A Financing Gap is Leaving Some BFR Investors Behind
Many BFR developers are being forced into the position of breaking ground with lower leverage or with more expensive mezzanine financing.
While the build-for-rent sector has exploded over the course of the COVID-19 pandemic, there’s one sector that’s finding it tough to break in: middle-market investors.
According to a new report from Walker & Dunlop, debt in the space has become “a tale of two markets,” as large institutions, family offices, and smaller private equity firms are pouring capital into construction. The same goes for mid-market funds and high net worth individuals.
But there’s a catch: “Where we see a large gap emerging, is within the construction lending sector. Institutional sponsors aren’t having any trouble securing debt; however, middle market investors are facing difficulty due to the lack of banks active in the space,” says Keaton Merrell, managing director, Capital Markets at Walker & Dunlop.
Many BFR developers are being forced into the position of breaking ground with lower leverage or with more expensive mezzanine financing.
“If you’re working with a big project or have a large institutional sponsor, you’ll find debt financing no problem. But in the middle market, there are just not enough banks in this space,” he says, forcing many BFR developers to move forward with lower leverage or expensive mezzanine financing.
Merrell urges banks to better understand the positive headwinds in the space “and want in on the action.” BFR properties can typically outpace conventional properties when it comes to per-square-foot rents: consider Phoenix, where BFRs for garden walkup properties net $1.90 per square foot, versus the $1.19 psf rate conventional properties can command. And BFR properties typically report expense ratios in the 20s, with acp rates narrowing toward parity with multifamily cap rates.
Bridge lending is also emerging as a new product in the space, according to Walker & Dunlop, with the typical bridge at certificate of occupancy financing hovering in the 65-80% loan to cost range.
“Lenders have been assuming lease-up risk, with even life companies considering bridge lending at certificate of occupancy,” the report states.