Permanent Financing Availability, Cost Remain Reasonable Through This Week’s Market Bloodbath

By Anuradha Kher, Online News Editor and Keat Foong, Executive EditorNew York–The stock market bloodbath intensified this week. Today, the Dow average closed at 8,451 and during the course of the day had even dipped below the 8,000 mark—for the first time since March 2003. How are multifamily financing observers reacting to the latest headlines? “The multifamily sector is relatively isolated from the carnage on Wall Street,” Nicholas Ingle, director of capital markets at Hendricks & Partners, tells MHN. “But the REITs (Real Estate Investment Trusts) are being impacted. Their dividend yield rate is falling, which is making it difficult for them to get deals done.”In the backdrop of all this uncertainty, Ingle says the LIBOR rates have been bouncing around in the last three weeks. “The Bank of England sets the target LIBOR rate and controls it by injecting money into the bank. But due to the credit crunch in the U.K., that hasn’t been easy to do. This has caused the LIBOR rate to go up,” says Ingle.“On the other hand, no one wants money in savings these days and this is driving treasury rates down and causing the spreads to widen. Having said that, the overall best debt rate you can find for multifamily loans right now is 6 percent, which is pretty good,” explains Ingle.Jeffrey W. Baker, executive managing director of Savills Granite LLC, tells MHN that the current financial market crisis is affecting all asset classes, including multifamily. He says that liquidity in the debt markets is severely constrained and the cost of debt financing has risen for all sectors. “The result has been reduced transaction volume and decreasing values as capitalization rates rise,” explains Baker.He goes on to say, “Debt financing costs have risen 200 bpts or more for the best sponsors and properties. Spreads have widened dramatically and the five-year swap rate is up over 100 bpts from one year ago. For lesser quality real estate, debt is virtually unavailable with the CMBS market essentially shut down. With three-month LIBOR at 4.8 percent, a 250 bpt spread produces a 7.3 percent interest rate and a constant in the 8.3 percent range with a 30-year amortization schedule. This compares to rates in the 5 percent range, with no required amortization before the credit crisis,” Baker says.The turmoil that roiled the stock market in the past few days has not had a tangible effect so far on the availability or cost of multifamily financing, according to David Cardwell, vice president of capital markets and technology at National Multi Housing Council (NMHC). The plunge in the stock market over the past few days has had “no effects other than on the valuation of the multifamily company stocks,” he tells MHN. “Mortgage liquidity for multifamily continue to be relatively strong because of Fannie Mae and Freddie Mac,” he says. “Spreads and rates on programs remain competitive.” Contrary to permanent financing, however, Cardwell acknowledged that multifamily construction financing “has become a major problem” as the primary lenders—the banks— have “frozen up.”