One of the most consistent pandemic-related trends we have seen emerge has been a momentum shift in the multifamily asset class away from the major MSA markets and into suburban and even tertiary markets. Lenders are now meeting investors where the action is, and investors are meeting the market where fundamentals indicate powerful shifts in demographic and economic trends.
In the Pacific Northwest, we are seeing this new trend emerge due to post-pandemic disruptions to workplace and social norms in the region’s major MSA markets (mainly Seattle, Wash., and Portland, Ore.). Many of the region’s primary professional industry classes driving major MSA employment—technology, legal and other white collar service sectors—are using this opportunity to revisit work style and culture in an untethered, decentralized model.
As these remote operating models adopted by many office users have taken root and grown following last year’s social distancing mandates, a generational shift valuing the lower cost of living, higher quality of life, and larger footprint domiciles available in secondary markets has clearly fueled the beginning of a new, robust cycle for regional markets outside the MSA domain.
For my market of focus here in Oregon, this means a dramatic shift of lender interest from the Portland urban market, where we have grown used to seeing stable and consistent multifamily investment and development activity, to what are traditionally more sleepy and less active secondary markets like Bend and Salem. This shift is now rewarding experienced sponsors in what have become prioritized markets by offering access to a host of new lending sources that once only reserved their allocations for operators in what were considered the safer major MSA markets.
Lender competition is high, and that includes a focus on specialization from lenders looking to drill down on a specific asset type, operating model, performance history and sponsor profile, with less emphasis on geography. In the current cycle, life company appetite is strong in the secondary markets for longer-term, permanent funding at extremely favorable rates with up to 65 percent leverage.
Higher Leverage Available
For those seeking higher leverage, agency lenders are also becoming active in these secondary markets at similarly appealing rates and terms up to 75 percent LTV. Finally, banks are looking to their long-term relationships with known clients to compete on rate, term and proceeds, as well as being an active source for new development funding.
This interest bodes well for multifamily investors who have often felt overlooked in secondary markets. Now is the time to refinance or acquire best-option lending rates and terms and capitalize on the front end of this cycle. Fundamentals point to a long-term trend of professionals and new families embracing a permanent migration to these once secondary markets that are becoming primary locations for quality of life and affordability. That is a trend worth noting for any owner or sponsor seeking to benefit from a fundamental shift in multifamily occupancy trends.
Blake Hering is a principal with Gantry Inc.