Opportunities Still Thrive For Investors In Ever-Changing Multifamily Sector

Between high unemployment numbers, dwindling housing supply and skyrocketing housing costs, the multifamily sector has been a rollercoaster of ups and downs, depending on whose fortunes we’re measuring. Partner Insights spoke to Michael Pedone, Managing Director, Real Estate Finance for CIT, to get a handle on where things currently stand in multifamily financing.

Commercial Observer: How would you characterize the state of multifamily financing today?

Mike Pedone: Very liquid. There is plenty of financing capital available for multifamily these days, and it’s getting more and more aggressive as we emerge out of the pandemic.

Why is that?

In part because some of the other asset classes — like office, retail and hospitality — have experienced prolonged difficulty as a result of the pandemic. You have a lot of dry powder looking at fewer opportunities to deploy, which is one of several factors driving up pricing on multifamily and industrial trades at the expense of some of the more capital-starved asset classes like hospitality and office. 

Why is multifamily faring that well?

Housing prices were already fairly high and there’s a housing shortage, so most investors and lenders consider it one of the more bulletproof asset classes. And from an investor standpoint, there was a lot of government aid helping to prop up revenues from the sector, and all sorts of relief packages going to occupants, helping them stay in their homes.

What are some other notable trends that you’re seeing in multifamily financing these days?

As we move closer to the termination of LIBOR in 2023, a lot of lenders are starting to quote their floating rate deals over the replacement rate, making it a bit of an education process for borrowers. I also think multifamily borrowers may see more SOFR bids than perhaps some other asset classes where banks aren’t participating as much, such as in hospitality, retail and office, where you’ll find more of the debt funds. Another trend is that from a financing standpoint, you’re seeing a lot of multifamily lenders getting more aggressive on the pricing front, given the influx of debt funds that can leverage their capital with repo lines and other credit facilities, to provide pricing that is approaching 2020 bank-level pricing at the 70 to 80 percent leverage mark. So, debt funds are capturing a lot of business from the agencies and banks on the multifamily space right now from investors who are looking for more leverage.

That all said, where do you see the greatest investment opportunity within multifamily these days? 

We still actively pursue construction loan opportunities and certain value-add opportunities in our target markets. Although many construction loans may still require some level of repayment guaranty, it seems the market’s been moving to more of a non-recourse, moderate-leverage structure on the most desirable, well sponsored construction projects, because loan spreads are still compelling on construction compared to the more traditional, value-add multifamily financing structure. We are also exploring the built-to-rent, single-family residential space. The liquidity flowing into single-family residential for rent is significant to the point where you can’t ignore it anymore.

Are there any notable deals from the past year or so that you can talk about?

We just closed a deal last month on a value-add type of business plan with an investor who’s acquiring and renovating workforce housing, which is a classic example of what we traditionally do. It’s an ’80s vintage property that has not been renovated in some time. We provided a floating rate acquisition loan as well as a future funding facility to renovate all of the units and the exterior of the property. That’s the model we pride ourselves on, where we do a deep dive into the property and the market fundamentals to understand the viability of the business plan, and then provide the financing to help our clients execute. We were able to win that mandate in a very competitive field, and we closed in less than 30 days. 

Given that many Americans relocated during the pandemic, what are some of the notable shifts that you’ve seen in this area, and how have they affected multifamily trends? 

We’re cautious with lending on multifamily in downtown areas right now because of the trend of people moving out of central business districts and downtown areas and into more suburban locations. That’s part of the reason we’re seeing a lot of rent growth in some of these more suburban and rural areas. 

How has the return to the office, such as it is, affected the multifamily sector in general, and CIT’s multifamily operation specifically?

I think the jury is still out on that. It’s different around the country. Where you’ve seen people returning to the office more, the multifamily markets are much more stable. In markets like Los Angeles, San Francisco, New York and Chicago, it’s been much slower, so that’s had an adverse impact on multifamily. Class A multifamily, specifically properties which are located in downtown areas, is where you’re going to start to see a bigger shift in either rents or occupancy based on how many office workers ultimately return to office. Are they going to continue to work in their apartments or move outside of some of these cities? The impact will be less on Class B- and C-type workforce multifamily housing where most of the tenants work in the service sector, retail or warehouse.

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