Demand for multifamily properties continues to soar. Investors want to sink their dollars into these properties, developers want to build more and more consumers are skipping single-family homes to become renters by choice.
Is there anything that can slow demand in this space? So far, nothing’s popped up to slow multifamily’s momentum. But rising interest rates and inflation are making building and financing new apartment deals more of a challenge. And that’s one potential hiccup that CRE professionals are watching today.
Marsha Goff, executive vice president and Fannie Mae and Freddie Mac chief underwriter in the Saint Paul, Minnesota, office of Merchants Capital, said that her company is still busy providing financing for multifamily housing deals. The new interest rate environment, though, has made closing these deals more challenging, she said.
Goff said that permanent multifamily housing loans are usually priced in relation to the performance of the 10-year Treasury. Today, the 10-year Treasury is particularly volatile.
“We have definitely seen an impact from that volatility,” Goff said. “Most deals today are debt-service-constrained, not loan-to-volume-constrained.”
Goff pointed to two construction-financing deals she has been working on since early June. As Merchants Capital was processing the loans and getting nearer to closing, the 10-year Treasury fluctuated frequently, rising to 3.5%, dropping to 2.6% and now moving to about 2.9%. This means that the loan amounts for these deals fluctuated, too, starting at about $33 million, dropping to $26 million and now rising back up to $31 million.
“With that much volatility and with the loan amount changing, the developers have to put more equity into the deal and find additional sources of equity,” Goff siad. “There is uncertainty today with getting transactions done.”
Goff said that borrowers and lenders are turning to early interest-rate locks to remove some of the volatility in today’s market. The downside to these locks? Borrowers have to pay more for them. Goff, though, said that many borrowers are willing to pay this extra upfront cost to help bring certainty to their deals.
“I was working with one client who said that he hasn’t had to do an interest-rate lock for more than 10 years,” Goff said. “In the short term, many developers are being forced to get gap financing, have to put in more equity or are taking advantage of early rate or index locks.”
Goff is far from alone in seeing this uncertainty. Others in the commercial real estate space say that the Fed must be careful when handling interest rates. Being too aggressive could significantly slow commercial real estate deals, they say.
Goff said that the demand for multifamily housing remains especially strong for that product type perched between affordable and luxury. There simply isn’t enough market-rate workforce multifamily housing in most markets. The demand for this type of product, then, continues to rise across the country.
Municipalities are working to help provide more market-rate multifamily housing in their communities, often offering tax breaks to developers, Goff said. Freddie Mac and Fannie Mae have also altered some of their programs to make it easier for developers to gain financing for these apartment types.
But the supply of this type of multifamily housing is still not meeting the demand for it, Goff said.
“For the past 10 years, there has been a decrease in the homeownership rate. That has resulted in continued demand for rental housing,” Goff said. “At the same time, housing prices and construction costs have gone up so much, it can be very expensive for people to get into a first-time home and move up. That has increased the demand for rental housing.”
The demographics of the United States have played a role, too, Goff said. Younger adults who in the past would have been hunting for single-family homes are turning to apartments as housing prices rise too high. Many empty nesters are turning to apartment units as a way to avoid the upkeep on single-family homes.
“It’s a combination of different factors that have accounted for this high demand for apartments,” Goff said. “It’s not just one thing that you can put your finger on.”