FEATURE ARTICLE, AUGUST 2006

MULTIFAMILY FINANCING SURVEY
Northeast lenders discuss current trends and the health of the lending environment in the Northeast multifamily market.
Interviews by Stephanie Mayhew

Northeast Real Estate Business recently interviewed several lending experts in order to gauge the current climate of the lending environment in the Northeast. Participants include: 

• Gregg Winter, the president of W Financial Mortgage Fund I, LLC and Winter & Company Commercial Real Estate Finance. Both companies are headquartered in New York City. W Financial is a direct lender that focuses on loan opportunities from $2 million to $50 million with a primary focus on the Greater New York Metropolitan area. Winter & Company is an intermediary that handles loans nationally. The companies provide loans for everything from new development and construction to permanent financing for all property types ranging from multifamily to retail, hospitality and office. 

• Charles Cronin, the CEO of Axiom Realty Advisors/Axiom Equities. Axiom, headquartered in Albany, New York, is an intermediary that provides loans nationwide with a primary concentration in the Northeast. Axiom provides permanent, construction, bridge and mezzanine loans.

• Daniel H. Lisser, the managing director of Johnson Capital. Johnson Capital is an intermediary lender that services loans nationally and provides several types of loans, including construction, bridge, permanent, land acquisition and development, mezzanine, preferred equity and equity.

• Greg James, the vice president of CBRE | Melody. CBRE | Melody operates primarily as a financial intermediary, but through CBRE Realty Finance, the company also acts as a direct lender. The New Jersey office is focused primarily on the New Jersey market as well as northeastern Pennsylvania; and Duchess, Orange and Rockland counties, New York. CBRE | Melody provides permanent loans for stabilized assets and bridge loans for non-stabilized property along with equity and mezzanine loans.

• Andrew Jonas, the vice president of investment loans for the Kislak Company, Inc. Kislak is headquartered in Woodbridge, New Jersey, and provides service in selling, leasing, managing and financing all types of investment real estate. As an intermediary, Kislak provides fixed rate loans for investment properties that are primarily multifamily.

NREB:  What type of multifamily products do you offer?

James:  Our primary objective is identifying a financial structure that is compatible to our client’s individual financing goals on a specific multifamily transaction. In today’s market the three primary products are first mortgages, equity and mezzanine finance. Most multifamily first mortgage lenders underwrite a financing based on a maximum loan of 80 percent LTV or LTC. Based on the underwritten cash flow of a specific property equity and mezzanine, investor/lenders are prepared to finance up to 100 percent of the equity requirement that a borrower needs to acquire or recapitalize a property.

Cronin:  We offer FannieMae, FreddieMac, Life Companies, Banks, CMBS and pension funds.

Winter:  We offer very low interest rate, fixed rate financing for stable, cash-flowing properties. For example, right now Winter & Company is locking in 10-year, fixed rate deals for high-quality assets at only 80 b/p above the 10-year Treasury at par.

Jonas:  We offer 5-, 7- and 10-year terms working with a number of banks, conduits and other lenders.

Lisser: As an intermediary, we are able to access all the different lenders to find the right product to meet our client’s financing needs.

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

James:  The most popular multifamily product of the last several years has been the interest only mortgage. Depending on property quality, most properties still underwrite to 3 years of interest only. On a 60 percent LTV, it is still possible to get up to 10 years interest only. 

Recently, we have noticed borrowers searching for lenders who will do a structured prepayment. Many borrowers are not satisfied with the defeasance and yield maintenance requirements that the vast majority of lenders have in their loans.

Cronin:  As I mentioned above, FannieMae, FreddieMac, Life Companies, Banks, CMBS and pension funds; however, CMBS remains a popular product as they offer favorable rates and high loan amounts. Commercial bank products are also seeing a fair share of mortgage flow.            

Winter:  Good, old-fashioned 10-year fixed rate loans are still popular for stable properties, while interest-only floaters are popular for acquisition and renovation deals. This type of loan is  sometimes in conjunction with a B-piece or a mezzanine loan.

Jonas:  Nearly everyone wants the  longest term possible, and interest only loans are popular for the first 3 or 5 years to help keep payments down.

Lisser:  We have been seeing a great demand in the redevelopment bridge loan area.  With the for sale market softening because of rising interest rates, we have seen an increase in developers buying buildings with the intent to convert them to rental units.

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

James:  Because of New York City’s role as the financial capital of the United States, the Northeast lending environment is one of the most competitive lending markets in the country. One example is the large New York Thrift Institutions that are not prevalent in other markets.

Cronin:  Market dynamics drive the level of interest by capital sources, but the basics are the same. 

Winter:  The barriers to entry are so daunting that it’s still more difficult to build multifamily product in the Northeast compared to other regions, especially sizable multifamily product; therefore, overbuilding is not such a problem here. For example, in areas such as south Florida, new buildings have 500 or 600 units, but in the Northeast, especially in New York City, many of the new developments have only 10, 20 or 30 units.

