How Arbor’s CCO Learns from the Markets and Captures Opportunity within Multifamily

With interest rate pressure easing and a housing supply/demand imbalance persisting, multifamily real estate is well-positioned for a robust 2025. David Friedman, Arbor’s Chief Credit Officer and Head of Non-Agency Production & Syndications, who recently spoke at the Commercial Observer’s Fall Finance Forum, explains what he’s learned from working in the capital markets for more than two decades and how those lessons can be applied to opportunities in 2025.

What have the changes in the capital markets in the past four years taught us? 

It’s not so much what the changes have “taught us” but rather what the changes have reminded or reinforced for us. The current capital market cycle is playing out in similar fashion to those that have come before it.  

A period of easier money (via lower rates) and lending standards results in robust financing activity from traditional capital sources while opening the door to newer entrants as investors look for a premium yield. At the same time, a robust supply of capital and demand (or the desire) to deploy it drives a sales and investment market with valuation expansions on the backs of the expectation of growth and achievable internal rates of returns, allowing for existing and newly established sponsors or owners to reach into new asset classes and markets. 

Then the inevitable macro event arrives, the market realizes it is at or close to the peak, and it pivots to operating in the soon arriving downcycle. The capital markets lock up for a period of time, and then the discovery phase of valuation, cash flow, interest rates, etc., begins. Once the ‘floor is in’, markets can then re-open, ultimately getting to a level of efficiency, which is where I believe the broader market is today.  

The length of the latter part of this cycle, aided by a longer period of higher rates and lenders’ delaying some of the harder decisions within their portfolios, has been a challenge, but I am encouraged to see traditional sources returning as well as new capital sources being constructive.

Why is the ability to pivot so important in today’s real-time marketplace? 

It simply comes down to volatility and the rate of change. In my almost 25-year career, these past 60 months have produced some of the most dramatic swings in volatility and market sentiment, and they are all happening closer together, sometimes right on top of one another. As a result, a lender needs to have all components (access to capital, active servicing and asset management, operations, credit/risk, strategy, etc.) constantly aligned and evolving to meet the market or get ahead of an up or down trend. There hasn’t been much downtime where the marketplace has been able to sit back and be idle.

How is the lender sector evolving to meet the changing needs of borrowers?

I feel the biggest evolution in the space has been the participation in the sector, and more importantly, that the participation has been, so far, staying in their desired lending lanes. With greater participation comes an increase in outlets and solutions that deals can fit with, which will lead to more transactions in a time where discovery is important to regaining market health for both equity and debt. In terms of lanes, I am finding that lenders are being very clear about what they can do versus what they can’t do.  

I find this new emphasis to be refreshing, as it brings clarity to borrowers on who the audience is for this type of deal versus that type of deal. It feels very orderly and has brought efficient and effective competitiveness and greater certainty of execution to borrowers.

What have you found to be the most advantageous forms of financing right now and why?

Arbor is committed to supporting affordable housing via its partnerships with Fannie Mac, Freddie Mac, and HUD, and will look to remain an active player in the bridge/value-add space. However, our conviction that the housing supply/demand imbalance will persist with the growing cost of homeownership has really put the wind at the backs of our single-family rental and multifamily construction lending products. 

Aided by the lower lending appetite of regional lenders (after the March 2023 mini-crisis), we have made sizable gains in the construction lending space for these new rental projects. They have been a natural fit with our bridge and permanent-lending products that allow a borrower to consider Arbor as a partner over the entire life cycle of its ownership in an asset rather than just a lender at a specific point in time. Being able to lend across that life cycle and knowing that we control the exiting financings has given borrowers a compelling reason to select Arbor, and that partnership allows us to consider the economic benefit of lending to a specific asset with multiple turns on our capital. These construction products have really become mutually advantageous to our borrowers and the firm.

How can lenders best maximize returns and capture opportunity in 2025? 

As a private credit lender (and as a lifelong hockey player), I’d say it this way: ‘Not every goal needs to be (or will be) pretty.’ This means that lenders are going to need to complement their on-strategy lending with some deals that may not make it to the highlight reel. Sponsors, markets, and assets coming out of this cycle may not look very pretty on the surface, but a lender that can take a thoughtful view of the circumstances, deliver a creative capital structure, and have the patience for a business plan to execute, will be rewarded. In the end, a goal is a goal.