The U.S. multifamily market ran at peak development and demand levels last year, though performance lagged a bit from earlier in this cycle. To better gauge the financing trends for the multifamily sector, we recently caught up with David Fetter, senior manager at Chase Commercial Term Lending.
REjournals: What’s your view on the current lending market?
David Fetter: From a lender standpoint, we’re optimistic on the downtown Chicago neighborhood market, especially as it relates to the core, stabilized B-C properties. This particular rental market is consistently solid, and while rent increases won’t be as high as in the past, we still expect to see increases.
REjournals: Have commercial mortgages been trending upward as a component of JPMorgan Chase’s lending portfolio?
Fetter: Commercial mortgage growth has been a steady component of JPMorgan Chase’s lending portfolio the past several years, as rental fundamentals have remained strong in the stabilized, core B-C rental market. It’s a large component of the Chase Commercial Term Lending business. In a rising interest rate environment, speed and certainty of execution is key for multifamily owners to jump on opportunities as they arise. Our dedicated customer service and efficient loan process gives companies we work with an advantage.
REjournals: The Federal Reserve is on course for more interest rate hikes. Will this have an effect on multifamily lending?
Fetter: Every deal is different and loans can be impacted as debt coverage reduces with higher rates. Even though the yield curve has flattened, Chase Commercial Term Lending has a variety of loan programs—from floating rate to long-term fixed—which offer a wider spectrum of yields to choose from. In regards to the equity market, rising rates can also impact acquisitions as cash-on-cash yields get reduced since cap rates lag the debt markets. On the flip side, rising rates can mean a healthy economy, which is good for apartment rental fundamentals.
REjournals: With construction costs increasing year after year, do you foresee an impact on development?
Fetter: Increasing construction costs are just one component of the development cycle, which can impact volumes. Equally as important are interest rates, rental supply and demand fundamentals, local building regulations, such as Chicago’s Affordable Requirements Ordinance, as well as general economic fundamentals, such as job creation. Keeping these factors in mind, we still anticipate continued growth in the market.
REjournals: Between refinancings, acquisition and construction loans, where has most of the loan origination been the last year and do you expect that trend to continue?
Fetter: Loan originations the past year for us have tended more towards refinances and acquisitions, as the construction loan market has softened with an increased supply of apartments in the core markets. Acquisition loans have tempered a bit, as these core markets become more challenged to find good value add deals. However, the refinance market remains strong, as interest rates are still low on a relative basis.
REjournals: Which markets in the Midwest are the most appealing to you right now and why?
Fetter: Chase Commercial Term Lending focuses its lending programs in both Chicago and Minneapolis, with both markets exhibiting generally strong apartment fundamentals, especially in the stabilized, core B-C rental markets.
Based on Minneapolis’ strong economy, positive job growth and absorption for all apartment types, apartment fundamentals remain very solid in this market.
Chicago had its largest apartment absorption in 2017, but new construction continues to outpace demand, which has softened the Class A market, especially in certain submarkets. Job growth in the downtown Chicago market remains positive as well, which will help the demand side of the equation as development delivery continues throughout the next couple of years. Continued job growth in this market will remain key to absorbing all the higher rent units becoming available.
From a lender’s perspective, although rent increases have tempered a bit from past years, the stabilized, core B-C markets remain positive, especially depending on the unit mix of the deal. We have dedicated teams in both markets with years of experience working with our clients to navigate changing environments, contributing to their overall growth.
REjournals: Is there a key trend you’re seeing that has a real impact on the Chicago market?
Fetter: We’re seeing a continued expansion of the higher cost units, which are having an impact on multifamily housing rent in the city. Older apartment stock is being renovated, as many owners have been putting capital back into their deals to upgrade their apartments and higher end units are being added by new construction of Class A buildings in both the city and the neighborhoods. Condo deconversions are adding to the supply of existing stock and there’s been notable expansion into multiple neighborhoods with the acquisition rehabs. All of this is adding to the increasing supply of higher-rent units.