Interest Rates Drop on Loans for Apartment Properties

Bendix Anderson | Aug 29, 2017 Via nreionline.com

Interest rates were supposed to increase this year. But for borrowers on apartment properties, they are dropping.

“The interest rate outlook has changed dramatically,” says Justin Bakst, director of capital markets for real estate research firm CoStar.

Interest rates for permanent loans on most types of multifamily properties have fallen 20 to 30 basis points since the beginning of the year. Growing uncertainty about federal policy is keeping long-term interest rates down. Meanwhile, demand for apartments is still strong and the capital markets continue to be healthy—and that means borrowers in the sector have a lot of financing options to choose from.

Interest rates fall, but underwriting tightens

Earlier this year, it seemed almost certain that the central bankers at the U.S. Federal Reserve would go ahead with regular 25-basis-point increases to benchmark interest rates. Now, experts at firms like CoStar put the odds of another interest rate increase in December at just roughly 33 percent.

Lender vs. Lender

Fannie Mae and Freddie Mac continue to make more permanent loans on apartment properties than any other type of lender, including life insurers, banks and conduit lenders. “We continue to think it will be a record year for us,” says David Brickman, executive vice president and head of Freddie Mac Multifamily.

Agency loans are especially attractive to borrowers who are buying property. “They continue to offer the best combination of maximum loan proceeds (up to 80 percent loan-to-value), attractive interest rates and the ability to structure interest-only payments,” said Dick. With these attractive terms, borrowers can reduce the equity they need to contribute when they buy the property, and maximize their cash-on-cash returns.

Fannie Mae and Freddie Mac lenders are also dependable and fast. “The agencies provide quick quotes and certainty of execution, which is beneficial on acquisitions,” says Brian Eisendrath, vice chairman with CBRE Capital Markets.

Life companies continue to dominate when it comes to lending to the strongest class-A properties in the best markets, and they are competing for more deals. “The life companies have more allocation for multifamily,” says Smith.

However, life companies have the toughest underwriting requirements, typically demanding debt service coverage ratios of more than 1.5x and refusing to lend more than 60 percent of the value of a property, says Bakst. On the other hand, they are now lending on new class-A properties that are still leasing their apartments.

“Life companies have stepped up this year and have provided aggressive quotes,” says Eisendrath. “They are generally limited to 65 percent loan to value, but have the ability to undercut the competition in pricing.”

Life companies are on pace to do $22 billion in multifamily loans this year, and approximately 75 percent of their production has been fixed-rate debt.

Banks continue to offer permanent financing. Their volume of loans on apartment properties grew by more than $8 billion in the second quarter of 2017. That’s a 2 percent increase from the year before.

But banks lenders are less competitive than they have been in recent years. “Banks provide some long-term financing, but it’s generally reserved for their high-net-worth clients and may come with recourse,” says Eisendrath.

Meanwhile, conduit lenders have been restrained by new regulations that have recently come in effect, including risk retention, which forces them to hold some of the risk of their loans on their own balance sheets. As a result, they are now more conservative. “Those deals that are closing are stronger deals,” says Bakst.