Multifamily

Back to Fundamentals

Basic strategies help investors obtain financing for multifamily transactions.

Rising interest rates and a lack of inexpensive debt in the finance market have ushered in a more sober tone among multi-family investors and lenders. While many investors are opting out of the market, viable long-term investment and financing opportunities still remain in multifamily housing.

While the instabilities in the financing markets are expected to continue throughout this year, financing is still readily available for multifamily acquisitions, rehabs, and new construction -- if investors know where to look. But in this uncertain market, lenders are asking a lot more questions and giving more careful scrutiny to each transaction.

When seeking financing in this market, smart investors should provide a clear business plan, be prepared to provide details about their multifamily experience and financial wherewithal, and demonstrate knowledge of their local market. The amount of capital available to borrow for multifamily properties will primarily depend on the dynamics of the local market. Lenders will look carefully at what is happening with housing in the general area to gain insight into the viability of an investment. Regions with low vacancy rates, good rent growth, and growing populations, such as Southern California infill, Phoenix, Las Vegas, and Texas, continue to offer opportunities that make sense.

In markets with a high level of residential foreclosures, standing home inventory, or broken condominium projects, predicting supply and demand is particularly difficult. Theoretically, one might expect the recent rise in foreclosures to push people into apartments, generating more rental demand and making multifamily housing a strong investment. While foreclosures certainly create more renters, the same factor also can inflate the supply of rental units as houses or condos are offered on the rental market instead of being sold. It remains unclear as to whether foreclosures are a net positive or net negative for multifamily rents; supply and demand is really determined at the local market level.

Investors are learning that lenders are underwriting with more-conservative assumptions regarding loan to cost and loan to value. Borrower experience, net worth, and liquidity are playing larger roles in lender’s decisions as well. The recent trend of lenders making nonrecourse construction and bridge loans is shifting back and lenders are asking for more recourse.

But there are opportunities for construction and bridge financing; in fact, George Smith Partners recently closed $40 million, 90 percent of cost, nonrecourse financing for a conversion of a hotel into an apartment building in Hollywood, Calif. This illustrates that opportunities are still out there and the capital is still available, if the business plan makes sense and the sponsor avails himself of the right resources in structuring the loan.

To find opportunities, investors should rely on old-fashioned economic fundamentals. Multihousing units with low vacancy and good rent growth in a growing population with potential job growth are all good elements for investors. In addition to the strong economics of the project, the sponsors themselves must be certain they have strong fundamentals, including a solid business plan, exit strategy options, development experience, a knowledgeable investment banker, and enough liquidity to lower leverage and stand up to these more challenging times.

Jan.Feb.08

Recommended

Multifamily Investment

Nov.Dec.15

This bull market continues to charge ahead. 29319 By all accounts, the multifamily investment sales market has been on a bull run in recent years. The fact that the sector was the leader in the real estate recovery and continues to produce solid occupancies and rent growth has caught and held investor inte

Read More

Multifamily Showdown

Nov.Dec.14

Multifamily properties have been a hot commodity in recent years. And potential threats on the horizon in terms of looming interest rate hikes and a growing development pipeline have yet to cool investor enthusiasm. “If you talk to any multifamily

Read More

Magnetic Attraction

Nov.Dec.13

Rising interest rates may prompt apartment buyers to modify expectations and strategies, but these factors haven’t diminished their desire for multifamily properties — at least not yet. The voracious demand that has fueled transaction activity and capitalization rate compression across

Read More

Apartment Hunters

Nov.Dec.12

Apartment investors are on the hunt. And they’re moving beyond trophy properties into unfamiliar territory in hopes of a rare catch. In 1H2012, secondary markets posted a 38 percent year over year increase in multifamily transaction volume, followed by tertiary

Read More