinquencies will rise in the coming year, which does reflect a sizable jump from the 57 percent who held that view a year ago. Likely, that response is related to the fact that delinquencies have been incredibly low. “Any uptick that does occur is likely to be in select instances where the business plan didn’t work out or other forces were at play, but on a broad brush in multifamily we don’t see delinquencies going up materially,” says Erxleben.