What's in store for Multifamily Capital Markets this year?

In most parts of the country, the top 50 Metropolitan Statistical Areas (MSA) have experienced significant gains in value in the multifamily real estate sector. Investors chasing yields are now looking into secondary and tertiary markets as capitalization rates continue to become more suppressed. In some major MSA’s, Class A, B, and some C have reached peak 2008 values again and with rising rental rates, more investors are taking construction and lease-up risk on new developments. Commercial real estate in SW Florida is seeing tremendous growth in Acquisition & Development again.

Going forward in Q2 through the rest of 2014, we anticipate plenty of available capital in the multifamily market. Lenders will become more aggressive on underwriting due to confidence in economy and markets. In addition to shear confidence, CMBS financing is on a comeback and it wasn’t until later in 2013 where Commercial Mortgage Backed Securities (CMBS) lenders were able to compete in multifamily loans. Not only has CMBS lending been peaking through, but it’s been thriving and we can expect CMBS lenders to continue to increase market share in 2014 and 2015. The competitive advantages to CMBS financing are:

• Limits on Personal Guarantees
• Flexible and competitive rates
• Aggressive Underwriting
• Competetive LTV’s and Debt Ratio Coverages (DCR)

While Fannie Mae rates have climbed, CMBS loans are currently offering rates in the low 5?s ranging from 5.10 to 5.20%, which are 10 to 15 basis points lower than Fannie Mae transactions.

CMBS loans are up to offering 75% LTV on 10-year terms for multifamily. The best Fannie Mae program I’ve recently seen is 75% offered on 5 to 7 year terms max. Locking in your interest rate for 10 years with 25% equity is a great investment combined with a quality asset. Essentially, CMBS lenders including Life Insurance companies are changing their underwriting metric from “very conservative” to “less conservative”.

As stated earlier in this article, investors and developers are bringing new starts out of the ground on apartments. Construction lenders are becoming a little more cautious this year as they are recognizing that the rent growth many markets experienced over the last 2 years will start to slow, and maybe plateau for a little while. While they don’t foresee any imminent problem in markets overheating, they are simply becoming a little more cautious.

In conclusion, our opinion for the investor looking at acquiring multifamily assets, it would be beneficial to do so in the first half of 2014. It is widely expected that the 10-year Treasury rate could cross the 4% level sometime in the third or fourth quarter of this year especially with the Fed’s anticipated easing of QE3. With that said, any increase in interest rates may not have such a significant impact on multifamily. Interest rates are still considered to be historically low. Our inner-office target on existing multifamily is to look for assets with rental rates from 2012 that have the capability of increasing its NOI for upside yield.