HFO-TV: Current Trends in Multifamily Lending & Finance

HFO-TV: Current Trends in Multifamily Lending & Finance


Male: Welcome back. You’re watching HFO-TV. Greg: Welcome back to HFO-TV. I’m Greg Frick,
partner here at HFO Investment Real Estate. Today, joining me is Mark Paskill, Vice President
at Intervest Mortgage which is a member of Umpqua Bank. Mark: Thank you. Greg: Thanks for coming. Mark: Thank you. Greg: I think we want to talk a little bit
about what’s going on in the multifamily side on the finance, the multifamily market in
Portland. Give me a little rundown on where we were last year and what you’re seeing going
forward this year in terms of rates, activity, refinance versus sales. Mark: We’ve seen a continued boom of refinancing,
for sure. Everyone’s looking at the rates and seeing how the rates are great, what can
we do, how much money can we pull out. Rents have moved, so equity has moved on a lot of
people. So I’d say it’s a very active year. We’ve seen probably more Refis than sales. Greg: And are you looking at, in terms of
trends, is it… are we seeing maybe more life companies coming back in, the CNBS market
jumping back in? I know we hear that. We’ve seen that in some of our transactions. What’s
your take on it? Mark: Yeah. It depends on the size of the
property. We’re seeing the smaller million to million five properties are being done
mostly bank. Greg: Okay. Mark: We’re seeing CNBS is back but more transactions
where people are having issues or they’re going for max leverage. The biggest change
has been at the agencies. Fannie and Freddie have changed. Greg: Right. Mark: They came out with a mandate of doing
no more than, I think it’s 30 billion per agency for this year. That slowed it down.
The agency pricing has widened a little bit with the idea that they don’t want to do more
than the 30 billion. Greg: Got it. Mark: So we’ve seen agencies shift around.
Now Freddie Mac has come out with a small balance program to pick up some of that slack
that Freddie can’t do. Greg: And who else is coming into that vacuum
as they start backing out a little bit? Not that they’re completely out. Mark: Well, they’re more backing out or their
pricing has widened for the larger transactions, so their using… 50 units is the break point.
So what we’re seeing is over the 50 units, you’re starting to see the life companies
beating the agencies. CNBS is beating the agencies on the real, nicer couple hundred
unit buildings, as they can. Greg: Classic [inaudible 00:02:11] Mark: Exactly. Greg: And on the underwriting side, I know
we’ve… a lot of people are comparing the market as it was before the crash. What’s
changed in underwriting on the multifamily side? I know there’s liquidity questions now
have come to the forefront of a lot of our transactions. The building has the debt coverage
but the liquidity of the borrower. What’s your take on that? Mark: Yeah. We’ve seen that. The liquidity
of the borrower has always been very paramount. We’re finding that obviously no one’s really
worrying about debt service coverage because the rates are four percent, three and a half,
everything works at that level. But we’re seeing more of a concern of management experience.
What can they do? What can they not do? That’s an interesting… we’ve seen more pressure
on that. Greg: Right. Then from your standpoint we
had… we didn’t see a lot of distress in this market. We’ve seen a lot of it… some
that had to do with management, maybe they had another asset. Is there any concern of
where the market’s been? What’s going to happen in the next couple of years in terms of rates
and how that’s going to affect? Mark: It’s interesting. We saw that about
two years ago where people were really concerned. Okay, we’re underwriting a transaction at
four and a quarter and it’s getting done and what’s going to happen in three to four years?
Now it seem like that pressure has really fallen off. It’s not a conversation; people
aren’t that concerned that we’re talking, okay, the Fed may bump short term rates, maybe
they don’t. They probably won’t is what our take is. The feeling is that there’s a long
ways to go before short term rates move. So there hasn’t been a lot of that pressure. I think the bigger concern from the lender’s
side is looking at the rents. Can the rents… are they sustainable in the long term? But
we’ve also seen an interesting trend recently — a lot of lower leverage transactions where
people are, for whatever reason, they’re not max leveraging it out. That could be a factor
of risk tolerance. It could be a factor of we don’t know where we’re going to put our
money. It could be a factor of an aging investor base that’s getting more ready to retire,
and so they’re not trying to leverage it out. But we’ve seen more transactions under 50%
in the last 4 or 5 months than we probably have ever seen. Greg: Really? Mark: On the smaller five million and under
space. Greg: Right. Now, we’ve seen [inaudible 00:04:21].
