Banks are more readily opening their wallets again to provide debt financing for multifamily for-sale and rental projects. But some banks still view this space cautiously, as they see competition now coming from an expanding host of non-bank capital sources. Other banks, while eager lenders, nonetheless are watching for signs of overbuilding, particularly on the luxury side of the spectrum, and looking for clues of where rents might be headed.
“We are guardedly optimistic about this product type,” says Jim Reynolds, executive vice president with Texas Capital Bank in Dallas. “There are a lot of lenders in this market, and it’s been the product de jour for the past few years.” At the moment, TCB is considering lending requests only from existing customers in Texas
Wells Fargo, the country’s largest commercial real estate lender, has seen a “dramatic acceleration” in lending competition over the past six months. “Everyone is looking for returns, and the real estate space is a good place to get them,” observes Chip Fedalen, Wells Fargo’s executive vice president and group head of institutional commercial real estate. That competition, however, has not tempered Wells Fargo’s longtime avidity as a lender to multifamily projects, for which it has been “a consistent provider of debt capital,” and, coming out of the housing recession, “a ‘first mover’ in this space,” says Fedalen.
Several commercial banks remain active in this space through the FHA 221(d)(4) program, which insures mortgage loans to facilitate new construction or substantial rehabilitation. This week, for example, Fairfax, Va.-based builder/developer VanMetre Cos. secured a $55.7 million FHA construction loan through M&T Realty Capital Corp. (a subsidiary of M&T Bank) to develop a 315-unit apartment complex in Woodbridge, Va.
Brian Sullivan, a spokesman for HUD, says FHA is on track this fiscal year (which runs through September 30) to issue about the same number of 221(d)(4) mortgages as in fiscal 2012, when it issued loans for 75 projects with 27,546 units totaling $2.7 billion. However, says Sullivan, later this summer FHA might exhaust its multifamily commitment authority, which has to be re-approved by Congress.
Any pullback in this FHA program probably wouldn’t slow down public or large private builders that can access public and private investor capital. But it could create some difficulties for private midsize and smaller multifamily builders that are more likely to have trouble securing bank financing, says Tom Farrell, the former Bank of America executive who is now director of Builder Lending for Sabal Financial Group, a Pasadena, Calif.-based private equity firm. “The smaller builders are the ones who need the most help.”
Sabal, which is providing capital only for for-sale multifamily projects at the moment, recently opened an office in Orlando, Fla., and is looking to generate more business in the Atlanta and Charlotte markets. It has also been getting “a lot of traction” from customers in the Pacific Northwest.
Sabal is a nonrecourse lender, and its maximum advance rate is 85 percent loan to cost, which compares to the 60 percent to 65 percent “industry standard” for banks, says Fedalen. Some banks, apparently feeling they are getting priced out of deals, have started pricing their debt lending more aggressively, says Drew Hudacek, chief investment officer for San Francisco-based Sares Regis Group, a multifamily builder/developer.
“Debt availability is as good as it’s been for a long time,” says Hudacek, whose company—which specializes in 200- to 500-unit projects—has relationships with a cluster of regional banks, including Comerica and PNC. This builder prefers to put more equity into deals to get better terms from lenders. That equity can equal as much as 35 percent to 45 percent of the cost of the project. “We would rather pass on a deal than to take too much risk on a recourse loan.”
Reynolds of Texas Capital Bank notes that builders’ private-equity partners generally are not allowing them to leverage their projects above, say, 70 percent of cost. “It’s a self-policing thing. But we’re always willing to give up some price to get more [builder] equity into a deal.”
Hudacek thinks the apartment market “has many good years ahead of it.” But he is quick to note that it's still tough to find financing for a good development deal in the Bay Area, partly because of the time it takes to get multifamily projects completed in northern California.
Fedalen of Wells Fargo adds that while multifamily “is a quality-consistent space,” it is subject to cycles “and demand isn’t independent of the single-family for-sale market.” He and Reynolds of Texas Capital are concerned that too much multifamily product is being built for upper-end, higher-rent customer, which could eventually lead to overbuilding and value depreciation.
Sources contacted for this article also don’t expect much rent appreciation over the next year or so. But that dynamic won't alter Wells Fargo’s lending practices because, says Fedalen, because “we underwrite for today’s rents, not forecasted rents.”
John Caulfield is senior editor for MFE’s sister publication Builder magazine.