Current Trends in Multifamily Financing and Debt

Multifamily Financing and Debt

Making debt work is more difficult than it has been in many years for commercial real estate generally, and multifamily housing is no exception. Investment sales advisors are seeing fewer bidders on a per–property basis. Some of this bidder decline can be attributed to aggressive pricing strategies as higher sale-side pricing makes it difficult to make deals work on the debt side. 

There are multiple practical implications to these conditions. A higher proportion of acquisitions with debt financing are 1031 buyers with less stringent property performance requirements due to tax savings. Those who can’t rely on exorbitant tax savings to make their cashflows work and are still finding debt are those who are exceedingly careful to find the right deals and select terms which will work for their respective investment strategies.  

The Impact of an Inverted Yield Curve on Multifamily Financing

With debt financing tighter than ever, it is essential for investors to understand the current financing landscape. Multifamily financing is no exception in that fixed interest rates are nearly always higher than variable interest rates. This is the risk premium a buyer pays for knowing what their interest rate will be over a period of time. 

With the present market’s inverted yield curve this gap in rates has diminished and the two product types have similar interest. With a wider gap between the two rates, a variable rate loan becomes a calculated risk that can lead to significant interest savings over time, or significant loss. Now that fixed rates are on par with variable, the risk calculation changes, skewing financing towards fixed versus floating rate loans. 

While this is the most significant factor contributing to the shift, it may not be the only lever pushing multifamily financing away from floating rates. Variable rates, being more likely to have a longer interest–only period and an easier exit, are especially used by those looking for value-add investment intending to have a short holding period. The decline in attractive value-add opportunities in the market therefore may be adding to this relative drop in variable rate financing.  

Despite these conditions floating rate loans remain an attractive option for some investors, particularly those who want to juice their cashflows in the short term with the longer interest–only periods.   

Overall current market conditions are unique. In efforts to adapt to these conditions some investors have turned to less traditional sources of financing, such as debt funds. Others are choosing to leverage smarter, tech driven tools to facilitate fast evaluation of more deals, enabling them to discover the few that will work on the debt side.

With the uncertainty around the economy over the next 18 months or so, and the extent to which the Fed will attempt to be proactive in any movement, how the current trends will play out remains unclear. Investors face important decisions right now when it comes to financing options. We will be keeping tabs on these trends and provide new insights as they become available. To receive insights into the multifamily market from redIQ just sign up at the left.