It’s the same question we have. Is it because of risk tolerance? Is it uncertainty of what’s
going to happen in the future so I’ll lower my exposure? That’s been an interesting…
Again, real estate has always been “leverage is king”, especially in the multifamily
market because of the perceived safeness of the investment. Now we’ve got people saying,
“Hey, I don’t want to go above 50%; it’s going to protect me on the downside.” Mark: But it’s interesting, because the new
Freddie Mac program which is, on the agency side, probably one of the most competitive
programs today for… they say it’s a million to five million, but it’s really limited up
to 50 units, so they can go back to seven and a half million as a real cap. It’s where
they balance out, but they can do up to 80% LTV, declining balance prepay. So it’s…
we’ve been doing a bunch of those transactions in our office. And that’s really attractive. Greg: Are they able to do that on a Refi too
or is it just more of on a purchase? Mark: On Both. Greg: Okay. Mark: Yep. So their tolerance for cash out
is very high. It’s really a neat program. Greg: And what about repositions? Acquisition
rehab or reposition place? Mark: Most of those have been around interior
unit renovations, it seems like. Getting the rents, buy a complex, get it, do a partial
gut or a rolling gut depending on . . . Greg: Right. Mark: We’ve seen that. We’ve seen people doing
it out of cash. We’ve seen people looking for some bridge loans, some construction loans. Greg: Okay. Mark: But we’ve seen less traditional construction
lending for that in more cash. Greg: So it’s more cash coming in, just some
kind of hold back or something like that? Mark: Yeah. Greg: I know you probably get asked this all
the time as we get asked as well, what is the recommendation moving forward in terms
of interest rates? I mean it’s… we’ve been saying for 10 years, “Geez, rates at some
point are going to go up. We’re going to get back to the median.” Do you do a five year,
seven year… what are you seeing? People still sticking in the five seven? Mark: We see it on… it’s almost generational
age. You look at a general person, if they are 20 years old or 30 years old then they’re
buying an asset; they’re not really thinking that this is a retirement asset. They’re thinking
it’s a retirement capital because they’re going to move through different assets. Greg: Right. Mark: So they’re generally go a five and a
seven or maybe even a three year. We’ve seen people that have maybe been in the industry
longer, or they’re older, they’re getting closer to a transition or retirement. They’re
going for a longer term fix. But we are seeing in the five million and under, almost all
that borrowing size, that loan size, people are doing something with a flexible prepay.
Because they’re thinking something’s going to happen. Over that asset, then we’re seeing
more hey I really want 10 year money or I want 15 year money. That’s where we do a lot
of work with life insurance companies. Greg: For that? Mark: For that space. Greg: Yeah. Are they getting creative on their
prepays? Mark: We haven’t seen that. There’s a lot
of money in the market in both debt and equity. But the amount of equity we’re seeing a
lot of debt in the market is just phenomenal. So we’re seeing life companies are very active,
banks really active. Agencies, even though they’ve got a cap, they’re still being very
active in the space. Agencies make up about 30% of the overall financing market if you
look at it in whole. But some of the life companies are burning through their allocations.
A life company lender has maybe a billion and a half allocation to spend for the year.
