Financing Multifamily in a Competitive Marketplace
SF Capital’s Aaron Stempel on adapting strategies to meet current conditions and options.
In today’s uncertain market, the multifamily financing landscape is both dynamic and challenging. To gain a deeper understanding of the current landscape, Multi-Housing News spoke with Aaron Stempel, vice president of loan origination at SF Capital, the commercial mortgage banking subsidiary of Friedman Real Estate.
Stempel sheds light on how borrowers and lenders are navigating the complexities of today’s market and finding new ways to make loans pencil.
How are current economic conditions impacting the multifamily finance?
Stempel: Some of the top trends I’m seeing are that borrowers are starting to be open to lending options they may not have previously considered. For instance, a borrower who historically financed his multifamily properties with bank financing is now more open to an agency or CMBS as a viable option to get the needed proceeds/rate. Also, due to the higher rate environment, borrowers who have historically looked to lock in 10- to 15-year fixed-rate loans are now opting for five- to seven-year loans for the added flexibility to refinance when hopefully rates are lower.
What are the key factors you consider when sourcing multifamily financing transactions in the current marketplace?
Stempel: I look at each deal individually. Some key factors I look at include whether the rents appear ‘affordable’ for that specific market to qualify for agency affordability discounts. How well will the property cover the new debt based on the trailing numbers? I also look into the sponsor to make sure they check the boxes for the ideal loan.
How do you decide between different financing options such as fixed- vs. floating-rate loans or agency vs. bridge financing?
Stempel: With the floating rates, typically based on the 30-day SOFR or Prime, both of which are very high indexes, borrowers today only consider floating rates if the property wouldn’t support a fixed-rate loan. Typically speaking, for multifamily, if a deal is stabilized and works for the loan to purchase or covers existing debt in the case of a refinance, we are going for a fixed-rate loan. The agencies would be competitive often but not in all situations.
Give us an example of a complex multifamily financing deal you structured recently.
Stempel: A unique deal I structured recently was a condo deconversion in the Midwest. The client had the property under contract, and the majority of condo owners were opting to sell it. As a condo property, there were virtually no historical numbers to underwrite, so everything was market-driven. There was a significant amount of deferred maintenance, and the borrower needed to spend several million dollars to bring the NOI where he needed it to be. I provided a fixed-rate bridge loan for 75 percent of the purchase price and 100 percent of the capex budget. We closed that loan, and the property is doing better than expected, with rents $200-$300 above what the sponsor projected.
What are the biggest challenges you face when placing equity or debt for multifamily projects? Can you provide examples of how you’ve successfully navigated these challenges in past transactions?
Stempel: I would say the biggest challenge today when financing multifamily projects is the effect inflation has had on these properties coupled with higher rates. Labor is up, material is up and almost all expenses are higher than what was budgeted, especially insurance and taxes in certain markets. This places a strain on multifamily deals where borrowers often focus on the top-line income, which may be up some as well but often not enough to get you a full 75 to 80 percent loan when practically every loan is cash-flow-constrained, even with somewhat higher CAP rates.
I have navigated this by being transparent with the borrower and letting them know this is why we are at the loan amount we arrived at. Thankfully, rates have come in from where they were a year ago, and deals are starting to pencil out where things begin to make sense.
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Besides affordable housing, what type of multifamily properties are currently harder to source financing for?
Stempel: There’s still a lot of capital out there for multifamily properties. I would say the hardest ones to source financing for today would be the newly built properties with retail components that may not have panned out as planned. So, the mortgage balances are high, but the in-place NOI isn’t close to paying off existing debt.
How much analysis goes into matching property owners with the right sources of capital, whether it’s life insurance companies, banks or other lenders?
Stempel: A lot. I don’t think borrowers quite realize how much work and effort it is to produce loan options, especially for more complex deals. Each lender has its criteria, and that criteria keep changing. Just keeping up with your lenders and knowing what they are looking for is a job in and of itself.
Recently, many borrowers have become more comfortable with alternative lenders. What’s your take on this trend?
Stempel: I think borrowers today, as much as they may say they will never do a CMBS loan or agency loan. They are open to new solutions. If the terms presented are the best they have, they will often take it. Many smaller and regional banks are not as aggressive today given their high cost of funds or being overexposed to CRE. Those borrowers who historically appreciated the simple bank process are now being forced to look at alternative lenders that they would never have considered a couple of years ago.
The Fed recently cut interest rates for the second time. Has the first cut impacted the market in any way? What should borrowers be aware of?
Stempel: Interestingly, the treasuries did not decrease after the announcement, but they went up a few basis points. What borrowers need to understand is that this does not affect long-term fixed rates. Those Fed cuts affect short-term lending and floating-rate loans. For a borrower who is looking for a five-year fixed loan on his multifamily property he hasn’t benefited by waiting for this Fed announcement.
