Why Apartment Operators Need a Flexible Approach to Debt

A late third-quarter shift underscores the need to remain adaptable when pursuing loans, according to Ernie Heymann of CAPREIT.

Ernie Heymann   Photo courtesy of CAPREIT

As apartment operators clamor to secure financing for their various multifamily endeavors, they often have to be flexible when searching for a lender.

That’s because the ideal financial providers for multifamily properties can rotate among the primary lenders, sometimes on a frequent basis, as they have in 2019. Given the fluctuation, companies are wise not to compartmentalize themselves to a certain type of lender for their various ventures. If 2019 has taught us anything with regard to debt financing, it’s that a flexible, case-by-case approach works best.

Here is one apartment operator’s view of the current multifamily financing conditions and the characteristics we’ve observed among the primary lenders.

Fannie Mae and Freddie Mac

For the first seven or eight months of the year, the agencies were the most active in financing multifamily assets, with the possible exception of high-end Class A. They were certainly the top option for core markets and value-add product, in addition to workforce and affordable housing.

But over the last 45 days, as the agencies have gotten close to maximizing their cap space, they’ve become less aggressive in loan amounts and interest-only loans. As Fannie Mae’s and Freddie Mac’s capacities and volume open back up in 2020, we’ll see them pick up right where they left off in midsummer. On an overall basis, the return of Fannie and Freddie to the LIHTC market has provided a significant source of financing in the affordable sector, and the government-sponsored enterprises figure to remain a solid source moving forward. 

Insurance companies

Some of the life companies are currently filling the void left by the agencies, although they are sharing the financing load with banks and commercial mortgage-backed securities. It’s shifted pretty sharply to those types of lenders over the past 30 to 45 days, a trend likely to continue for the next few months.

While those entities will become the predominant lenders for the short-term, the industry figures to move back to more of a balance by year’s end.

Life companies tend to shy away from tertiary markets and concentrate on the large core sectors, and aren’t very active in the affordable space. They are much more aggressive on lower-leverage, high-quality assets for the most part. Their interest wanes on loans that hover above a 70 percent loan-to-value threshold. They’re much more active in the 50–65 percent loan-to-value deals.


Banks are a bit more active in the value-add, workforce and affordable spaces, although their lending habits differ based on whether they’re a national, regional or community bank. National banks often concentrate on the larger markets whereas regional and community banks are more likely to provide loans for smaller markets and locales they are familiar with.  

While many of the Fannie and Freddie lending concepts don’t readily translate to the tendencies of life companies, they are more congruent with what banks do. That includes the propensity to be a little less geographic-specific and more inclined to consider tertiary and secondary markets. Banks also are not averse to providing loans for newer lease-up properties nearing stabilization.

Apartment operators are undoubtedly looking ahead to 2020 with keen interest. Fannie and Freddie are pausing now, but it is widely believed that they will be back strong. It remains to be seen how the banks, life companies and CMBSs will share the remainder of the business in 2020, but it’s a reasonable assumption that all will be active moving forward. Plenty of liquidity and debt capital will be available to do new business.

The current pause of Fannie and Freddie has underscored the need to expand relationships and not be so dependent on agency financing. A multitude of options exist, and the industry is bound to utilize all of them in 2020.

Ernie Heymann is the chief investment officer for CAPREIT.

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