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MF Lending Pipeline Should Continue to Flow

Carrie Rossenfeld Multifamily

San Diego–based Crittenden Research has released a report predicting that bank lenders of all sizes will continue to be bullish on multifamily lending in the foreseeable future.

According to the report, major banks such as Wells Fargo, Chase, BofA, KeyBank, U.S. Bank and Capital One will offer the best pricing and terms — 4 percent to 5 percent — rates on multifamily loans, but those loans will require some level of recourse. “They will continue to be aggressive but become a little more selective on multifamily products,” the report says. “Banks will begin to request more due diligence for each loan, as they become slightly more cautious moving forward.”

Regarding construction loans, the report says changes in regulations will lead to banks to offer more of these, but they will monitor incoming supply carefully. “Construction loan rates will be 6 percent to 8 percent,” according to the report. “Count on banks to also want the perm loan once construction is complete.”

In addition, borrowers should expect 60 percent to 65 percent LTC from banks on construction loans, the report says. “Other lenders will go up to 70 percent leverage, but 60 percent to 65 percent will be the standard.”

In addition, spreads on these loans have dropped from the low 300s to 250 basis point range over Libor, according to the report. “Banks are becoming more flexible with extension terms, and developers are getting 48- to 60-month total terms.”

According to the report, developers will also be able to secure relatively low recourse as long as they don’t go too high on leverage. “Banks could tighten down LTC ratios, as they are concerned with overbuilding and valuation being at the top of the market,” the report says. “If values do top out, they want enough wiggle room for values to fall and not have the loan upside down. As interest rates climb, the constant for the interest rate and loan amount becomes greater than the cap rate for most multifamily deals, which limits the proceeds available to the borrower.”

Also, spreads are tightening for acquisition opportunities, but banks will still offer 70 percent to 75 percent leverage for most deals, according to Crittenden. “Five-year fixed rates will be in the 4 percent to 4.5 percent range, while seven-year loans will be 4.25 percent to 4.75 percent. Expect 5 percent-plus rates for seven- and 10-year terms in secondary markets with a lender fee ranging from one quarter to one full point.”

The firm also says loans in weaker markets will start at 5 percent to 5.25 percent-plus and that floating rates will start around Libor-plus 250 basis points, while DSC will start at 1.15x to 1.20x in core markets. “This could push to 1.25x-plus in the next six to 12 months,” the report says, adding that tertiary market deals will be 1.30x to 1.35x-plus, lenders will target 7 percent to 8 percent debt yields, and banks could start offering more interest-only terms in order to compete.

The report indicates there are signs of cap rates creeping up and rents slowing down. “This could lead to slightly more cautious multifamily bank lending moving forward by the end of 2018 and leading into 2019. With market fundamentals slowing down, banks are showing initial signs of concern about multifamily lending and will begin to take fewer risky loans than they have in the past few years.”