By Nate Gant, SVN Cornerstone Advisor

 

In the last year, multifamily lending has been on a wild ride. In Q1 of 2022, as multifamily specialists, we were primarily concerned with one fundamental piece of the transaction: securing the smallest amount possible a buyer had to put down to purchase an asset. Fast forward 12 months to April, 2023, and although we still have the same focus, we now have to juggle other considerably significant variables, including interest rates and debt coverage ratios (DCR).

Q1 of 2022 was the definition of easy lending; many deals were done with less than 20% down, debt service coverage ratios hovered around 1.2, interest rates dipped as low as 3%, and 10 year notes with amortization over 25 years were common..

I personally noticed a shift in early April, 2022. I had two deals under contract: a $17,000,000 complex and a $5,250,000 complex. In one day interest rates rose 1% point and the amortization time frame had dropped from 25 years to 20 years. That same day my buyer called to inform me that they would be terminating their contracts. If the buyer had chosen to close on their property under those terms, they would have lost $60,000 per year. An important thing I have learned as a broker is that investors don’t like to lose money on a monthly basis, let alone a yearly basis.

This year the headwinds are pushing stronger. Interest rates have continued to rise, and on deals under 5 million we are seeing rates between 6.5%-7.5% with shorter amortization periods and most down payment requirements between 35-50%. Rising vacancy rates and tempered rents have only added to the list of influential variables.

Despite these conditions, strong demands remain in place for the multifamily sector, particularly when the correct financing is provided. With capital provided through traditional lenders becoming more limited and expensive compared to the last decade, owner financing has emerged as a reasonable solution.

For owners with assumable loans, or even the ability to play the bank, this is a unique opportunity. Owners could achieve a higher sales price than what would have been possible through traditional financing with the lower interest rates of 2020-2022.

In three recent offers that my team has written utilizing owner financing, the owners were offered a sizable down payment and a monthly payment that was significantly higher than their current NOI. Imagine that – a large down payment in your pocket, and your monthly net income has increased!

Navigating the ongoing ride of today’s multifamily market can be taxing, but there is an opportunity right now to mitigate your risk and capture the highest pricing we may see in the foreseeable future. If you have been considering selling because of retirement or recent life changes, this is the time!

 

Nate Gant is a commercial real estate broker with SVN Cornerstone in Spokane, WA, specializing in Multifamily and Industrial Sales. With a strong focus on helping multifamily investors maximize their income and financial outcomes, Nate brings a wealth of experience and knowledge to his work. To get in touch with Nate, email nate.gant@svn.com or call 509.993.4440.