Sometimes that’s a fluid number, sometimes it’s a hard number, but a lot of them are
burning through them this year. Some of them see that as a positive because that means
next year they can have more allocations. Greg: Right. Mark: Some are more concerned about, well,
since I’m burning through my allocation, maybe I’ll move my rates. Because they want to capture
that last part of the yield curve in the second half of the calendar year. It’s an interesting
dynamic to see a portfolio lender, how they manage and disperse their funds. Greg: Yeah, with a quarter by quarter, month
by month. Mark: Exactly. Greg: And what about tertiary markets? Are
we seeing more or less with the tightness in demand and limited… is it Salem’s now
on the map. I mean they were on the map but from a lending side, is that an easier sale
now or is it still… they want to be with in the . . . Mark: You know what’s interesting is that
it’s not necessarily a harder sale in terms of where the price per unit is or the cash
flow is. It’s more of which lender will go into it. You almost have to shift your hand
and say okay, well we’ve got a transaction. Say a guy’s buying a building that’s off the
I5 corridor, there are certain lenders we work with that will not go to those markets.
National banks won’t go to them. Our parent company gets a little less interested in a
transaction if it goes… if it’s far off the I5 corridor or in a smaller market. We’ve
got credit unions. We’ve got life insurance companies, ironically, that will follow the
right borrowers in some of those markets. Greg: Okay. Mark: Some of the community banks will go
into those markets as well. But it’s not a slam dunk, well, of course our financing structure
is going to be X Y Z because the property is in… I’ll say Eugene and Veneta or something. Greg: Right. Yeah. This is just a… we’ve
been hearing a lot of talk within Portland on unreinforced. Have you heard any talk on
the lender’s side on how they are going to look at that? Because on our side, on the
investment side, the question now is: If I’m looking at an unreinforced or there is a potential
of having to do seismic upgrades, how do I price that in, in buying or selling at this
point? Nothing is concrete, but it looks like there’s going to be something coming down.
Have you had any conversation? Is that even on the map yet? Mark: We’ve seen a lot of unreinforced transactions,
and we’ve done our fair share and a lot of lenders have done their fair share. The question
becomes: How do you quote a loan when you don’t know the whole transaction on reinforced? Greg: Right. Mark: So generally what we’re seeing is it’s
going to be a lower leverage or a very sophisticated borrower where the thought process is: In
an earthquake, do they have a financial wherewithal to step up? Greg: Okay. Mark: Or trying to keep your loan so low that
your insurance proceeds are clearly going to take you out. But there are definitely
some lenders that will not touch them. Greg: Right. Mark: Or they’re going to say, “We’re not
going to do more than 60% or something.” Greg: So it would be an LTV adjustment to
offset the risk? Mark: Generally. Yep. A lot of the unreinforced
masonry are going to be in an urban core; you’re gonna have really high land value,
so we’ve actually done a couple of transactions where the land value… I mean we were like
110% of land value or something. So really, you’re exposure to the building is really
minimal. Greg: Right. You’ve got the land security. Mark: Yeah, you get the land as security. Greg: Yeah, it’s a question we’ve had just
in terms of underwriting and projecting out who’s making the adjustment and nothing’s
been official. It’s coming, so we just arbitrarily put a number on there and try to cover it.
