Robert LaRue knew it was a blink-and-you’ll-miss-it kind of a deal. His client, who happened to be another mortgage banker, was refinancing a 230-unit apartment complex.
“The 10-Year Treasury dropped down to 60 basis points. I’d never seen it hit that number in my career,” says LaRue, Senior Vice President of Grandbridge Real Estate Capital.
While the client debated locking in that rate or waiting for it to drop, the 10-Year rebounded a bit.
“We closed at a spread of 165 over the 10-year Treasury, which was 1.04% at the time of rate lock, for an all-in rate of 2.69%, 10-year term, 30-year amortization, non-recourse,” LaRue shares. “That deal included an $8 million cashout to the borrower.”
The lender is a life company, which rarely agrees to cashouts like it did for this deal. It was a sign to him that the appetite for multifamily investment is there.
“My advice to borrowers is to take advantage of these rates while you can,” says LaRue.
He calls the real estate finance sector “much improved” compared to this time last year. Other experts REDNews spoke to used words such as “robust,” “competitive” and “vibrant.”
“There’s a lot of capital being put to work and I think there’s more capital coming in, so the overall health of the capital markets in terms of liquidity is pretty high,” says Jeffrey Erxleben, Executive Vice President and Executive Managing Director for NorthMarq. “From an asset class perspective, real estate is looked upon pretty favorably. There are plenty of opportunities to deploy capital into many different options for borrowers depending on their overall strategy.”
Multifamily is one of the few sectors that stayed strong over the course of the past year and it’s one lenders are banking on.
“The longer-term outlook for residential markets remains positive, especially if economic activity accelerates later in 2021,” says John Hutchinson, President of Central & Southwestern U.S. for Trez Capital. “Trez has seen great demand for financing the build-to-rent product for horizontal multifamily and the build-to-rent product built on platted lots. We also feel there will also be increased opportunities to finance self-storage facilities in addition to residential projects due to the population growth in the markets in which we focus.”
At Colliers Mortgage, where Sam Butler is Executive Vice President of Agency Lending, the focus is primarily multifamily and healthcare-related properties, such as assisted living, skilled nursing and rural healthcare facilities.
“With government bond yields at or near historically low levels, investors are seeking out higher yields available in the multifamily marketplace,” Butler says. “As such, equity capital continues to be readily available for both acquisition and new construction transactions.”
That’s what LaRue believes is driving demand beyond multifamily into other property types as well.
“Lenders want multifamily and industrial because those assets are performing so well, but we see a lot of borrowers seeking financing for properties that are viewed as less desirable,” he says. “Historically low interest rates, the expectation of higher rates as the Fed eases back on buying paper, the perception of a post-Covid economic rebound and the Biden tax and spending proposals are all additional factors driving demand.”
Not to mention Texas’ population growth. Erxleben adds that the fundamentals of most property sectors throughout the state of Texas have remained fairly strong.
“That’s spurred by the migration of people,” he says. “Coupled with corporate relocations and the corresponding jobs that go with them, I think that Texas has definitely performed well.”
“People are leaving high-tax, high-regulation states and moving to states with lower taxes and a more favorable business climate,” echoes Hutchinson. “And that’s not just Texas. We’ve seen this in Florida, Utah, Idaho, Nevada, Arizona and, to a certain degree, Colorado. Those who are moving to the high-growth cities may want to wait awhile before purchasing a home, driving up multifamily and build-to-rent demand.”
All of those reasons, along with the abundant availability of both debt and equity capital in the marketplace, mean lenders anticipate that origination volume will be higher in 2021.
“Currently attractive interest rates on debt financing and historical low cap rates, driven by both low interest rates and overall investor demand for properties, are contributing factors to this increased demand,” says Butler.
What kind of projects that capital is primarily going to seems to depend on the focus of the lending firm: new construction or purchasing. For example, Trez Capital is seeing more demand for construction financing, while there’s fairly equal demand between construction and purchasing at Colliers Mortgage.
“Demand for new product, whether it’s multifamily, retail or industrial, is going to vary a great deal from one city to the next,” explains LaRue.
On the flip side, Erxleben says NorthMarq is working on a lot more acquisition activity as construction deals with headwinds, such as increased costs and labor delays,
“You can get into a deal today and say, ‘Hey, look, it’s not going to get any less expensive to build something tomorrow. So therefore if I’m purchasing it today, I feel like I’m getting in at a good basis,’” he says. “I think that thesis is alive and well out there amongst the buyers.”
When it comes to getting a loan, these pros want you to emphasize the importance of fundamentals.
“Property location, physical condition, current and historical occupancy as well as the sponsor’s experience and financial capacity are all factors that are taken into consideration,” says Butler.
The sponsor relationship is also critically important, Erxleben adds, especially after the uncertainty brought on by the pandemic.
“Really understanding, knowing, being very familiar with your sponsor and being able to articulate if there were issues, how do we get through them? If there were delays, which is understandable, how did we address them?” he says.
That said, LaRue emphasizes that there is an abundance of capital available right now. At Grandbridge, sources include Fannie Mae, Freddie Mac, FHA, HUD and various life companies and debt funds.
“What we need is more deals,” says LaRue.
Looking ahead, our experts expect it won’t be long before those deals materialize.
“As the pandemic wanes, there will be more demand for retail space as restaurants and stores start opening,” Hutchinson adds.
Office is still a point of uncertainty for him due to the work-from-home phenomenon, but Hutchinson does predict an increase in office occupancy as some people return to work.
“If you look at the overall health of the office market in Texas, it’s doing pretty well,” Erxleben says. “We’ve benefited from a lot of corporate relocations and, based on what I’m hearing, there will be more coming soon.”
The biggest takeaway: if you’re working on a deal, now’s the time to seek out capital and take advantage of historically low interest rates. The money is there — via Grandbridge, Colliers, Trez and NorthMarq — as long as your fundamentals are strong.
