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Despite rising interest rates, Janover data reveals steady stream of inquiries for commercial financing
Year-to-date through August, Janover received more than $25.5 billion in multifamily loan inquiries, with demand for construction financing representing 47% of all requests.
Image by Austin Distel from Unsplash
Following record mortgage rate growth in 2022, Freddie Mac®’s second quarter Apartment Investment Market Index (AIMI) showed that it’s becoming increasingly difficult to find attractive investment opportunities across the U.S., with AIMI falling on both a quarterly and annual basis. However, data from Janover, a CRE platform for connecting borrowers and lenders, revealed that demand for multifamily loans remained robust in the first eight months of 2022.
Year-to-date through August, Janover received more than $25.5 billion in multifamily loan inquiries, with demand for construction financing representing 47% of all requests, followed by inquiries for acquisitions at 40% and refinances at 12%. This trend held throughout every month with slight variations in proportions.
Demand for Construction Loans Shoots Up
The spike in demand for construction loans is not surprising given the solid multifamily fundamentals sustained by the substantial and continuously growing need for rental homes. With interest rate hikes and market instability, more and more people are reconsidering buying a home, choosing to continue renting instead.
Additionally, the U.S. currently has a housing shortage of 600,000 apartment homes, according to a recent study released by the National Multifamily Housing Council and the National Housing Association. Overall, the country needs to build roughly 4.3 million apartments by 2035 to mitigate the housing shortage and meet future demand.
Nonetheless, according to Brad Beattie, director of Capital Markets at Janover “with construction costs and now financing costs up significantly, the only way for this demand for construction loans to sustain is with continued rent growth. If rental rates start to decline, the demand for construction financing will likely follow suit.”
Despite high construction costs — due to supply chain disruptions, labor shortages, and pandemic-driven restrictions — commercial and multifamily construction starts increased by 18% year-to-date through July in the top 20 metro areas across the country, according to research from Dodge Construction Network.
Although CBRE predicted construction costs to increase by 14.1% year-over-year by the end of 2022, falling lumber prices could indicate that material costs may soon begin to normalize, further increasing developer appetite for new projects.
At the end of August, lumber prices stood at $465 per thousand board feet, reaching a new low in 2022, according to insights from Builder. This is slightly higher than the $407 at the beginning of 2020, but significantly below the record high of $1,670 in May 2021, an article from Barron’s noted. If material costs continue to normalize, demand for construction loans should stay high in the coming months, with slight fluctuations due to seasonality.
One notable deal Janover closed this year is a $27.3 million loan for a multifamily property with 53 existing units, and another 53 apartments under construction in Boca Raton, Fla. Janover worked with the sponsor to refinance the existing debt of $7.6 million and provided $19.7 million for the second phase of the development, all under one loan.
Although the deal closed with favorable terms for the borrower, securing the loan package was rather challenging due to the current economic conditions and the sponsor’s lack of liquidity, Beattie detailed. “This higher rate meant that the interest reserve had to be increased, making the no cash in scenario even harder to fit for the borrower. However, we were able to make the numbers work with quite a bit of effort,” he concluded.
Refinance: A Shift to a Longer-Term Investment Strategy
While deals continue to pencil out, both buyers and sellers have to adjust their expectations and shift their investment strategies accordingly. In a volatile market, focusing on the longer-term horizon is an appropriate strategy for investors — and it’s healthy for the markets.
To protect properties against current and future economic uncertainties, borrowers have hurried to swap their floating rate loans with fixed rate ones. Janover found that refinancing demand saw a 99%-uptick in February over January, whit this year’s refinance inquiries peaking in May, accounting for more than half a billion dollars or 16% of total requests.
However, the sudden rush to refinance loans has blown the cost of swapping from floating to fixed rate out of proportion. Mirroring this trend, Janover data revealed that inquiries for refinances fell by 50.1% in June from May and remained in that range in the following months.
Lenders have also tightened underwriting standards and are focused on near-term maturities and whether their borrowers will be able to refinance those loans under the current economic conditions.
This will depend greatly on rent and cash flow, which means that property types in high demand, including multifamily, will most likely have a less stressful time ahead. And stabilized properties will remain a safer bet over transitional ones.
As buyers and sellers learn to navigate the new economic conditions and market dynamics, deal volume will undoubtedly moderate in the near term. Investor sentiment will likely vary across the sectors, but multifamily is bound to remain a safe haven compared to other asset types.
Multifamily markets with steady rent increases driven by positive demographic and employment trends are expected to see the most activity, both in terms of transactions and new development. Nonetheless, investors will likely embrace the flight-to-quality strategy, as cap rates are expected to rise at a faster pace for Class B and C assets, resulting in less accommodative financing for value-add deals, CBRE research noted.
