Value-add apartment investors are back in action, and they are driving a boom in the bridge lending market. It’s all thanks to the great migration during the pandemic. As people traded urban living for secondary markets, including tech hubs, apartment rents in small metros and suburban markets climbed to record heights—and the trend hasn’t stopped in 2021.
“Rent growth has supported transitional business plans where sponsors are buying properties with the idea of investing additional capital into those properties or executing a rental increase plan,” Alex Cohen, CEO of Liberty SBF, tells GlobeSt.com. “We are seeing a lot of bridge demand from borrowers that are executing on those types of business plans.”
In the current market, value-add business plans are most viable for mid-tier investors focused on properties in the $5 million to $25 million price range and located in cities with strong rent growth. “We tend to finance what we call emerging institutional sponsors,” says Cohen. “Those are middle market investors that have 10 to 15 projects under their belt.”
There is liquidity to meet the demand for bridge loans, but Cohen says that it is limited, especially compared to other areas of the market, like core and core-plus investment. “Liquidity in this area in the market, particularly for non-recourse loans, is not as deep as in the institutional market,” he says. “That is where we think believe we can add a lot of value compared to debt funds and institutional investors, that’s why we play in that space.”
For that reason, securing a bridge loan on a value-add deal takes a strong business plan, and more importantly, a realistic gauge of rent growth in the market. Cohen is bullish on long-term rent growth, but he also doesn’t expect the same rents to increase at the same velocity as they have for the last year. “We believe that we will continue to see increased rent growth, but it will plateau,” he says. “Borrowers need to understand the rent growth story in the submarket where they are operating, and they need realistic pro forma rents with realistic operating expenses.”
Rising interest rates—which many experts have come to expect—could derail the activity in the value-add market. However, Cohen says that the foundational supply-demand imbalance in multifamily will keep fueling rent growth, serving as a strong counterbalance to rising interest rates. “The market is closely watching interest rates, and conventional wisdom would suggest that a rising rate environment and rising inflation would put negative pressure on asset prices, but I think there is a fundamental story here that will continue to support asset growth, particularly in emerging markets for the next two years,” says Cohen.
“We feel very good about 2022.”