FEATURE ARTICLE, AUGUST 2005

Multifamily Lending in the Northeast
Lenders discuss the state of the multifamily market, which is being affected by cap rates, condo conversions and popular multifamily loan products.
Interviews by Nicole Thompson

Northeast Real Estate Business talked to several lending companies in the Northeast about trends in the multifamily lending market. Here are the professionals NREB spoke with:

Hudson Realty Capital
Spencer Garfield is managing director of New York City-based Hudson Realty Capital LLC, a direct lender that provides bridge and mezzanine loans on a national basis. A non-conventional source of capital, Hudson Realty Capital provides high-yield bridge and mezzanine loans for multifamily projects.

BRT Realty Trust
David Heiden is vice president of Great Neck, N.Y.-based BRT Realty Trust. BRT Realty Trust is a direct lender that services loans nationally, with the Northeast as a primary target market. The mortgage REIT provides bridge loans for office, retail, mixed-use and multifamily real estate. It offers rehab financing of distressed and underutilized property, in addition to hotel-condo conversions and land acquisitions for new development.

L.J. Melody
Mark Cohen is a senior director in the New York office of Houston-based L.J. Melody & Company. L.J. Melody & Company is a mortgage intermediary that provides loan servicing and loan sale advising on a national basis. L.J. Melody offers a full line of debt and structured equity products. L.J. Melody & Company is a Freddie Mac Program Plus® Member, and acts as both a correspondent lender and as a broker providing all types of debt from traditional first-mortgage financing to preferred equity.

NREB: What multifamily loan products are particularly popular right now?

Heiden: Bridge loans for the acquisition of properties for condo conversions are extremely popular right now. This has been common amongst hotels for condo conversion.

Garfield: In today’s complex marketplace, we find bridge and mezzanine loans to be popular loan products.

Cohen: Currently, the primary emphasis is on long-term fixed-rate financing. With the current flat yield curve, there is very little incentive to not lock in long-term debt with maturities of at least 7 years. The flattening yield curve and more aggressive underwriting have mitigated some of the onerous prepayment penalties. These factors have brought many properties to the refinancing marketplace that still have existing long-term loan maturities with heavy prepayment penalties.

Additionally, there is strong demand for preferred equity where long-term debt is already in place that prohibits traditional secondary financing.

At the present time, the acquisition arena is fueling the market for pure equity, taking the purchaser up to 95 percent of the equity required in a purchase.

NREB: How does multifamily lending in the Northeast compare to multifamily lending in other markets?

Heiden: In certain areas of the Northeast, such as New York and New Jersey, the price per square foot is much higher.

Garfield: The Northeast is experiencing a strong multifamily lending market similar to that in the West — particularly the Southwest — while the Midwest continues to have a good deal of softness in its market. That being said, the abundance of condominium conversions has put pressure on most multifamily markets across the United States. The saving grace for many multifamily properties has been the downward pressure on capitalization rates.

Cohen: I do not see the lending environment in the Northeast as being materially different from the rest of the nation. In my experience, the lending underwriting criteria is generally consistent nationwide on multifamily properties.

NREB: What geographical markets of the Northeast are hot for multifamily right now? Which ones are struggling?

Heiden: The entire region seems to be in a boom.

Garfield: Primary markets and suburbs of major cities are still maintaining relatively high occupancies and rental rates while secondary and tertiary markets are really struggling. In addition, capitalization rates have been pushed way down in primary markets as most multifamily either sells for conversion to condos or simply for a stable but low yield.

Cohen: The soft markets are basically ones where affordable single-family housing abounds, and that is generally not the case in the Northeast.

The large increase in land values and overall costs within the core of cities, such as Manhattan, has fueled the growth of both rental and for-sale housing projects in what were formerly fringe areas largely devoted to industrial uses. The outer boroughs of New York City are seeing a huge surge in residential development aimed at people who cannot afford Manhattan prices.

NREB: How does multifamily lending right now compare with multifamily lending in 2004?

Heiden: Multifamily turnover has increased since 2004. Acquiring property with the intention to do light rehab work and sell within a 6-month period is common.

Garfield: In the first two quarters of 2005, we saw an increased number of multifamily assets struggle, even those we expected to experience positive absorption with the perception of rising interest rates. Now many of these projects require additional capital in the form of high-yield loans or mezzanine financing.

Cohen: The underwriting criterion is less stringent with lenders more readily accepting of the higher valuations in the multifamily property arena. There are also more lenders at all levels of the capital stack bringing down yields in order to stay competitive.

NREB: How do you think the lending environment will change during the second half of 2005?

Heiden: If the market begins to slow, lending institutions must be extremely careful on loans they make. Borrowers might be too highly leveraged, and when the return of the borrower’s proforma is not as anticipated, this can cause problems.

Garfield: If interest rates remain low during the second half of the year, the multifamily market will continue to struggle as people choose to purchase homes rather than rent.

Cohen: I think it will stay on an even keel from where it is today. The lending market has become quite efficient as there are numerous lenders at all levels of the capital stack.

NREB: How will changing interest rates affect the lending environment?

Heiden: Development projects will start to slow and some may be tied into mortgages they can’t pay off.

Garfield: As one would imagine, interest rates have a dramatic effect on the lending environment. The multifamily market will continue to experience softness if interest rates remain low. Of course, if interest rates rise, this sector would get stronger.

Cohen: So far the more things change, the more they remain the same. Even with all the talk of rising rates, the interest rate environment has remained relatively stable for 3 years — however, if rates materially moved up, it would lower valuations by raising the cost of capital at all levels.

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