Lument: Navigate Today’s Multifamily Lending Market With These Strategies
Two experienced originators at Lument discuss how to get ahead of economic headwinds.
The bar is rising for multifamily borrowers, and Lument is committed to helping clients navigate the market as 2023 approaches.
Given rising interest rates, inflation, and concerns about a potential downturn, our originators find that trusted relationships and credible operational, investment and financing strategies can make a world of a difference on almost every deal.
“The smart long-term owners focused on cashflow are ready to ride this out and take new ground,” said Chad Thomas Hagwood, Senior Managing Director and Southeast Regional Director for Lument.
Brian Sykes, Managing Director and Head of Lument’s Boston office, said today’s financial climate gives borrowers and lenders opportunities to negotiate new loan terms. “As we adjust to a new reality, a lot of folks are starting to reconsider what we define as long-term debt,” he said.
While it’s no secret that some lenders are starting to pump the breaks on debt deals, Lument’s experienced originations team remains active and takes the long view on economic cycles. Corrections in the market are never easy, but they can help keep valuations honest while curbing exuberant spending.
Having worked with borrowers before, during, and after the 2008 financial crisis, Hagwood and Sykes offered their advice on how borrowers and lenders can stay ahead of the curve in today’s climate.
Renovate and Refinance Within Reason
There’s a time to go all in on major investments, including capital improvements, and a time to scale back without cutting corners. Of course, some multifamily sponsors are in better positions than others when it comes to cash reserves and net operating incomes.
Those who can afford to adjust their financing and investment plans based on market conditions need to make sure they have long-term plans for both a brighter future and a potential recession. Given the unpredictability of the past few years, the next few years could be equally challenging, Hagwood and Sykes maintained.
For investors with contract deadlines or a clock ticking on interim debt, “nothing good comes from waiting,” Hagwood noted. He suggested borrowers with time pressures proactively seek out new financing solutions for acquisitions and upgrades far enough in advance, in some cases at least six months to a year.
Owners and operators concerned about covering their basic costs, including debt service, also need to weigh the impacts of inflation on everyone from their tenants to their financial backers, Hagwood cautioned.
That doesn’t mean everyone will need to tighten their wallets and purse strings, though.
There is still a ton of capital sitting on the sidelines, according to many industry veterans. For deep-pocketed investors who want to avoid sitting on too much dry powder, buying and improving multifamily assets remains one of the safest options, given that housing will remain a necessity in any economic environment.
“Workforce and affordable housing continue to be underserved areas,” Hagwood pointed out.
Get Creative with Loan Terms and Consider All Available Products
A number of investors are reluctant to lock into 10-year fixed-rate loans, believing the economy will soon stabilize and interest rates will come back down, Sykes noted.
While not even the Federal Reserve holds the answer to the direction that rates will head beyond the short-term, there are some ways to hedge. That includes agency debt packaged with other financing options.
“Some borrowers would rather do a five-year deal with a flexible pre-payment structure,” Sykes said. “That way they can get the loan they need today and know they’ll be able refinance it with something more favorable in the next three to four years.”
Sykes pointed to Freddie Mac’s floating-rate product as one of the more flexible options for multifamily borrowers right now. He added that the GSEs have been known to come up with creative solutions when the chips are down.
“One option for those looking for short-term solutions is to do mezzanine financing behind a Fannie Mae loan, for example,” Sykes said. “Blended loans are going to start making more sense for borrowers looking for more flexibility, though the financing costs will be a bit higher.”
Learn from the Longstanding Players
Even the biggest names in the business often have to step back and reassess their financing plans.
Sam Zell, a stalwart investor in the multifamily space, told CNBC this November that his firm Equity Residential—which he called “a behemoth with low leverage”—faced challenges with its latest revolving credit line, for example.
That doesn’t mean newcomers should be deterred. It’s a sign that regardless of rank, many investors are feeling similar pain points and can learn from one another’s experiences.
What many are confronting today is akin to the market of the early aughts from a financing perspective, Sykes contextualized.
Multifamily sponsors who take a measured long view will be among the first to get out of the woods when the economy stabilizes. Though interest rates may continue to rise, recent reports indicate that inflation could soon peak, which would help reduce some of the recent pressures on tenants and their landlords.
For the time being, Hagwood said borrowers concerned about bullet maturities and higher refinancing rates should focus on tackling any downsides with their properties—even if that involves adjusting rents in the short-term to help boost occupancy.
By doing so, “the upside will take care of itself,” he said.
Keep a Forward Outlook Knowing History Repeats
From manufactured housing to skilled nursing facilities, there are ample chances to make smart investments as 2022 wraps.
There is sufficient liquidity for sponsors with stable investment plans, as well as a growing number of opportunities for investors looking to buy distressed assets.
Even a deeper decline would be familiar territory for the dogged, Hagwood and Sykes maintained.
“We’ve been here before,” Sykes said. “We also have a whole generation of real estate professionals who haven’t been through an environment like this. So, it will take some time to adjust.”
For his part, Hagwood noted that many sponsors who entered the market during the boom years that followed the Great Recession have mostly seen commercial property values rise and interest rates hover around three percent.
“It’s relatively easy to put deals together when rates are low and underwriting terms are very favorable,” he said. “It’s a whole different mindset when there has to be creativity, true negotiation, and structure around headwinds.”
At Lument, there’s a long-standing belief that knowing how to maneuver through cyclical highs and lows will help unlock more value with every deal. That perspective comes from decades of experience combined with solution-focused financing and investment services in our current financial climate.
If you’re curious about strategies for navigating today’s lending market, please get in touch.