Lisser: Due to the continued population growth in Northeastern cities, the lack of developable land and the weakening of the for sale housing market, lending in most urban areas of the Northeast is very strong compared to the rest of the country.

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

James:  Currently, within the Northeast, the hottest sectors in the multifamily market are Class A quality multifamily developments located in the Boston, New York Metropolitan area, Philadelphia and Washington, D.C. regions. These particular areas within the Northeast market, spanning from Washington, D.C. to Boston, have solid market fundamentals that can be attributed to a healthy economy, the scarcity of land, the difficult new development environment, and the vast number of condominium conversions that have occurred between 2003 and 2005. Typically, the primary investors and buyers of these properties have been REITs, pension funds, institutional investment advisors and European institutions. Upstate New York is an example of a struggling multifamily market.

Cronin:  The Hudson Valley and Tri-State region is a hot market. Industry in the Hudson Valley north of New York City is changing. Tech Valley is creating an environment of job growth, not only in the tech industry, but related industries that cater to these businesses. The real estate industry will see the payoff from this growth as well. Northern, Middle and Western New York regions are not as hot right now.

Jonas:  Lenders will consider loans in all markets. However, they may be a bit more conservative in upstate New York or areas that don’t have a mobile population to fill apartments.

Lisser:  The New York City metropolitan area is still very strong.  In addition, transit oriented developments in the suburbs are also very strong as they appeal to both younger, single families and empty nesters. Secondary cities such as New Haven, Connecticutt and Newport, Rhode Island, are also quite strong right now. 

NREB:  How does the current multifamily lending environment compare with multifamily lending in 2005?

James:  The biggest change in lending has to do with the shape of the yield curve. With the Federal Reserve having increased rates 14 times in the last 18 months and the Yield Curve being flat, 10-year fixed rate money is more attractive then LIBOR-based floating rate financing or shorter term fixed rate financing based off the U.S. 5-year and 7-year.

Cronin:  The lending environment is much the same and loan products are similar. According to the Mortgage Bankers Association, 2005 multifamily originations set a new record high that was 48 percent higher than in 2004. It is fair to say that the Northeast multifamily industry has contributed to that. 

Jonas:  Many owners did very well financing in 2005. If they were constrained by prepayment fees last year,  they will find rates up somewhat this year.

Lisser:  The market is as active or even more so than it was in 2005.  The weakening of the for sale market has had a very positive impact on the rental market. In addition, the move toward urban living, which is occurring nationwide, has improved demand for properties in or near major Northeastern cities. With interest rates projected to remain where they are, we expect multifamily lending to remain robust through the end of 2006 and into 2007.

NREB:  How do you think the lending environment will change during the second half of 2006?

James:  I don’t see a tremendous amount of change in the lending environment. Because most loans are underwritten to conform to CMBS Securitization Standards, the lending environment is still very healthy and should remain very competitive during the second half of 2006.

Cronin:  So far, 2006 has been a productive year. The increasing interest rates, however, may cause proceed reduction or greater caution.

Jonas:  It may slow down if interest rates spike. We have been spoiled for the past few years, so now 6 percent doesn’t seem attractive, but we will get used to it.

Lisser:  We believe that cap rates will need to increase to remain in-line with the increase in interest rates. With the strengthening of the rental market, lenders will show an increased appetite for multifamily lending. In most Northeastern cities, the risk of  condominium units having a major impact on the rental market is minimal compared to substantially over-built markets like Miami.

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

James:  Interest rates will only affect the lending environment to the extent borrowers perceive whether fixed rate or floating rate debt is the cheapest source of capital. In the current cycle, if the yield curve stays inverted and the market perceives that the Federal Reserve has not finished tightening, 10-year fixed rate financing will continue to be the cheapest source of capital for borrowers.

Cronin:  The increasing rates will most likely reduce proceeds and leverage. As rates rise, lenders will put more emphasis on exit test at higher rates at the end of a loan term. 

Jonas:  Owners will continue to refinance their buildings, but they may choose to take shorter terms, such as 5 or 7 years, in the hope that rates will fall again.

Lisser:  The increase in interest rates will lead to more structured deals as first mortgage lenders limit proceeds and borrowers will be forced to put on mezzanine or preferred equity to reach the required proceeds. 

NREB:  Are there any other predictions you’d like to make regarding lending in the Northeast?

James:  If the market fundamentals remain strong regarding housing formation, immigration, job creation and the supply of multifamily housing in each northeast market, then local, regional, and national lenders will continue to make the Northeast one of the most competitive lending markets in the United States.

Lisser: Investors who are able to invest more equity into deals will have an advantage because sellers might be willing to take a lower bid if there is a greater certainty in closing with an all cash or lower leverage buyer versus a buyer that will need a full leveraged loan.

©2006 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.