Walker & Dunlop’s TJ Edwards on the GSEs and Other Sources of Multifamily Financing
Experienced investors are still finding ways to finance their deals, according to Edwards.
More than halfway through the year, the GSEs continue to dominate the multifamily lending landscape. Sponsors that have close connections with both Freddie Mac and Fannie Mae are staying active in a market that has historically offered stability in the face of uncertainty. And as interest rates stabilize—and the Fed’s moves become more predictable—experienced investors are ready to capitalize on favorable circumstances as they arise.
“There will still be a significant amount of opportunities as investment sales activity returns and sponsors feel more stability in the market,” said TJ Edwards, chief production officer of Walker & Dunlop’s Multifamily Finance group. Edwards has almost 15 years of experience in debt and equity investments, client relationship management, business operations and marketing, having served as a regional director at Freddie Mac. Here’s what he told Multi-Housing News about the financing trends he’s seeing.
How would you assess the current multifamily lending landscape?
Edwards: As with all asset types within commercial real estate, there are challenges being driven by the continuous rise in interest rates and some credit tightening across the industry. However, multifamily is still an incredibly strong asset class with great opportunities for investors. The lack of supply and affordability of single-family homes means more demand is put on the availability of multifamily properties. Freddie Mac and Fannie Mae continue to be active providers of capital and focused on their FHFA housing goal requirements.
To what extent have multifamily borrowers’ needs changed in the past year?
Edwards: Over the past 12 months, we have seen interest rates rise and some capital sources exiting the market. As a result, in certain markets, the bid-ask spread between sellers and buyers has placed added pressure on net operating income growth for deals purchased with negative leverage. This has also created a need for creative financing solutions and some sponsors acquiring deals without debt.
Have the recent bank failures and lingering recessionary concerns eroded multifamily investors’ trust?
Edwards: Some sponsors are waiting on the sideline for interest rates to fall. However, the overall fundamentals of multifamily housing remain strong, and there continues to be a significant need for more affordable and workforce housing in the U.S. Sponsors investing in assets at or below 80 percent AMI will continue to benefit from FHFA’s scorecard requirements for the agencies. It is also more important than ever that investors have access to a wide range of capital and a deep knowledge of various platforms, such as FHA, that can provide financing solutions.
What do you expect the Fed’s next move will be and what would that mean for multifamily investors?
Edwards: Regardless of what happens, the good news is that we seem to be getting closer to the end relative to the Federal Reserve’s concerns. A lot of experts are leaning toward more interest rate hikes this year, but the sentiment and fear of the unknown is not at the same level as it was late last year and in the first quarter of 2023.
If the interest rates continue to rise, financing will become more challenging and sponsors with discretionary refinance will have less motivation to transact.
The impact of the previous rate hikes was expected to take nine months to a year to fully emerge, and we’re passed that mark. Besides declining multifamily sales, what other effects have increased financing costs had on investors so far?
Edwards: The cost of interest rate caps on existing floating-rate loans has increased significantly over the past 12-plus months. This has forced traditional floating-rate borrowers to utilize fixed-rate debt to finance their properties. In some scenarios, borrowers are electing to assume existing debt on acquisitions instead of sourcing new capital.
Some deals are still getting done. Where is the lending coming from?
Edwards: Freddie Mac and Fannie Mae continue to be active participants in the market. As a result, sponsors with strong relationships with both firms are still finding ways to transact and execute their business plans.
Walker & Dunlop also has a very strong capital markets team that continues to close deals across all asset types every day. They have access to a wide variety of capital sources, including banks, insurance companies, debt funds and other non-traditional lenders. There is still financing available despite banks lending less.
What creative ways are there to structure a loan today?
Edwards: The preservation of affordable housing is extremely important to both agencies. Sponsors willing to maintain a certain percentage of their units at workforce and affordable housing levels for most of the loan term could see a benefit in pricing and credit structure from the agencies.
What does the lending market need to finish the year relatively strong?
Edwards: Clarity is what the market craves because it gives borrowers and lenders a level of assurance. The balance of the year holds a significant number of opportunities for Walker & Dunlop. We must be creative and find opportunities in areas we might have not been focused on 12 to 24 months ago.