As Buyers and Sellers Haggle Over Pricing, Multifamily Lending Slows

“It’s hand to hand combat.”

Multifamily lending has slowed as buyers and sellers do battle over asset valuations, interest rates rise and the cost of capital continues to tick up, panelists at GlobeSt. Multifamily conference agreed. 

“It’s hand to hand combat,” said Gregory Reed, SVP Originations Multifamily and Finance at Capital One, at a panel on capital and lending resources. “It almost feels a little like Q4 2008.”

As the Fed speeds up quantitative tightening, more product is coming online to compete with higher spreads.

“It’s just a different world,” said Laurie Morfin, SVP at Bellwether Enterprise. “Construction costs, even though they seemed to level off a bit, have been taken up by rising interest rates. You’re looking at 6 to 7% today on construction loans. It’s definitely a different world in that arena.”

According to Jeff Burns, Senior Managing Director – Walker & Dunlop, the relative value of an agency-backed bond versus other alternative investments in the market has widened considerably. As the Fed pulls back from quantitative easing, the support the central bank has provided to the mortgage-backed securities market for the last decade has slumped.  And that’s led to “tremendous” increases in the cost of capital across the board.

“Everything in the credit markets is a bit dislocated,” Burns said. “One of the real challenges we’ve seen in the last six months is that the volatility is just staggering. With the swings we’re seeing, it’s so hard if you’re trying to buy a deal.  How do you underwrite?”

Burns also says the acquisition market has softened, as buyers and sellers find themselves at loggerheads over asset pricing.

“There’s definitely a disconnect,” Burns said. “Sellers don’t want to sell at a 6 cap right now. The story for a while was, we’ll take negative leverage because we can roll rents and roll NOI and get positive leverage in 12 to 18 months.  But I think now, the rate of rent growth is not going to continue at the same pace so you can’t really sell that story that much.”

Voluntary refinancings are “few and far between,” perhaps predictably, and the deals Burns says he’s seeing on the transaction side are more merchant builders who have acapital partner expecting a sale. Northmarq’s Joe Giordani said lower leverage deals are getting done, as are loan assumptions.

The panelists agreed that multifamily sellers and buyers alike seem to be resetting expectations. Giordani says deal flow is “way down,” as “nobody seems to know what value is today.”

“We are staying active, talking to a lot of lenders, kicking tires,” he said. “It seems like a lot of lenders are on the sidelines right now, but the long-term investor clients are still in the market and looking for deals. They’re just fewer and further between. And then it’s find a lender or loan structure that makes the deal work.”

“Nobody is choosing to transact,” said Seth Grossman, Senior Managing Director – Meridian Capital Group. “Equity wants to buy and lenders want to lend, but it’s ‘what does your universe look like?’ There’s still a discovery process going on for pricing on the borrower side and will take a few more months to fully get through the system.”