2024 Multifamily Financing Outlook: Navigating Challenges and Seizing Opportunities Amidst Rising Rates and Market Adjustments

Posted by

Vincent SantaLucia


March 1, 2024

The past year brought rising rates, negative leverage issues, and price discovery challenges. But solid demand drivers keep the sector's outlook positive long-term.

Where We Stand

Higher capital costs inhibited investment sales, as buyers and sellers struggled finding executable risk-adjusted pricing. Multifamily cap rates climbed 100-150 bps since late 2022 accordingly. There's still ample liquidity, just at lower leverage points, as bid-ask spreads continue narrowing.

The Fed's December announcement that rate cuts are likely coming in late 2024 was welcome news. But apartment financing closely tracks Treasury yields and SOFR, so indexes don't directly correlate to Fed policy. For now, investors are being patient in the "risk off" environment, slowing transaction activity across sectors.

With our entrance into an election year, history suggests possible rate cuts ahead, which would incentivize buyers. We're already seeing more products brought to market in anticipation of cuts.

Financing Landscape

Investment capital remains selective on both equity and debt deals presently. The development pipeline took the biggest hit. Challenges include:

•    Rising construction expenses

•    High cost of construction financing

•    Achieving needed risk-adjusted returns

For existing assets, higher rates diluted lending calculus. A 150-200 bps jump in loan constants over 9 months means materially lower proceeds. For example, a 5.5% cap rate purchase at 20% leverage two years ago can maybe get 10% leverage with today’s 7%+ interest rates.

As rates stayed elevated, more borrowers utilized alternative structures on maturing loans like bridge financing, mezzanine capital, and preferred equity to maintain leverage. These private capital sources should remain robust over the next 12-18 months as refinancing hurdles persist.

We're also seeing more rate buydowns, with borrowers paying 1-4% of loan amounts to increase proceeds. Most agency and CMBS lenders allow buydowns. Additionally, more owners opt for shorter 2-5 year terms to refinance faster when rates hopefully decline.

Fundamentals Buoying Demand

The ongoing housing shortage, especially affordable rentals, combined with homebuying barriers like decade-high rates, keeps multifamily fundamentals firm. Aspiring home buyers still cannot afford rising single-family costs. And current owners with sub-4% mortgages are unlikely to sell and take on 7%+ replacement financing.

This dynamic persists alongside new apartment deliveries and local rent control regulations in some markets. Nonetheless, construction cost inflation should dampen new supply, keeping demand well ahead of inventory additions.

Financings Getting Done

Cash-flowing deals remain most attractive, drawing liquidity from agencies, banks, life companies, CMBS, credit unions, and debt funds. Typical terms are 30-year amortization, 8-9.5% debt yields, and 6.4-7.5% all-in rates. Leverage runs 55-70% loan-to-cost.

For value-add plays, bridge loans, mezzanine capital, and preferred equity maintain decent availability, especially for experienced sponsors. Underwriting includes DSCRs below 1.0x with built-in interest reserves for renovations. Bridge financing also continues, usually carrying 8-10% variable rate pricing with guarantees.

However, construction financing remains scarce outside of local/regional banks. Requirements now include 10-15% deposited cash collateral, 55-65% LTCs, variable rates of 8.5-10%, personal guarantees, and GMAX contracts.

What's Ahead

With the Fed holding rates higher longer than the past decade, apartment owners face a wall of maturities in an unusually high rate climate.

From 2023-2027, nearly $1 trillion in multifamily debt expires. And $1.99 trillion comes due through 2028. While some lenders allow extensions, that means assuming rates decline soon plus injecting additional equity potentially.

For loans being refinanced, either more equity or buydowns are necessary to maintain leverage with higher constants. And owners with variable rate maturities must replace rate caps upfront while securing refinancing.

For groups in serious trouble, rescue financing like preferred equity to pay down debt, all while avoiding out-of-pocket equity, remains an option. And if refinancing is impossible, selling—even at loss—can be the solution.

But multifamily’s overall outlook remains healthy. Demand drivers won't disappear. And first-time investors or those with dry powder can acquire properties at fantastic discounts as more non-performing bridges and construction loans hit markets around Q2 2024.

Reach out to our Capital Markets team to discuss personalized strategies in more detail at contact@offerd.com.


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