This article appeared in the November 2020 Issue of the Colorado Real Estate Journal's Multifamily Properties Quarterly

There has never been a better time to be a commercial real estate borrower.  The cliché has been repeated on a loop for the last several years, but it is still truer than ever today.  The Fed has signaled it is going to hold short-term interest rates at near-zero for at least three more years, and credit spreads have stabilized after spiking in the early days of the pandemic.  The net result is we are living in a period with the lowest interest rates the team at Essex has ever seen.  [Author's Update 11/17: Since this article was written, benchmark rates have jumped slightly on news of two potential COVID vaccines, but the team at Essex has yet to see a corresponding rate increase from lenders].

Commercial real estate owners – and especially multifamily owners – are commonly locking in interest rates for stabilized properties in the low-to-mid 2% range.  But when you look beyond the headline grabbing coupon rates, property owners will be pleased to hear the menu of lenders and loan programs available for multifamily properties is bigger and more competitive than ever before.  Think Cheesecake Factory menu big.  This means that no matter the age or size of your property, there is a lender and a loan that will meet your property’s needs.

The two largest agency lenders – Fannie Mae and Freddie Mac – have increased their market share of the total multifamily debt outstanding by 3.1% in the first quarter of 2020 and are still actively lending [1].  Fannie Mae offers many attractive loan programs for borrowers looking for moderate leverage (60% - 65% LTV), estate planning flexibility, and a shorter closing timeline with lower transaction costs. Fannie also offers very competitive pricing for those properties that have or are considering one of the many green building certification programs available.

Freddie Mac offers competitive programs for those property owners seeking higher leverage (65% - 80% LTV), a longer interest-only period, and cash out refinances. Freddie also is an excellent source of floating rate debt. For owners of smaller properties, Freddie Mac offers a very competitive small balance loan program that offers much of the same flexibility and optionality of a traditional agency loan but is tailored to smaller loan sizes by streamlining approvals and limiting closing costs.

While Fannie and Freddie often provide the most competitive rates and terms on requests for 10-year loans with moderate to high leverage, life insurance companies have cornered the market on multifamily loans with shorter five and seven-year terms at slightly lower leverage (less than 60% LTV). The lack of a secondary market for shorter duration loans has forced the agency lenders to increase their pricing to a point where they are commonly 25 – 30 basis points higher than the life companies.  This has allowed life companies to increase their market share of the multifamily debt outstanding by $2.5 billion (1.5%) in the first quarter of 2020 [1].

Life company loans offer other benefits that may appeal to multifamily property owners including the ability to underwrite and size the loan based on forward-looking statements (as opposed to recent tenant collections which can be volatile during the pandemic), the ability to fund the loan prior to stabilization, and the ability to lock the interest rate at the time of application.  Forward rate locks (up to 9 months), local servicing relationships, generous estate planning and transfer provisions, more flexible prepayment options, and the ability to waive tax, insurance, and COVID reserves are also benefits not commonly seen with agency loans.

Owners of properties in transition or developers seeking construction financing also have compelling debt options available to them.  Life insurance companies, banks, and debt funds are closing loans with future funding components that allow owners to acquire a property and finance the costs of future rehab work. Typical rates for these value-add loans are in the low-to-mid 4% range.  Life companies are also actively seeking to make construction to perm loans on new multifamily developments that allow borrowers to lock in low interest rates for ten years and longer, taking construction loan refinance risk off the table.

Regardless of a property owner’s priorities when seeking out a loan, there has never been a better time to be in the market.  Interest rates are the lowest in history, and each loan can be customized and outfitted with a variety of features and structures so that it delivers the exact financing solution a property owner is looking for.

[1] Mortgage Bankers Association. Commercial/Multifamily Mortgage Debt Continued Rise in the Second Quarter of 2020.  September 28, 2020.  LINK