Multifamily Lending: New regulations and risks of overbuilding

Multifamily Lending: New regulations and risks of overbuilding

Bank lenders are making a lot more permanent loans on multifamily lending projects. Banks are looking to place money in stabilized properties and cash-flowing. These banks are lending to owners of stabilized apartment buildings even as they step away from funding new construction programs. New regulations and risks of overbuilding are driving many banks to make smaller loans, and to lend on fewer properties.

Banks lenders originated more than a third of all multifamily lending in 2016. That’s not far behind the share of construction loans made by agency lenders, including Freddie Mac and Fannie Mae, which have been the top source of lending on stabilized apartment properties since 2012.

Agency lenders still originated more apartment loans than any other type of lender, but their lead is shrinking, with less than half just 44 % of all permanent apartment loans according to New York City-based research firm Real Capital Analytics.

Local and regional banks, on the other hand, have been growing their multifamily lending business at a lively pace. Around 1,300 local banks were recorded as originating a significant commercial mortgage in 2016, a 37 % increase from a year earlier. Local banks captured 19% of the multifamily lending business over the same time frame, up from 11% in 2014.

At the same time, banks are making far fewer construction loans as apartment experts begin to worry about overbuilding in certain markets and the percentage of vacant apartments begins to rise on average across the nation, according to Reis Inc.

Banks typically offer permanent financing with shorter terms than agency and CMBS lenders. They strongly prefer to focus on 5 year loans, but some are willing to go up to 7 and 10 year terms. That’s a good fit for private equity funds. Private equity funds tend to buy and hold properties for about five years at a time.

Both regional and local banks have increased their share of market activity in all regions, but they have done so at a greater pace in the Southeast and the Midwest—regions that previously had a greater reliance on CMBS financing, according to RCA.

“Instead of banks taking market share from agency lenders, the banks are taking market share from CMBS,” says Mathews.

Risk-retention rules shadow CMBS

CMBS lenders survived volatile bond markets earlier this year, but now they have to contend with new risk retention rules that came into effect of last year. It has cut into their profits and will probably motivate some lenders to raise the interest rates they charge for CMBS loans.

CMBS lenders currently offer all-in interest rates fixed at around 4.0 percent for 10-year loans. That’s a big difference from earlier last year, when CMBS lenders offered rates closer to 5.0 percent. The all-in rate for CMBS is just a little higher than agency loans.

Fannie Mae and Freddie Mac lenders offer all-in interest rates that are fixed at just under 4.0 percent for 10-year loans or a little more than 200 basis points higher than the yield on 10-year Treasury bonds.

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