Lument: The Long and the Short of It: The Panel Discussion at IMN Middle-Market Multifamily Forum Examines Benefits of Long-Term and Bridge Loans

During a panel discussion at the Information Management Network’s (IMN’s) annual Florida Middle-Market Multifamily Forum titled “Multifamily Financing: Long-Term vs. Bridge & Short-Term Loans & Lines,” several insights emerged that shed light on the state of financing in the multifamily industry today. As in many cases, a quick look back helps set the stage for where we’re headed as 2024 unfolds.

Lessons from History

When will the Federal Reserve (Fed) next cut interest rates? History offers some clues, panelists suggested. Over the last four economic cycles in the United States, there’s been a nine-month gap, on average, between the final interest-rate increase and the first interest-rate decrease.

With the last increase occurring in July 2023, the next cut following the nine-month gap would put us in April 2024. No rate cut materialized by then, of course, and it is not clear one will happen in 2024 at all. The nine-month average spans a range of gaps, from five months to 14 months, and it remains to be seen how long the current gap will stretch. Further, as long as unemployment stays low, inflation remains above the Fed’s target, and no financial crisis erupts, a “higher for longer” rate environment seems likely.

If the Fed manages to engineer a “soft landing” for the economy, any rate cuts that do arrive this year will probably be modest, insisted a panelist. Consider history again. The most recent soft landing was in 1996, when interest rates barely moved. This time, if the Secured Overnight Financing Rate (SOFR) declines by, say, only 25 to 50 basis points, that’s “unlikely to move the needle for multifamily lenders and investors.”

Either way, conditions for multifamily financing are “extremely difficult” at present, added another panelist. In 2023, transaction volume was down 74% year-over-year, while debt volume was down 68%. All this has made market participants extra cautious. “We don’t want to just dive into something,” said one panelist.

Top of Mind

Faced with difficult conditions, panelists agreed that they’re playing more defense than offense. “We’re sitting on a lot of cash and making sure we can defend our balance sheet.”

At the same time, standing on the sidelines and hoping for a market “reset” carries its own risks. “If we just wait around for rates to fall, we’re not going to see multifamily at a 60% discount. We’re going to see a 75% discount instead,” warned a panelist.

What, then, are some other things that multifamily lenders and investors should think about when structuring deals in this environment? Today’s elevated geopolitical risk—especially from Russia/Ukraine, China/Taiwan, and Hamas/Israel—is an area that should be top of mind.

The abundance of negative leverage in the market is another point to consider. “In our bridge platforms, there was negative leverage in every deal that was underwritten over the last three years,” explained a panelist. Many more multifamily loans could also be extended in the coming months. “This year is going to be extremely challenging for borrowers, as well as for lenders,” added another panelist. Borrowers currently crave “flexibility” and “optionality” on their loans.

Raising equity is another challenge. “It’s almost easier to get debt than equity in the multifamily space,” lamented a panelist. Ongoing shifts in the banking landscape will affect multifamily lending in big ways as well. The Fed, for example, is discussing how to implement the Basel III “endgame” regulations. Whenever these new regulations are finalized, banks may have to adjust their capital allocations.

Find the Opportunity in Tough Times

“Resets are not moments in time. They happen over duration.” Therefore, a key to finding opportunity in tough times is to focus more than ever on revenues, liquidity, and expenses.

For revenues and expenses, in particular, inflation has been a critical factor of late, agreed panelists. Though inflation has been good for rents in general, most of the inflationary effect has already been felt over the last four years, a period when numerous markets saw double-digit rent growth. On the expenses side, inflation has fueled wage growth, rising maintenance costs, and soaring insurance premiums.

As for areas of opportunity, construction lending stands out, according to some panelists. That’s partly because many banks that previously provided liquidity have pulled back substantially or are out of the multifamily market entirely. The same is true for private debt funds.

“Nashville has 5,000 units coming online over the next 18 months,” explained a panelist. “They’re A-class projects. Still, we wouldn’t touch them.” Ditto for Texas, where multifamily rents are declining because of the deluge of new properties in recent years.

But in South Florida, the opposite is true. “Construction is starting to fall off a cliff. So if you can make a deal work, do it,” urged a panelist. “Two years from now, you’ll be able to push rents up there when everyone else has no product coming online.”

Clearly, the state of the market is evolving rapidly, and those that stay abreast of the latest trends will be well-positioned to pursue a financing solution that helps advance their goals.