But it’s been an interesting deal. Mark: Well, we’ve seen some lenders that are
less sophisticated in the multifamily space and they will lend on an unreinforced masonry
because they don’t do a lot of multifamily. They don’t see the perceived risk or they
are more comfortable with the borrower’s strength and so they’re: we’re doing a 60% loan and
we like the borrower. Greg: And with rates this low, are we looking
at more 15- or 20-year nontraditional. Traditionally multifamily is 25- to 30-year ams [SP]. Are
you doing any 15-, 20-year fully am where we can still get some positive debt coverage
because the rates are so low and somebody is really thinking as a long term, it’s going
to sit in the family for 15 years I just want to . . . Mark: Yeah, definitely. We’ve been doing…
I mean that’s all traditionally going to be life companies. Some of the national banks
have their 15, 15, 15, 15-year am, 15 [inaudible 00:11:34] or term. The banks tend to be a
lot… it’s more of a secondary product where for life companies it’s more of a main product
for them so they can typically beat it in rate and structure. Greg: And what are the new hot points in terms
of underwriting? Maybe that’s different for the audience that doesn’t know; things that
are more on the radar or on the radar or getting more scrutiny from an underwriting standpoint
as we’re moving through the cycle. Do reserves need to be higher, making tax… I mean we’ve
had our new construction, it’s been property taxes. Are we allocating a right number for
property taxes? How are you guys dealing with that as we go along? Mark: For underwriting, I’d say maybe that’s
different this year than last year in an ironic… with the way the market is going, maybe it’s
even less, less intense. Greg: Really? Okay. Mark: Because there’s so much money that wants
to get out. I wouldn’t say it’s less in terms of what their main points are looking for
and not getting looser, but more confident in what they’ve collected. Greg: Got it. Mark: If that makes sense. So we’re not seeing
the: Oh on your tax return there’s this item and what in the heck is this and how did that
happen? It’s more of: Okay, that happened three years ago and not beat it up. Greg: Not today? Okay. And then what about…
do you have any… from a lender’s perspective, all the new construction we have in Portland
and Portland is on the map or the place to be in the west coast. Has there any rumblings,
life companies, the agencies of when is this party going to slow down or can we continue
this kind of rent growth? Are you hearing any whispers? When lenders start talking about
it, that may change the financing options. Have you heard anything like that in terms
of Portland? Mark: I think the lenders have been concerned
about the new construction for the last 36 months, but I think the market has been showing
that it’s going on but it hasn’t affected it yet. So I think the… after a while everyone
gets used to that concern and the concern goes away a little bit, but obviously the
concern is there. We see it on the portfolio lenders, the life companies are more aware
of it in terms of when they’re going to their credit committees than maybe the banking side.
Because the banks are looking at the appraisal, they’re talking to people. They don’t see
it out there where the life companies know that this is going to sit on their balance
sheet because of yield maintenance for a longer period of time. Greg: They may be sitting with it for 10 years,
15 years. Mark: Yeah, or a bank transaction is going
to have a declining balance. Prepay, easier to pay off; by nature it rolls more. Greg: Okay. Mark: So you don’t see that concern as much.
The agencies are definitely more concerned. Greg: Yeah. From our standpoint that has been
a big question: can we continue this rent growth, looking at wage growth? How do we
do that? Mark: In construction lending it’s interesting
because we see a lot of construction requests and the construction requests will change
based on lender demand as an aggregate in the market. So if we start getting a slew
of construction loan requests in a shorter period of time, a month, three weeks, you
can tell… or month and a half, you can tell that other lenders are now either full or
concerned internally on their existing book, so they’re saying no. So the borrowers are
maybe . . . Greg: Having to go other directions. Mark: Correct. Greg: Are you seeing that now? Have you seen
that in the last quarter? Mark: Yes. Greg: You have? Yeah. Greg: Because we’ve been asked from the development
side: what are some other options in terms of lending? It’s like you said — it almost
feels as if some of these traditional new construction, they’ve hit their allocation,
or there’s: Hey we’ve got enough exposure in this market, let’s dial it back a little
bit. Mark: We’ve also seen through this cycle the
traditional commercial players office, industrial, retail developers move into the multifamily
side, do some merchant building. We’ve seen probably more of them not being… not taking
on new projects today than they were a couple of years ago, which is an interesting… That
could just be where the available land could be. It could be where they inventory. They
came in, they did their projects. They would do five more if they could but they can’t
because they can’t find the land. Greg: Right. We’re not finding anymore easy
projects to do. Definitely. Well, thanks for coming in. If you guys have any information
for Mark, you can see his phone number and website down below, and we’ll see you next
time on HFO-TV. Thank you. Mark: Yep. Thanks for having me. It was great. Greg: Thanks. Male: Our entire office specializes in multifamily
real estate making HFO the largest multifamily brokerage in the Pacific Northwest. Your success
is our passion. Build your legacy with HFO. Call 503-241-5541 or visit our website at
hfore.com for more information.

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