As 2019 surpasses the midway point, methodical apartment developers and owners have to feel good about the availability of debt.
The accessibility no doubt stems in large part from the healthy state of renter demand for multifamily product. According to Yardi Matrix, the national occupancy rate for stabilized apartment communities stood at 94.9 percent in April.
In the National Multifamily Housing Council’s most recent quarterly survey of market conditions, conducted in April, the Debt Financing Index was 81 (a reading above 50 indicates that, on balance, debt finance is more available when compared to three months earlier; a reading below 50 indicates that debt finance is less available). Furthermore, for the first time in the survey’s 20-year history, not a single respondent “reported worsening debt financing conditions,” according to NMHC.
Clearly, lenders remain enthusiastic about the apartment industry.
Different than the Past
But all of this is not to say that obtaining a loan for a development or an acquisition is a slam dunk by any stretch. Generally speaking, during this cycle, lenders have remained extremely disciplined and are staying in the lending lanes they know best. They are diligently underwriting both the real estate and the sponsor. If a lender has a previous and successful history with you, obviously that will help them feel more comfortable about working with you in the present.
The current cycle stands in notable contrast to previous ones, when banks especially seemed prone to overreacting. When times were really good, banks and other lenders would overreact and get very aggressive on lending at higher leverage to less experienced borrowers. Then, when times were not as good, they would pull back, and it would be almost impossible for anyone to get a loan. This cycle has been characterized by lenders remaining very measured and using sound underwriting.
As for which lenders are most prominent in the current environment, from our vantage point at Bainbridge, we see that traditional banks are active on the new development front. Meanwhile, the agencies are active on the acquisition front.
In the Future
Looking ahead to the rest of 2019, I generally expect the availability of debt to remain the same. The length of this current cycle and the discipline of sponsors have created very realistic expectations from both lenders and equity. Likewise, both groups should remain committed to continuing to invest in multifamily.
One thing to keep an eye on: Lenders could eventually become more active in Opportunity Zone projects. Right now, we are in the opening innings of the Opportunity Zone game and everyone is just getting up to speed on the way to play it. There is a tremendous amount of equity being raised. As that equity commits to sites in greater numbers, we are going to see a greater need for debt to emerge. At that point, we’ll get a good understanding of what lenders will be most active in this area.
In the end, there will always be some sponsors who find a different mousetrap, but real estate remains largely a herd mentality. As long as the herd continues to remain disciplined, the accessibility of debt for both new developments and the acquisition of existing properties should not change significantly in the future.
Mark Stewart is the senior vice president & chief investment officer for The Bainbridge Cos., developers, owners and managers of luxury multifamily communities along the entire east coast from Florida through Long Island, NY.