Key takeaway:
- The demand for housing across the US isn’t slowing down anytime soon.
- Multifamily properties continue to draw significant interest from investors, lenders, and tenants even as the pace of multifamily housing construction cools.
- High mortgage rates also make single-family homes more expensive, which may encourage more people to consider renting multifamily housing.
- If you want to capitalize on this opportunity, consider taking out a commercial bridge loan.
- Bridge financing lenders can provide the capital you need to take advantage of multifamily property growth potential in this high-interest rate landscape.
Introduction
Now that we’re well into the third quarter of 2024, it’s safe to say that the year has been challenging for conventional bank lenders.
Stalwarts like Freddie Mac and Fannie Mae keep the lending wheels turning, but traditional financing routes are drying up.
It’s easy to see why traditional lenders are treading carefully. With sky-high interest rates, an unpredictable economy, and the shadow of global political tensions, the environment isn’t ideal.
Add upcoming elections and uncertain property values to the mix — not to mention last year’s bank jitters — and you see why they’re on edge.
In response, credit unions are also pulling back. Publicly traded mortgage REITs are tightening their belts on credit, and regional banks are keeping their cards close. Finding a non-agency multifamily loan is more challenging than ever.
So if you’re struggling to secure a loan for a multifamily building, you’re not alone. But don’t worry — bridge lenders are stepping up to fill this gap. Over the next 12 months, more multifamily real estate financing will be shifted from conventional banks to agile and responsive private lenders. Now is the best time to connect with a bridge lender who can navigate this changing landscape and secure the financing you need.
Pressure points
Banks are stepping back from offering mini-perm loans for multifamily property purchases — short-term loans crucial for commercial properties poised to generate income.
Why? A mix of factors squeezes the multifamily sector, including concerns about oversupply, climbing operational costs, and slowing rent increases.
The struggle is more accurate than ever for those locked in properties at tight cap rates in 2020 and 2021 with floating rates.
Their projections for net operating income growth aren’t hitting the marks they expected, and many are now scrambling to cover the costs of new interest rate caps, which keep floating rates from skyrocketing.
They’re also hustling to top off their interest and operating reserves while grappling with negative leverage (having more debt than their property is worth).
Particularly in the Southeast and Southwest, there’s a lot of worry over too much inventory, pushing banks under regulatory scrutiny to reduce their stakes.
This has opened the door for private lenders and debt funds to fill the void with mini-perm loans from which banks are now shying away.
Increased demand reshapes the market.
Looking at construction trends from 2023 and this year, it’s clear that Class A properties are still struggling despite a significant workforce housing shortage.
Millions of people who recently arrived in the country — many currently staying in hotels or other temporary accommodations — are looking for more permanent homes.
This is driving the demand for workforce housing, particularly affordable housing targeted towards individuals and families who earn between 80% and 120% of the area’s median income.
Given the existing shortage, this segment is expected to become a significant driver in multifamily investment.
High mortgage rates are also pushing more people to rent instead of buying homes, further increasing demand in the rental market.
Brighter prospects on the horizon
Due to its proven stability and solid historical performance, multifamily housing remains attractive to international and domestic investors despite economic fluctuations. Newer assets located in populous centers with significant employment opportunities are particularly sought after.
Bridge lenders predict a thinning in the new supply pipeline over the next 18 months because of the stark reduction in new construction over the past year.
According to the latest reports from the US Census Bureau and the US Department of Housing and Urban Development, only 278,000 multifamily units were under construction in May — a sharp 51% decrease from the previous year.
It’s not all doom, though. The situation is expected to improve in 2025, providing a potential exit strategy for short-term one- to three-year financing offered by bridge lenders.
There are plenty of opportunities for private lenders, who—even though they’re maintaining a cautiously optimistic stance—see considerable potential in markets marked by positive net migration and strong demographic profiles.
Short-term opportunities in a shifting landscape
The US economy remains resilient despite pressures on the CRE segment and the real estate market. Prospects of a soft landing are becoming more vital for the second half of 2024.
CRE analysts expect positive shifts in the economic backdrop, potentially including falling short-term interest rates.
Investments in commercial real estate have become less risky recently, as indicated by the narrowing spreads on commercial mortgage-backed securities and commercial real estate collateralized loan obligations.
However, there is still a risk of a recession due to political problems and uncertainty about the Federal Reserve’s interest rate decisions.
Bridge lenders will likely keep investing in multifamily properties because they believe it’s an excellent long-term investment.
However, there are conservative loan-to-value ratios compared to 2021 and 2022, leading to either cash-neutral or modest cash-in refinancing due to stringent property valuations. You may need to put more money into the deal if you’re a borrower.
Rent increases for multifamily properties may slow down, possibly delaying some sponsors from hitting their business targets for an extra year or two.
However, there are still good opportunities in the multifamily sector, especially in the Sun Belt, where the current oversupply is expected to stabilize soon. Things may improve in the next six months, which could be the end of the most challenging times.
Waiting for change and new opportunities
We’ll likely see at least one interest rate cut in 2024, but don’t hold your breath — these cuts will roll out slowly.
Until then, conventional lenders might take their time re-entering the market, so it might be challenging to refinance multifamily properties until 2025.
Until rate cuts take effect, the banking system will remain tight, and bridge lenders will be the go-to for unmet demand.
If you need a funding strategy to help you manage the current financial climate more effectively, consider taking advantage of shorter-term bridge loans. These come with flexible prepayment options that allow you to refinance when the rates drop.
Expect these trends to continue until a more explicit consensus exists on commercial real estate values and fundamentals.
Once the Fed clarifies rate cuts, transaction volumes should spike back up, and conventional lending will make a strong comeback. Bid-ask spreads will narrow and boost transaction volumes.
By mid-2025, there should be a gradual return to market equilibrium and renewed lending enthusiasm from credit unions, regional banks, and other conventional lenders as their confidence in the market fundamentals solidifies.
Get a bridge loan from Private Capital Investors.
Are you a commercial real estate investors needing fast and flexible financing now? Private Capital Investors can help.
We specialize in bridge loans that provide quick liquidity to bridge your financial gaps and can lend across the US, including major markets like Miami, Denver, Massachusetts, Phoenix, and Texas.
Whether you’re repositioning a property, adding value, or undertaking a significant rehab, our bridge loans can give you the funding you need to act quickly.
You don’t have to wait for traditional financing because bridge loans are much faster — in fact, you can have funds in as little as 14 days. With loan amounts up to $50 million and terms from one to three years, we offer competitive rates starting at just 7.5%.
Our loans come with the assurance of a first mortgage lien and include practical features like monthly tax, insurance escrows, and replacement reserves.
Key features at a glance:
- Get your loan approved within 24-48 hours and access funds in 14 days.
- Loans up to $50 million with terms ranging from 1 to 3 years.
- Enjoy rates as low as 7.5%.
We cover a wide range of property types and transaction scenarios, from non-stabilized properties to luxury residential and mixed-use developments.
Our experienced team of private commercial real estate lenders or CRE professionals are here to analyze your specific needs and help you secure the best rates and terms. Are you dealing with a vacant building, a special-purpose property, or a property in foreclosure?
We understand the CRE market and can help you navigate complex situations.
Contact our team here at Private Capital Investors today to discuss how you can use our quick, reliable, and sensible bridge loans to fund your next CRE investment.
