Multifamily Finance: A Tough Road, But Not Impossible

MHN recently spoke with Ryan Welsh, principal at Aries Multifamily, about the prospects for multifamily finance in the near- to mid-term.

Dees Stribling, Contributing Editor

Chicago–It’s no secret that times are hard for anyone looking to find money to buy a multifamily asset. Many of the lenders that had previously financed such ventures have either disappeared or are no longer actively making new loans.

Yet the demand for such financing is still there, because investors still see shorter-term opportunities in multifamily as the economy slowly recovers and longer-term ones as the U.S. population expands. Early this year, Chicago-based Aries Capital formed a new division, Aries Multifamily, to tap into that demand by providing loans under $5 million for apartment properties nationwide.

MHN recently spoke with Ryan Welsh, principal at Aries Multifamily, about the prospects for multifamily finance in the near- to mid-term. Welsh was recruited to lead the new Aries Capital as a commercial real estate executive with more than a decade in commercial and multifamily underwriting, loan origination, portfolio management and loan sales.
MHN: What kinds of multifamily properties are easiest to finance in this tight-credit market?Assets in major markets with stabilized occupancies, though that isn’t quite the case in every market. Lenders look for markets with concentrations of recent graduates and empty nesters, both of whom tend to rent closer to city centers and near transportation and other amenities. The age of the property, provided it’s well maintained, is less of a concern than having a stable pool of occupants over 85 percent, or preferable over 90 percent, in an urban location.


There’s also been an increase in lender interest in smaller deals. A number of Fannie Mae originators they haven’t been in the space before have recently entered small-loan underwriting. Small, as in under $3 million. They’ve recognized that even the smaller, well-located assets — in the same kinds of urban locations as the larger, well-located assets — make for good deals as well.

MHN: Do you expect lending to remain as tight next year as this year? Relatively speaking, multifamily has been the easiest property type to finance, and I expect that to remain true next year. Fannie, Freddie and HUD will remain the key players, though HUD recently tightened its underwriting standards, which one lender described to me as, “the party is over.” But the changes to the HUD 221(d)(4) program for market-rate apartments were long overdue. They might cost some jobs and hurt developers holding land, but the changes will be healthy for the overall market, as they limit new supply.


More fundamentally, there have been some changes in how lenders think about multifamily. Property cash-flow used to be the most important consideration, but lately I’ve seen a lot more interest examining the borrower’s financial position and overall real estate portfolio in detail. A track record is more important than ever.

MHN: Is there any trepidation about how Fannie and Freddie might be changed after the mid-term elections? Any changes to Fannie and Freddie are so politically sensitive that I’d be surprised if there were any major revamping of their central position in real estate finance.


MHN: Will the financial reform bill just signed change anything for multifamily finance, even indirectly? The final version of the bill isn’t as restrictive as many people feared it would be. It appears that the bill will allow originators to trade and place new issuance securitization, which is essential. There’s still a little uncertainty as to whether the underwriter will have to hold the first-loss position. As I understand it, the bill requires regulators to establish underwriting standards that determine if the first-loss position needs to be held or not. Still, the consensus seems to be that the standards won’t have much of an impact on straightforward CMBS loans anyway, but might well on some of the more exotic instruments such as CDOs.