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Multifamily Borrowers Will Continue to Have Access to Multiple Capital Sources in 2019

Capital sources ranging from banks to private equity funds still find multifamily lending attractive.

Multifamily borrowers will have lots of choices on where to get permanent loans in the new year—despite worries about rising interest rates, high property prices and overbuilding.

“There is nothing out there that is going to create a lack of liquidity,” says Gerard Sansosti, executive managing director with capital markets services provider HFF.

Multifamily investors can get permanent loans from a growing list of lenders, including Freddie Mac and Fannie Mae lenders, banks and life companies. Many private equity fund managers have also created debt funds to provide loans on apartment properties.

“Rising rates aside, 2019 should feel the same as 2018 in terms of liquidity,” says Peter Donovan, executive managing director with CBRE’s capital markets multifamily group.

Debt funds provide ready money

Even developers whose new projects are taking too long to lease up can find loans to take out their construction loans. Many private equity fund managers have created debt funds that now provide bridge financing on apartment properties. “There are out there in force,” says Donovan. “They are the new unregulated lenders.”

These loans can over up to 85 percent of the value of a property, with interest rates often floating at 275 to 300 basis points over the 30-day LIBOR.

Once the property has fully leased, the borrower can find convention permanent financing to take out most of the bridge loan, so the remainder of the bridge loans from the debt fund functions as a much smaller mezzanine loan. Value-add investors also use these debt funds to secure bridge financing for their properties.

Interest rates still low

The interest rates are still relatively low for permanent loans, despite two years of rate hikes from the Federal Reserve.

At the end of 2018, lenders offered all-in interest rates from 4.25 percent to 4.50 percent, for permanent loans from Fannie Mae or Freddie Mac programs that cover up to 75 percent of the value of a stabilized, fully-leased property. That’s up roughly half a percentage point from the end of 2017.

That increase is far below the rate hikes from Federal Reserve officials, who have been pushing their benchmark Fed funds rate higher by 25 basis points at a time for the last two years—from close to zero to well-over 2.0 percent. The Fed is expected to raise its rates several more times in 2019.

To keep their all-in interest rates low, permanent lenders have cut their spreads—the amount that they add to their interest rates. The current interest rates from Freddie Mac and Fannie Mae work out to a spread over the yield on 10-year Treasury bonds of about 150 to 160 basis points. The yields on Treasury bonds have also stayed low. The yield on 10-year Treasury bonds was about 2.7 percent in the last trading days of 2018. That’s only a little higher than in 2017, when the yield hovered in the mid-2-percent range. The Treasury bond yield has risen to over 3.0 percent for much of the fall, but fell back as the stocks markets grew volatile at the end of the year.

Eventually Treasury bond yields are likely to rise again. That will eventually push interest rates higher for permanent loans. “Rising rates start to pinch at 3.25 percent. Certainly, at 3.5 percent you are going to start to feel it in loan proceeds,” says CBRE’s Donovan.

New overseer for Freddie Mac and Fannie Mae

All the biggest lenders are expected to stay busy in 2019. Freddie Mac and Fannie Mae were still the biggest sources of capital for apartment loans in 2018, and are likely to hold onto that spot in 2019, despite having a new federal overseer in 2019.

Mel Watt will step down in 2019 as the leader of the Federal Housing Finance Agency (FHFA), the federal agency that regulates Fannie Mae and Freddie Mac. The new director of FHFA could hypothetically impose tighter restrictions on how much Fannie Mae and Freddie Mac can lend.

However, industry experts are positive about the nominee, Mark Calabria, who is currently an economic advisor to Vice President Mike Pence. “He absolutely understands the finance world for single-family and multifamily. He comes with great experience,” says Donovan.

Other leading capital sources, from banks to life insurance companies, remain active. Life companies continue to compete to make loans on the most desirable, class-A apartment properties, offering interest rates as low as 105 to 110 basis points over the yield on Treasury bonds for low-leverage loans. “They don’t seem to have any less capital available,” says Sansosti.

Conduits lenders and lenders that provide Federal Housing Administration loans also continue to be active.

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