During the past year, the multifamily market seems to have entered a state of suspended animation. According to Real Capital Analytics, sales volume totaled just $89.6 billion during the first three quarters of 2023. This is just 36% of the $251.9 billion recorded over the same period in 2022 leaving this year on track to have the lowest annual total in nearly a decade.
Buyers and sellers alike are sitting on the sidelines, waiting for the Federal Reserve’s rate hikes to crest and new market norms to emerge. In the meantime, sellers are reluctant to price their properties below post-pandemic highs, while buyers are waiting for valuations and cap rates to reflect interest rates more accurately.
The gap between buyers and sellers is also reflected in depressed originations. The latest figures from the Mortgage Bankers Association (MBA) show that at the end of the third quarter, year-to-date multifamily mortgage loan originations were just 49% of their third-quarter 2022 total.
Originations have not fallen as much as transactions because they include an increasing number of refinancings. As we enter 2024, those refis could be the spark that restarts the market and there are significant signals from the agencies that they’re here to help.
The Approaching Refi Wave
The sheer volume of loans coming due over the next two years underlines their disruptive potential. According to the MBA, multifamily mortgage maturities (bank and nonbank) will surge from $184.9 billion in 2023 to $254.6 billion in 2024, accounting for 12.9% of multifamily loans outstanding. The MBA expects maturities to remain elevated during 2025 as well when the group predicts they will fall slightly to $242.6 billion or 12.3% of loans outstanding.
As every loan in this half-trillion-dollar overhang reaches maturity, borrowers will come face to face with the consequences of the sudden, sharp run-up in interest rates since March 2022—but not all borrowers will find themselves in the same position. All refis will be constrained by debt-service requirements, but borrowers with standard bank or agency loans, typically with seven- to 10-year terms, should be able to manage the transition. Typically, their loans have amortized over time, and the value of their assets has increased. Solutions like mezzanine financing or preferred equity will help these deals pencil out.
Those with bridge loans will be in a more difficult position. All 300 executives who responded to a recent survey of the multifamily industry Lument conducted were concerned about the amount of bridge debt coming due in the next 12 months—with 76% considering themselves “moderately” or “very concerned.” Many borrowers with bridge loans closed them in the hothouse environment of the early 2020s, characterized by elevated values, low cap rates, and low interest rates. Some of these loans, especially those with a floating rate based on the 30-day SOFR average, are already in trouble, and even borrowers with fixed-rate loans face difficulties. In many cases, no infusion of capital will enable borrowers to refinance successfully. Rather than walk away, they will put these properties on the market—and price them to sell.
At the same time, many investors holding properties off the market will be running out of time. One of the most eye-opening findings of the Lument survey was that nearly all the respondents (90%) said their companies were most likely to be net sellers over the next 12 months. When you add these sellers to those unable to refinance, we are reaching the critical mass needed to restart the market.
The Agencies Step Up
Those investors who can make a convincing case for refinancing, however, face another impediment. Of the $254.6 billion in loans coming due in 2024, $125.4 billion (49%) are held by banks, which have lost some of their appetite for commercial real estate loans following the failures of Silicon Valley Bank and First Republic. According to the Federal Reserve’s November 2023 Senior Loan Officer Opinion Survey, the net percentage of banks tightening (rather than loosening) standards for multifamily loans was 65.5%. And while banks have by no means abandoned the market, multifamily investors can expect wider interest-rate spreads, higher debt-service coverage requirements, and limited interest-only terms.
In response, Fannie Mae and Freddie Mac, whose common mission is to ensure liquidity in the multifamily market, have stepped up and are exploring new approaches. During the first two quarters of 2023, for instance, the agencies offered 35-year amortization to address debt service constraints. While this structure is no longer being offered, Fannie Mae has shown its openness to structuring creative solutions in the future.
By making more five-year loans available, the agencies have also responded to multifamily borrowers’ view that rates will peak and then decline over the next few years. If rates do decline, holders of these five-year instruments will then have the option to roll over their loans into seven- or 10-year debt. Freddie Mac, for instance, has historically closed approximately $2 billion in five-year loans. This year, it has already completed more than $15 billion. Both agencies are likely to continue this policy into next year.
Furthermore, the agencies are also working to address the interest among investors in preferred equity to address gaps in financing. The agencies are actively studying their options and are expected to provide guidance in 2024.
In other words, Fannie Mae and Freddie Mac are positioning themselves to play a significant role in helping investors through the upcoming wave of refinancings.
Refi Proactively
Against this backdrop, investors would do well to take a closer look at agency financing, choosing their agency lender carefully. First and foremost, they should look at lenders with long, productive relationships with Freddie Mac and Fannie Mae. They should also seek lenders with a record of keeping open lines of communication with their agency partners and working with them to find solutions for clients when unusual circumstances arise.
One of the standout findings of the Lument survey of multifamily executives was that only 1% said their lender met all their needs. Accordingly, borrowers should seek out lenders offering a wide variety of platforms and products, enabling them to offer solutions that address individual borrower’s circumstances—and to change course, for instance from FHA to Fannie Mae— if obstacles arise. This should include non-agency as well as agency platforms, allowing them to embrace as much of the capital stack as possible, including balance sheet loans, mezzanine finance, and preferred equity. And firms with an in-house investment sales group offer borrowers the added advantage of enabling them to switch gears quickly if all avenues to refinancing are blocked.
It should also be mentioned that borrowers themselves have a part to play. The agencies have made it clear that in 2024 they will be taking a close look at property conditions. By putting their property’s best face forward—for instance, catching up on deferred maintenance and installing energy-saving upgrades—borrowers can ensure that the merits of their loan application are unambiguous and as clear as possible. Finally, borrowers should seek out an agency lender that has assembled an experienced team. Team members should have an established track record of working together smoothly through more than one cycle. Great people, great products, and close agency relationships can help borrowers with maturing loans secure the certainty of execution that was so important to executives in the Lument survey.
