August 25, 2020

Capital Corner: Rates remain low, offering pricing benefits from all lenders

As the capital markets try to settle into a rhythm or some understanding of our ever new “normal,” many lenders are becoming more creative in securing new business. Borrowers are reaping the benefits with better pricing, longer-term options, and new opportunities from lenders.

Key points as summer 2020 comes to a close:

Rates are low
Terms are attractive
While borrowers are trying to decide if rates will ever get lower or if they will go up in the near future, there is some risk associated with waiting too long. We see some uncertainty from declining collections, delayed school openings, and the upcoming election.

Going into the last month of the third quarter, we’re seeing an uptick in activity, with lenders offering financing terms that make refinancing and buying attractive to private investors. That’s primarily because the gap between the cap rate and interest rates make many deals more attractive. The gap between the going-in cap rate and the finance rate for the new money is as wide as we’ve seen it, making these acquisition opportunities more accretive for private investors. Pre-Covid pricing had cap rates at 4.5%- 5% and interest rates were at 3.5%. Today we see the Cap rates still in the 4.5% -5.0 % range, but now the interest rates are 2.5% - 3.0%. Buyers are taking note and it’s resulting in better investment returns, which drives the increased activity in investment sales.

There’s some caution to note, however, especially in collections. Without additional government support for an extended CARES act, multifamily collections have dropped another 2.1 percent in the latest NMHC survey, perhaps foreshadowing continued declined. Most lenders still require additional reserve or escrow to protect themselves from potential declining collections. The message investors should consider is to have options in their back pocket to protect the asset.

The other caution in the CRE market is the upcoming presidential and congressional election. With the uncertainly of which party will control the White House, Senate, and the House, most industry experts think buyers/borrowers will be better served to consider acting in the next six weeks rather than waiting until after the election.

The GSE’s
Agency pricing is as good as most market watchers have seen, with high 2s using 80% leverage, and for lower leverage transactions, the pricing is coming is in the low 2s.

Green pricing from both Freddie Mac and Fannie Mae, available for both green renovations and new construction built to the green-certified specifics, continues to fuel the multifamily markets.

Freddie Mac
Freddie Mac continues to price loans aggressively with rates below 3% while maintaining strong underwriting fundamentals. Acquisitions continue to grow, making up a larger percentage of loans than the previous five months.

Fannie Mae
Fannie Mae continues to quote and close loans at historically low-interest rates. Despite continued economic uncertainty, interest rates have remained remarkably stable, with the majority of transactions trading between 2.50% and 3.00%.

Furthermore, Fannie Mae’s pipeline of Green loans continues to grow. Whether Green Rewards or Green Certifications, this program provides borrowers with an additional reduction to already low-interest rates, and remains one of Fannie Mae’s most aggressive and competitive products. This unprecedented low-rate environment has driven substantial growth in Fannie Mae’s pipeline throughout the year, as borrowers seek to refinance their existing debt (often well before maturity) in order to take advantage of the opportunity at hand. Clearly, Fannie Mae remains an effective and attractive source of capital is today’s dynamic environment.

FHA/HUD
Interest in FHA loans continues to be robust as borrowers can combine historically low-interest rates with fully amortizing loan terms. Current rates for a refinance/acquisition transaction are below 2.25% and rates for a new construction/permanent loan are just north of 2.75%. These are for 35- and 40-year terms, respectively. Many borrowers are seizing the opportunity to refinance their multifamily properties on these long-term notes and enjoy enhanced cash-flow at these aggressive rates. A significant advantage of the FHA finance program is the removal of any refinance risk, as a result of the self-amortizing loan terms. This is a tremendous opportunity for borrowers to take advantage of the current favorable interest rate environment and avoid the risk associated with a shorter-term loan that will need to be refinanced in the future (potentially at much higher rates).

Life Companies
Life companies are finding their niche within the very competitive multifamily market. They are creating programs that include pre-pay flexibility, early rate locks, long-term fixed rates, and construction loans. They will also look at floating rate loans to help them compete with the banks and agencies, as well as fill the void left by the bridge lenders.

They continue to finance grocery-anchored retail centers and are always interested in industrial.

Equity Providers
Institutional equity providers are looking for mezzanine or preferred equity structures, rather than joint ventures. Capital is plentiful but taking many different forms. Overall equity continues to be creative and find different ways to structure around short-term needs. JV capital remains scarce; we think private equity will be the first and best option for the foreseeable future until the institutions see more “green shoots” in the property markets.

In closing, borrowers should consider the interest rate environment with the pricing benefit, and act sooner than later given the risk from declining collections and the disruption from Election Day. Contact your local NorthMarq debt & equity experts to understand your best options.