Market Stability Elusive as Multifamily Finance Tactics Adjust

Multifamily investors have been absorbed in a guessing game – when will rate decreases start, and by how much will they fall? According to two finance professionals at NewPoint Real Estate Capital, borrowers are anxiously anticipating a sub-4% 10-Year Treasury before considering voluntary refinancings. Acquisitions, on the other hand, are more reliant on stability than pricing, concur Laurie Morfin and Mike Ortlip, both senior managing directors at NewPoint. 

“If we could have 30 days of stability in the Treasury markets, sellers would take that as the market beginning to flatten out,” Morfin says.

Plateaued Federal Funds Rate Only Part of the Stabilization Puzzle

Though there is no set definition for stability, Morfin says she would define it as when swings in the 10-Year Treasury narrow to the range of 10 basis points, as opposed to the current volatility that has often seen weekly swings of 30 bps.

“There would be inherent stability in the Treasury if it were not for the heightened anticipation and knee-jerk reactions to data releases like CPI, PPI, retail sales, and the like,” Ortlip adds. “If everyone practiced some breathing exercises, the market might settle a bit.”

In terms of where the 10-Year needs to stabilize, both Morfin and Ortlip agree that the magic will happen once we see a three-handle.

“Mathematically, the five-basis-point difference between 3.95% and 4.00% is negligible,” Morfin says. “But there is a psychological shift when people see that ‘three.’” They expect that to trigger new activity in both refinancings and acquisitions.

Where Morfin and Ortlip differ is on when the 10-Year rate will dip below 4%. Ortlip sees the Fed making its first 25 bps drop in September, while Morfin is “cautiously optimistic” it will happen after the June FOMC meeting. In the meantime, deals are still getting done if you know where to take them.

No One-Size-Fits-All Solution for Borrowers

When asked about the strategies borrowers are taking in terms of capital sources and loan structures, Morfin and Ortlip say we first must understand a few broad categories of borrower scenarios at play.

Seasoned developers – firms with decades of experience that do their own contracting work – are still able to deliver product efficiently. These groups continue to tap bank relationships for their construction needs and have the equity to do so efficiently. For the exit, Morfin and Ortlip note that NewPoint has successfully provided these developers with attractively structured and priced stabilization bridge loans, allowing them to recycle that bank construction debt.

Smaller developers and syndicators with “high octane” construction or bridge debt are another story. Exit rates have moved from the 4% underwritten two years ago to 5.5% or 6.25% now, which “is an issue, but these firms still have options,” Morfin says. “We can solve for that with an Agency execution that is well priced with a favorable amortization term, but the borrower will need to bring in some pref equity and likely still make a capital call until we see that Treasury back below 4%.”

And then there are borrowers with a fixed-rate maturity coming due. The existing debt was underwritten during a completely different economic climate and tempered expectations regarding cash-out are recommended.

“While the markets are functioning for all of the above and more, capital sources are more selective, and the parameters for what fits into one bucket or another can change quickly and unexpectedly,” Ortlip says. “As a result, we are advising clients to clear the full market with each new opportunity.”

He adds that sponsors should lean on a team with a deep bench and extensive relationships to ensure that deals are brought to the right capital sources, including the Agencies/HUD, insurance companies, bridge lenders and other third-party capital solutions. While different lenders have very specific criteria for each deal, the quality of the sponsor is now paramount.

“It does not matter how good the market or deal is, lenders want to know about the sponsor’s history, capitalization and portfolio,” says Ortlip. “From my perspective as a mortgage banker, it is vital that we have a deep understanding of the borrower’s needs and the strengths of a transaction. If we believe that we can find the capital to facilitate the transaction, we are going to undertake the assignment and execute that deal.”