Multifamily Lending in the Era of Speed and Flexibility
We’ve officially entered the final stretch of the second quarter. Reflecting on the multifamily market’s progress in 2019, it’s clear the sector remains strong; rentals lead the way with no downturn on the immediate horizon.
While low unemployment rates and high consumer confidence boosted housing demand in 2018, bank regulations lingering from the Great Recession have kept banks from being overly exuberant in lending. Additionally, banks are getting increasingly wary of where we are in the cycle, over 40 months into the recovery, and are reducing leverage levels. Most banks are requiring developers to put between 30 and 45 percent equity into deals, forcing more and more developers to the sidelines and spelling good news for alternative lenders, particularly those trafficking in the mezzanine and preferred equity space.
Amid concerns over rising interest rates and growing labor and construction costs, commercial banks remain tight on multifamily lending, causing borrowers uncertainty about getting funding from traditional banking programs. The borrowers are growing more concerned with the associated high risk of execution and long lead times, propelling them to look for new ways to keep their projects moving forward. Alternative lenders, like UC Funds are an appealing option, providing an efficient path to long- and short-term financing options and streamlined approval processes, enabling speedier transactions and ensuring developers’ assets stay stable. In fact, it’s very important to lean towards an alternative lender who has many years’ experience with these sophisticated transaction solutions.
Multifamily borrowers opting for alternative lending will also see attractive advantages not offered by banks. For instance, private lenders aren’t subject to the same strict regulations, which lowers the barrier to entry for loans. Non-traditional lenders can be more agile and responsive than their traditional counterparts, too, by creating flexible and competitive non-recourse loans. More personalized service allows for loan customization and a direct line of communication between lenders and clients, particularly transitional loans containing rehabilitation and a nimble, centralized construction and rehab draw process. At UC Funds, we manage and service investments in-house, including managing construction draws as if we’re the owner of the underlying real estate.
JLL reports that the current renter’s economy led to a record-breaking 2018 and provided a solid jumping board for 2019 multifamily investments. Value-add has proven especially lucrative in workforce housing; multifamily absorption has kept pace with unit completions, allowing fundamentals to hold steady since December. Since traditional banks remain cautious and continue showing a preference for secure markets and high-quality assets, value-add, particularly for Class B assets in secondary and tertiary markets, is increasingly ripe for alternative lending. This is especially true in and around secondary cities experiencing technology job growth. Tech hubs like Atlanta, Phoenix, Dallas and Houston are areas expected to see extremely positive upsides this year.
With this in mind, UC Funds is honing in on redevelopments proximate to downtown Atlanta’s top employers. Most recently, we finalized an $18 million equity investment in Fayetteville, Ga., and an $18.4 million in nearby Stone Mountain, Ga., along with developments in Gulf Shores, Ala., and South Bend, Ind. As a specialty finance firm, we have the ability to customize capital solutions based on the needs of each project and sponsor.
While multifamily demand remains strong, there are certainly risks all lenders must consider. Stock market volatility, Federal Reserve interest rate hikes, rising construction costs and excess supply are a few factors that may negatively impact the multifamily market in the coming months and years. However, the value of alternative lending in this sector remains strong and, given the market’s trajectory, its upswing will likely continue into 2020.
Daniel Palmier is president and CEO of UC Funds