Financing Harder Than Ever to Get, Expert Says

This is the most difficult time for obtaining financing since Zelman and Associates started measuring this in 2012 and the number of floating-rate mortgage loans is headed to zero.

That is according to Mark Franceski, Managing Director, Zelman & Associates – A Walker & Dunlop Company, who was joined by Matthew Vance, Senior Director and Americas Head of Multifamily Research for CBRE, as part of a panel that last week discussed multifamily housing financing and investing at the Middleburg Housing Summit, hosted by Middleburg Communities.

Multifamily is the most preferred asset class among investors for the first time ever, according to the most recent CBRE client survey.

Vance said there’s $500 billion in dry capital on the sidelines and half of that is for multifamily.

An Eye on the 10-Year

The rising 10-year treasury rate has been grabbing all the headlines lately.

Vance said it and cap rates are not moving at a 1-to-1 relationship.

“We see the Federal Reserve making its first interest rate cuts in the first half of 2024,” Vance said. “What the Fed is doing is working, core inflation has been cut to around 1.5%.

“When this happens, interest rates and cap rates will come down swiftly (but won’t sink to pre-pandemic levels) and you should be ramping up right now to take advantage of that opportunity.”

According to CBRE’s Q3 Multifamily Cap Rate Report, issued last week, both going-in and exit cap rates for prime multifamily assets increased slightly in Q3 after the Federal Reserve’s 25-basis-point interest rate hike in July and the steady rise in the 10-year Treasury rate during the quarter.

Steady, yes. The 10-year moved higher last week and settled Friday at 4.78%.

Although CBRE expects that cap rates likely are near their peak, they could increase slightly into early 2024 if rates continue to rise, according to the report.

The average prime multifamily going-in cap rate has increased by 155 basis points (bps) to 4.92% since Q1 2022, exceeding the pre-pandemic 2018-2019 average by 70 bps, CBRE reported.

“Though some additional expansion is likely, particularly if the Fed raises rates again in November or long-term rates continue to climb, underwriting assumptions for prime multifamily assets are likely nearing their peak,” according to the report.

The spread between going-in and exit cap rates fell to 15 bps at the end of Q3—the smallest spread since CBRE began a quarterly survey of its investment professionals in 2014.

“This spread likely will remain positive provided that economic conditions do not deteriorate significantly,” according to CBRE.

Cap Rates Unlikely to Invert

It said average exit cap rates are not expected to decrease in the near term, so it is unlikely that they will invert on a national basis.

However, an inversion or parity between cap rates has occurred in some markets, such as Chicago, New York, Phoenix, Seattle, and Washington, D.C., CBRE reported.

For the eighth consecutive quarter, Austin had the lowest risk requirements on an underwriting basis among the 15 prime multifamily markets tracked by CBRE.

Furthermore, although risk metrics did not improve in any market during the quarter, they were unchanged in Houston, Los Angeles, and New York, CBRE said.

Some Avoiding High Insurance Markets

Insurance costs continue to weigh on multifamily owners, Franceski said, with 6% of those surveyed saying they would no longer invest in high-insurance premium markets.

However, a majority (56%) said they have not made any changes in their investing due to insurance rates and 38% have not exited any submarkets but have incorporated higher risk premiums in certain areas.