Lenders Are Bullish on Multifamily, But Trouble Might Be Coming

Competition to finance multifamily is strong within the market especially from banks, including New York Community Bank, Signature Bank, Chase Commercial Term Lending, Dime Savings Bank of Williamsburgh, Capital One, Flushing Bank, Customers Bank, People’s United Bank, Investors Bank and Bank United. These lenders as well as a host of smaller savings and commercial banks and credit unions continually compete on price and terms (which may include interest only for a few years, three-year amortization, higher loan proceeds, higher loan-to-value, low-cap rates, no pre-payment penalties and debt yields). Regardless of the location, condition or whether the property is 100 years old, lenders will remain aggressive to be the winning bidder to provide financing.

But it’s that love of multifamily product that could pose a bit of a problem. “From what I am seeing in the market, the first quarter is steady but not as robust as the fourth quarter,” said Kirk Lloyd, the senior vice president of commercial lending at Dime. Most of the banks are chasing the same asset class, and the supply might be slowing down.”

While most lenders are bullish on financing, one must be cognizant of potential risks in financing due to interest rate climate, rent regulation and stabilization.

Multifamily lending will remain a desirable asset class for banks in the near future, said Frank Korzekwinski, the senior executive vice president and chief of real estate lending at Flushing Bank. “Lenders should be cautiously optimistic with regard to such external factors as future changes in interest rates, future increases in fuel costs, the potential for future changes in cap rates and the potential for more rent regulations.

He added: “Many lenders today appear to be focusing on cash flows that are valued with historically low cap rates and high rent multiples at a time when certain fixed costs have been reduced by falling commodity prices, low interest rates and favorable weather conditions. Leaving room on the table for future adverse changes is likely a more prudent approach in today’s lending environment.”

A former senior banking executive, who asked to remain anonymous, said, “Every bank is hungry to finance multifamily. Nevertheless, they are being a little more cautious and sensitive, especially in light of the reduced rental increases under the current rent stabilization code.”

Negative cap rates across Manhattan, Brooklyn and Queens are also something banks need to consider because “there is sensitivity to debt service coverage and stressing ‘higher interest rate in five years when the loan will come due’ is causing a compression on loan amounts,” said Barry Stein, a principal at Rohman-Stein Associates. “Even though proceeds might be lower, due to the stressing and debt service coverage parameters, lenders continue to be bullish on the market.”

Nowadays, selling off assets seems to be the only way for investors to make a profit.

“Given the sales price per apartment of $140,000 to $150,000 in the Bronx, it raises questions as to the long-term profitability of these purchases,” said Michael Wengroff, chief financial officer at Bronx Pro Group. “In essence based upon selling price, limited increases in monthly rents in rent stabilized apartments and higher operation costs, it seems that the only way to really make money in multifamily is to find another purchaser for the property. Due to this, certain lenders are cautious in funding these acquisitions.”

Given the realities of the rental market today, with concessions, free rent periods and oversupply, “lenders must be cognizant that rents may not increase at the levels developers and owners are projecting,” said Paulo Garcia, the senior vice president and regional head of commercial real estate at Mercantil Commercebank. “Therefore, one must be conservative for underwriting risks.”

And those risks are coming from other places besides market conditions.

“I see some lenders having an issue with the regulators especially those who have grown too fast in the commercial real estate market,” Mr. Lloyd said. “Some of our competitors who just started in the market the last couple of years might slow down because of their overall exposure to their capital. Growing too fast without a track record causes bank regulators to get worried about the underwriting, low cap rates, full-term interest only and the possibility of a bubble in the market.”

Michael Stoler is a managing director at Madison Realty Capital and is the host of the Stoler Report-New York’s Business Report.