There are certainly shifts on the horizon in terms of financing. With that in mind, below are three factors to keep in mind when seeking financing for multifamily product in the year ahead.
Availability will change
2016 has been a strong year for multifamily financing. Multifamily mortgage debt rose to $1.09 trillion by the second quarter of the year, and subsequent quarters have demonstrated steady activity. Compared to the end of 2015 which reported $1.6 trillion for the entire year, this lead indicates a much higher debt as we near the end of the fourth quarter.
As we move into 2017, multifamily owners and developers should anticipate a tightening of availability for both financing and refinancing based on two factors: rising supply of apartments and slowing rent growth.
- Rising Supply: Multifamily construction is at an all-time high. Development in this sector has steadily increased since 2010, and will continue to do so as we move into 2017 and beyond. In major markets throughout the United States, more than 385,000 multifamily units are expected to be delivered in 2017, which will cause lenders to be cautious.
- Slowing Rent Growth: As supply increases, rents will begin to flatten. This is already evident in some gateway cities, where apartment concessions are beginning to re-emerge as owners compete for renters, which will negatively affect loan proceeds.
Regardless of these changes, apartment lending remains the most aggressive of all product types. Looking ahead, multifamily owners and developers should be prepared to approach transactions with flexibility, understanding that the lending criteria may be different in 2017 compared to 2016. It will be even more important to work with specialists who can nimbly navigate these inevitable shifts.
Interest rates will rise
Interest rates will certainly continue to increase in 2017, and the effect will be two-fold.
On one side, increasing rates will make it more difficult for people to purchase homes, resulting in a growing demand for rental apartments.
Rising rates will result in lower underwritten loan proceeds, requiring more equity and ultimately increasing cap rates and lowering values.
Additionally, rising interest rates coupled with a continued increase in construction costs makes the total cost of building new units more expensive. Depending on what changes are made under the Trump administration, which remain to be seen, material costs could rise even further, resulting in financial pressure on new construction.
Regulations will loosen
Regulations have continued to push the cost of apartments up, whether it is for the cost of entitlements or the requirements for additional affordable units at below their actual costs to build.
It is likely that 2017 will bring a loosening of lending regulations, which is good news for the multifamily market. While lenders will always remain cautious, when there is too much regulation, or rules become too strict, lending slows. The key is finding the right balance.
In the current market, many industry experts believe that the Dodd-Frank regulations have made it too difficult for banks to provide apartment financing, especially for construction. A relaxing of these regulations, which is likely under the new Trump administration, will lead to a stronger financing climate for owners, investors and developers.
Looking ahead, the outlook is positive for the multifamily finance market. Even amidst a changing political climate, fundamentals remain sound for multifamily projects that are well-located. Specifically, product in urban markets near transit as well as highly-amenitized luxury product continues to perform well, and remains attractive to lenders.
As positive activity continues, those who are preparing for the future and keeping their finger on the pulse of what is to come will be well equipped to succeed in the year ahead.
Steve Bram is a principal with George Smith Partners, a national commercial real estate investment banking firm that has arranged more than $35 billion in financing since its inception. Contact him at [email protected].