To Finance Multifamily, Get Creative

Multifamily investors are navigating a tough capital landscape. With challenges ranging from fluctuating interest rates and uncertain property valuations to a wave of upcoming loan maturities, investors face a complex set of hurdles. In this environment, it’s more important than ever for investors to work closely with a skilled lending team to develop innovative financing strategies for their multifamily assets.

This article explores resourceful capital solutions for investors to meet current and future multifamily investment objectives.

Advancing the capital stack

Capital professionals are developing innovative solutions to advance the capital stack on multifamily deals. Today, a typical permanent financing deal, for example, would include an agency bridge loan with preferred equity. This moves the deal up higher in the capital stack.

For instance, a 1031 exchange deal in California’s Inland Empire used this very capital structure. The borrower needed $150 million in debt and had $55 million in equity to put into the deal. While the deal was challenging to structure—there were 27 pages of org docs at one point—this type of arrangement is quickly becoming a current industry trend.

Lenders are also increasing lines of credit for clients as another financing alternative. Typically, that route is for larger sponsors where the financing is not required but rather a preference. This option tends to work well if a client is pursuing a line of credit from a bank at 200 or 300 over the Secured Overnight Financing Rate. This option is quickly becoming one of the most compelling financing solutions available, beating mezzanine and preferred equity. A few years ago, expanding the line of credit was not a financing option, but in today’s environment, it is becoming a more common solution for borrowers to meet financing needs.

Reinvesting in relationships

Investors that have close relationships with their banks or other capital providers tend to naturally be more active, particularly in challenging capital environments like the one we are in now. Banks continue to be discerning in their lending activity, and are reserving their lending dollars for existing relationships. An existing relationship can include deposits with the bank, permanent financing or agency financing deals.

Relationships are important for all types of sponsors, but developers stand to benefit the most. In the current lending environment, construction lending opportunities, for instance, are extremely limited, but with an existing relationship, developers can find the financing they need.

Navigating high interest rates

“Extend and pretend” was the industry’s catchphrase for 2024 and the mentality has largely remained in 2025. Lenders are still by and large extending the maturity of loans to accommodate borrowers. Meanwhile, sponsors have chosen to postpone and delay refinancing while waiting for interest rates to stabilize or decrease. Mortgage rates haven’t yet fallen significantly, and therefore, loan modifications have become more common. The Federal Open Market Committee has decreased interest rates three times over the prior year, with expectations for additional cuts this year.

Unfortunately, as the federal funds rate has decreased, the 10-year Treasury has trended in the opposite direction. Interest rate cuts will likely continue to be slower than we saw last year. Fundamentally, if interest rates stay high, that’s a challenge for people, especially those who bought in the 2021–22 timeframe. Interest rates directly impact borrowing activity. As interest rates began to fall in the third quarter of 2024, multifamily mortgage loan originations increased 59% according to research from the Mortgage Bankers Association. However, the industry group noted that the increase in long-term rates would slow momentum.

Interest rates are a key factor in whether a deal will work. It is a math equation. When the five-year Treasury was below 3.50 percent, many lenders were receiving dozens of inquiries a day. However, when the five-year Treasury went up to 4 percent, the inquiries slowed down significantly.

Borrowers should shop around for the best deal possible because every bank is going to be able to offer a different financing solution or get creative with a deal. For example, Commercial Mortgage-Backed Securities are proving to be a highly successful route for some multifamily properties. In fact, during the third-quarter surge in 2024, multifamily CMBS securitization was up 75 percent for non-agency deals and 38 percent for agency deals, according to Inside Mortgage Finance. For multifamily, this is sometimes a good route, as CMBS can beat out agency on some deals.

Insurance costs are coming down, and that will also help offset the higher cost of capital and help move the needle.

Finding the right banker

Capital markets experts are getting creative and innovative to finance even the most challenging deals. Ultimately, creative financing solutions come down to the capital team. An experienced bank can dig into a deal and find the right path forward. For multifamily investors exploring capital solutions, it is crucial to thoroughly assess the capabilities of potential lenders and determine which lender is the best fit for your particular objectives and company structure.

The right lending team is always open to exploring creative financing solutions for new clients interested in a broad relationship that serves both parties well.

John Petersen is a vice president and mortgage banker at KeyBank.

This article is for general information purposes only and does not consider the specific investment objectives, financial situation, and particular needs of any individual person or entity. All credit products are subject to collateral and/or credit approval, terms, conditions, and availability and subject to change. Banking products and services are offered by KeyBank National Association.