Bendix Anderson | Aug 21, 2018
Multifamily investors are still able to get low interest rates on permanent loans as different lender groups continue to compete for market share.
“The competition between the agencies and life companies is creating bidding wars on the debt side, with increased interest-only and decreased spreads a requisite to win deals,” says Brandon Harrington, managing director with JLL Capital Markets.
Benchmark interest rates like the yield on 10-year Treasury bonds have risen nearly half-a-percentage-point since last year. But the interest rates on permanent loans for multifamily assets have remained relatively stable. To make more loans, lenders are cutting the extra amount that they add to interest rates—the “spread” between their cost of capital and the interest rates they charge borrowers.
“The debt market for multifamily remains very liquid,” says Mitchell W. Kiffe, co-head of national production for the debt & structured finance group at CBRE Capital Markets. “All of the capital sources remain active and are seeking multifamily borrowers.”
Strong demand for apartment keeps lenders interested
Lenders keep fighting to make loans partly because on a national basis, apartment rents continue to rise. “We’ve been expecting a moderation of rent growth for a few years now and have continued to be surprised how resilient the market is,” says Harrington.
“More institutional investors are entering the secondary markets and even the class-B space, which they have historically shied away from. This has caused lenders to be even more aggressive in the secondary and class-B space, which has been positive for all borrowers in the space,” says Harrington.
Other lenders also keep interest rates low
Lenders are also offering interest-only loans on multifamily deals. How much of the loan term is interest-only depends on how large the loan is in comparison to the value of the property. “At 50 percent loan-to-value there are a lot of people offering full-term interest-only loans,” says Kiffe. “At 65 percent loan-to-value… it depends on the cash flows from the property.”