Nearly half of respondents say both equity and debt are less available for multifamily properties than it was 12 months ago. In all, 46.2 percent of respondents believe equity is less available, 29.1 percent say it is unchanged and 18.0 percent said it is more available. In addition, 7 percent were unsure. On the debt side, 55.7 percent said financing is less available, 26.0 percent believe it unchanged, 14.0 percent said it is more available and 4 percent were unsure..
Although capital may be less available, there continues to be good liquidity in the market from a variety of different capital sources. “I don’t see the availability of capital constricting from a big picture standpoint, although there are some geographic areas where some of the fundamentals face a little more headwind than others,” says Jeff Erxleben, executive vice president and regional managing director at NorthMarq in Dallas. For example, some coastal markets that experienced off the chart rent growth in recent years could very well see some erosion of rents, he says.
Respondents continue to believe there is ample capital available from a variety of different sources, with Fannie Mae/Freddie Mac being the most prevalent with a mean score of 6.7 out of 10, followed by local/regional banks at 6.3 and national banks at 6.2. It is notable that respondents said that capital is slightly less available from each lender source than in past surveys. Those that saw the biggest drops were pension funds and REITs, each rated a 6 in the 2019 survey and have now fallen to 5.2 and 5.1 respectively.
Fannie and Freddie remain the primary financing sources for borrowers. Their purpose is to provide liquidity to the housing market during up and down market cycles, and they have been living up to that in the current downturn with consistent financing throughout 2020. “They definitely took a harder look at certain aspects of the multifamily market as we have gone through this pandemic, but they remain the go to lenders,” says Erxleben. Life insurance companies continue to have a favorable outlook on multifamily, although different participants did take a pause at certain points over the past few months. “Although multifamily is a top asset class that they want to invest in, they are definitely picking their selective spots. When they find those opportunities they want to pursue, they are very aggressive about getting that money out,” says Erxleben. The one category of lender that has shrunk is bridge lenders due to capitalization issues.
Debt service coverage ratios (DSCRs) have continued to tighten on the refinance side, in large part because of the liquidity that Fannie and Freddie provide. For example, a cash-out refinance at the beginning of the pandemic was challenging to get done. Today, the DSCR requirement is at 1.25x on a very good quality loan, notes Erxleben. Larger up-front reserve requirements are playing a significant role in that lender appetite. However, those low DSCR levels are also a reflection of the confidence that lenders have in the fundamentals and competition that remains in the market, particularly for good quality loans.
Half of respondents expect increased risk premiums (54 percent) and debt service coverage ratios (49 percent) over the next 12 months, and stable interest rates (58 percent).
“Overall lender appetite for multifamily is still strong and a favored asset class compared to other sectors,” says Erxleben. The refinance market in particular has remained strong and in fact represents a large percentage of the mortgage origination business in 2020. The acquisition market has been building steam again heading into August. Meanwhile, new construction lending is more mercurial in that it is more geography driven, he adds.
Respondents reported mixed views on the level of development in the multifamily sector. Overall, 36 percent believe it is the right amount, 27 percent think it is too much, and 24 percent said it is too little. Those views are consistent with the 2019 survey, where 38 percent said it was the right amount; 35 percent said too much, 16 percent too little and 10 percent were unsure. According to RentCafé, construction has dropped 12 percent this year, with 283,000 new units expected to be delivered in 2020. Even so, some pockets of oversupply are inevitable. Dallas-Fort Worth, for example, is leading the nation in terms of apartment construction with 19,300 new units scheduled for completion this year.
Despite some of the near-term uncertainty, multifamily developers and investors appear to be looking beyond COVID-19 to the longer term demand drivers for rental housing. “Multifamily has traditionally been a good investment over the last several years, and it will continue to be a good investment for the foreseeable future, especially as we see the younger generations move into the rental space,” notes Sebastian.