There has never been a better time to be a commercial real estate borrower. The cliché has been repeated over and over again over the past few years, but it is truer today than ever. The Fed has signaled that it will keep short-term rates near zero for at least three more years, and credit spreads have stabilized after rising in the early days of the pandemic. The net result is that we are living in an era with the lowest interest rates our team has ever seen.
Commercial property owners – and especially multi-family owners – often set interest rates in the lower to medium range of 2% for stabilized properties. But if you look past the headline-grabbing coupon rates, homeowners will be pleased to find that the choice of lenders and multi-family home loan programs is larger and more competitive than ever. Think of the Cheesecake Factory menu. This means that regardless of the age or size of your property, there is a lender and loan to meet your property’s needs.
The two largest agency lenders – Fannie Mae and Freddie Mac – increased their market share of total multi-family debt outstanding by 3.1% in the first quarter and continue to actively lend. Fannie Mae offers many attractive loan programs for borrowers looking for moderate leverage (60% to 65% LTV), flexibility in estate planning, and a shorter closing time with lower transaction costs. Fannie also offers very competitive prices on properties who have or are considering one of the many green building certification programs available.
Freddie Mac offers competitive programs for property owners looking for higher leverage (65% to 80% mortgage lending value), longer fixed interest periods, and refinancing with payout. Freddie is also an excellent source for floating rate bonds. For owners of smaller real estate, Freddie Mac offers a very competitive small loan program that offers the same flexibility and freedom of choice as a traditional agency loan but is tailored to smaller loan sizes by streamlining approvals and limiting closing costs.
While Fannie and Freddie often offer the most competitive rates and conditions for inquiries for 10-year loans with medium to high leverage, life insurance companies have the market for multi-family loans with shorter five- and seven-year terms with slightly lower leverage (less than 60% mortgage lending value). The lack of a secondary market for shorter maturity loans has forced lenders to raise their prices to the point where they are generally 25 to 30 basis points higher than life insurance companies. This has allowed life insurance companies to increase their market share in outstanding multi-family debt by $ 2.5 billion (1.5%) in the first quarter.
Life insurance loans offer other benefits that may be attractive to apartment building owners, including the ability to subscribe and rate the loan based on forward-looking statements (as opposed to recent tenant collections, which can be volatile during the pandemic), the ability to do that Finance loans before stabilization and the ability to fix the interest rate at the time of application. Forward rate locks (up to nine months), local service relationships, generous estate planning and transfer regulations, more flexible prepayment options, and the ability to forego taxes, insurance, and COVID-19 reserves are also benefits that are not common with agency loans.
There are also attractive debt capital options available to owners of transitional properties or property developers who are looking for construction financing. Life insurance companies, banks, and loan funds take out loans with future financing components that allow owners to purchase a property and finance the cost of future renovation work. Typical interest rates for these value-added loans are in the low to medium range of 4%. Life insurance companies are also actively seeking home loans for new apartment buildings that allow borrowers to hold low interest rates for 10 years or more and take home home loan refinancing risk off the table.
Regardless of a home owner’s priorities in finding 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 fitted with a variety of features and structures to provide the exact financing solution a property owner is looking for.
Featured in the November 2020 issue of CREJ from Multifamily Properties Quarterly