Looking at Janover’s proprietary lending data, it is clear that borrower sentiment is deeply impacted by current economic and macro-financial conditions, causing some investors to pause and others to move ahead at a faster pace. “The hope is that inflation will tamper, and the Fed will begin lowering interest rates towards the end of the year and into 2023. This will ultimately result in higher achievable leverage on bridge, construction, and permanent financing,” Beattie said.
What are the current interest rates for commercial real estate financing?
The industry median interest rate for most commercial real estate loans usually falls approximately 3% above the effective federal funds rate. That said, different financing options have rates based on different indices. It is important to be aware of where these stand to get a good idea of what you can expect from your commercial property mortgage. Many loans utilize the secured overnight financing rate, or SOFR, while others tie rates to the relevant Treasury yields. Others, like loans backed by the Small Business Administration, lock rates to the WSJ Prime.
Check out today’s interest rates for many different types of commercial real estate loans. These ranges are updated in real time and reflect current market conditions — though be aware that borrowers with substandard credit or properties in struggling markets may find themselves at the upper end of these ranges.
What types of commercial real estate financing are available?
There are many types of commercial real estate financing available. These include debt fund loans, bridge loans, permanent loans, mezzanine loans, and construction loans.
Debt fund loans are a type of financing that is provided by private debt funds. Private debt funds are typically composed of a group of investors who provide financing to businesses and organizations in the form of loans. Loans from debt funds generally cover financing scenarios that many other lenders, like banks, may shy away from. This could include lease-up financing for multifamily properties, or a loan to rehabilitate an office asset.
Bridge loans are short-term loans that are used to bridge the gap between the purchase of a property and the permanent financing. These loans are typically used when a borrower needs to close on a property quickly and does not have the time to secure permanent financing. Bridge loans are typically more expensive than permanent loans, but they provide the borrower with the flexibility to secure permanent financing at a later date.
Permanent loans are long-term loans that are used to finance the purchase of a property. These loans are typically used when a borrower has the time to secure permanent financing and wants to lock in a low interest rate. Permanent loans are typically less expensive than bridge loans, but they require the borrower to commit to a long-term loan.
Mezzanine loans are a type of financing that is used to finance the purchase of a property. These loans are typically used when a borrower needs to finance a portion of the purchase price of a property and does not have the funds to do so. Mezzanine loans are typically more expensive than permanent loans, but they provide the borrower with the flexibility to finance a portion of the purchase price.
Construction loans are short-term loans that are used to finance the construction of a property. These loans are typically used when a borrower needs to finance the construction of a property and does not have the funds to do so. Construction loans are typically more expensive than permanent loans, but they provide the borrower with the flexibility to finance the construction of a property.
What are the advantages of commercial real estate financing?
Commercial real estate financing offers a variety of advantages, including access to competitive financing options, lower interest rates, longer amortizations, and longer terms. Additionally, commercial real estate financing typically allows for higher loan-to-value ratios, meaning your down payment as an investor can be smaller. Another advantage of commercial real estate financing is the speed of funding. Bridge loans are among the fastest-closing financing packages available to commercial real estate borrowers, and a loan can close in a matter of days, enabling an investor to execute their real estate strategy quickly and effectively.
For more information, please see the following sources:
What are the risks associated with commercial real estate financing?
The risks associated with commercial real estate financing include the potential for monthly payments to increase significantly at the end of the interest-only period when you are required to start paying both principal and interest. Additionally, if the property’s value decreases, you could find yourself underwater on your loan – owing more than the property is worth. Additionally, if the projected net operating income decreased substantially, the owner may be liable to make principal and interest payments or even, at some point, pay back the entire loan prematurely. The Benefits and Risks of Interest-Only Loans in Commercial Real Estate and Cash On Cash Returns: Calculator, Risks Involved.
What are the qualifications for obtaining commercial real estate financing?
In order to qualify for a commercial real estate loan, you will need a detailed business plan, plans for the property, 3-5 years of financial documents (business and personal), and your personal credit history.
For more information, please see the following sources:
What are the best strategies for obtaining commercial real estate financing?
The best strategies for obtaining commercial real estate financing depend on your specific needs and financial situation. It is important to research all of the available options and understand the terms of each loan product. Some tips for shopping for a commercial real estate loan include:
- Understand the different types of commercial real estate loans and their terms.
- Compare loan products from multiple lenders.
- Know your credit score and financial history.
- Be prepared to provide detailed information about your business, including financial statements and tax returns.
- Work with a trusted advisor who can help you find the best loan for your investment needs.