Multifamily Borrowers Will Continue to Have Access to Multiple Capital Sources in 2019
Apartment Building investors will have lots of choices on where to get permanent and short-term bridge loans in the new year.
By: Winston Rowe and Associates
Debt funds provide ready money
Even developers whose new projects are taking too long to lease up can find loans to take out their construction loans. Many private equity fund managers have created debt funds that now provide bridge financing on apartment properties.
These loans can cover up to 85 percent of the value of a property, with interest rates often floating at 275 to 300 basis points over the 30-day LIBOR.
Once the property has fully leased, the borrower can find convention permanent financing to take out most of the bridge loan, so the remainder of the bridge loans from the debt fund functions as a much smaller mezzanine loan. Value-add investors also use these debt funds to secure bridge financing for their properties.
Interest rates still low
The interest rates are still relatively low for permanent loans, despite two years of rate hikes from the Federal Reserve.
At the end of 2018, lenders offered all-in interest rates from 4.25 percent to 4.50 percent, for permanent loans from Fannie Mae or Freddie Mac programs that cover up to 75 percent of the value of a stabilized, fully-leased property. That's up roughly half a percentage point from the end of 2017.
That increase is far below the rate hikes from Federal Reserve officials, who have been pushing their benchmark Fed funds rate higher by 25 basis points at a time for the last two years—from close to zero to well over 2.0 percent. The Fed is expected to raise its rates several more times in 2019.
To keep their all-in interest rates low, permanent lenders have cut their spreads—the amount that they add to their interest rates. The current interest rates from Freddie Mac and Fannie Mae work out to a spread over the yield on 10-year Treasury bonds of about 150 to 160 basis points.
The yields on Treasury bonds have also stayed low. The yield on 10-year Treasury bonds was about 2.7 percent in the last trading days of 2018. That's only a little higher than in 2017 when the yield hovered in the mid-2-percent range. The Treasury bond yield has risen to over 3.0 percent for much of the fall but fell back as the stock's markets grew volatile at the end of the year.
New overseer for Freddie Mac and Fannie Mae
All the biggest lenders are expected to stay busy in 2019. Freddie Mac and Fannie Mae were still the biggest sources of capital for apartment loans in 2018, and are likely to hold onto that spot in 2019, despite having a new federal overseer in 2019.
Other leading capital sources, from banks to life insurance companies, remain active. Life companies continue to compete to make loans on the most desirable, class-A apartment properties, offering interest rates as low as 105 to 110 basis points over the yield on Treasury bonds for low-leverage loans.
Conduits lenders and lenders that provide Federal Housing Administration loans also continue to be active.
Published by Winston Rowe and Associates https://www.winstonrowe.com