At the peak of the last investment real-estate cycle in 2006-2007, investors borrowed hundreds of billions of dollars to finance the acquisition of investment properties from coast-to-coast. While many loans went into default during the ensuing financial crisis as building owners were unable to service the principal and interest on their obligations, the vast majority of that 10-year debt survived the crisis and is now coming due over the next 12 months. This coming wave of mortgage refinancing is just one piece of an ever-evolving real estate debt marketplace.
For the non-institutional investor, real estate opportunities are only as viable as the money you have available to invest. With real estate fundamentals remaining strong, the debt markets are quite favorable for investors, primarily in the multifamily sector. As home ownership declines to 50-year lows, lenders continue to view apartment properties with high occupancy and strong rent growth favorably. While there are some concerns about overbuilding of Class A multifamily in many submarkets, lenders remain bullish on Class B and Class C assets.
Mortgage financing remains available from a variety of sources, ranging from banks and private lenders, to quasi-government agencies like Freddie Mac and Fannie Mae, to the resilient CMBS (commercial mortgage backed security) market that was at the heart of the last financial crisis. Likewise, interest rates remain near their historic lows for a variety of terms and products.
That said, banks have tightened their underwriting standards for commercial real estate loans as they face increased scrutiny from regulators. As such, lenders are doing more due diligence than in the past and making sure that both the borrower and investment have the necessary wherewithal to support the debt service expense and avoid default.
One of the shifts we are seeing among lenders is the requirement that investors bring more cash to the closing table. Long gone are the days of highly leveraged properties with little buyer equity in the deal. While “agency” programs are increasing their lending and continue to offer 80 percent loan-to value financing, commercial lenders have continued to pull-back on multifamily lending. The tighter underwriting is evidenced in lower loan-to-value ratios and shortening of interest-only periods. As a result, real estate investors working with commercial lenders will be required to put up more equity in return for loan approval.
Despite the tighter underwriting, mortgage financing for real estate is readily available, and low interest rates are luring borrowers for both acquisition and mortgage refinancing. Banks and private lenders are particularly eager to make loans to fully-occupied apartment properties with steady income from rents. Construction financing for new apartment development is, however, more difficult to obtain as lenders are increasingly concerned with overbuilding of new Class A product in many submarkets.
With interest rates low and real estate values rising, some investors are also looking at cash-out refinancing, either to raise capital for additional acquisitions or simply profit-taking. For the former, the challenge becomes where to reinvest in a market in which asset values are in many cases at record highs. There are pockets of real estate investment opportunity all around, and investors are taking a closer look at secondary and tertiary markets, primarily Class B and Class C assets, for higher returns and repositioning opportunities. We are seeing many obsolete commercial and mixed-use properties get a second life due to value-add investment and strategic financing. As we wrote a couple of months back in our blog post, “What’s Happening in the Westchester Real Estate Market” (June 23, 2016), “New zoning regulations present an opportunity for investors to become early adopters,” submarket specialist Steven D’Ambrosio of Northeast Private Client Group, said. “Vacant retail or commercial space in many of Westchester’s markets is prime for adaptive reuse and presents an opportunity for investors to repurpose assets and make capital improvements to maximize their value.”
Are you looking for an investment sales broker who with a deep understanding of the lending and property value markets? We can help. Contact us today.