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Multifamily bridge lenders remain active but with tighter underwriting

Image: Emerald Creek Capital

Bridge lenders will continue to fight over multifamily deals during the second half of the year, although rising rates could start to hinder underwriting and terms. There will be a flight to asset quality, deal size and more conservative exit underwriting. Lenders will widen their base assumptions on debt service coverage ratios and debt yields.

Keep an eye out for more focus on the exit, with regard to either a sale or a takeout perm loan. Bridge lenders are also questioning whether the lease trade outs, including rent bumps at renewal or rolling to new leases, are sustainable at these record levels, especially with inflation. Underwriting needs to be sound and proven out with back up data.

“Bridge lenders have had an amazing run in the past couple of years as Libor (and now SOFR) were stuck at very low levels and the Treasury remained low allowing the lenders to size to very low exit debt yields,” said Melissa Quinn, senior managing director at JLL.

Recent interest rate volatility and the rapid rise in costs will cause multifamily borrowers to consider all options including paying more for fixed-rate loans or going to the agencies.

“There are a small handful of bridge lenders that have recently rolled out fixed-rate bridge products hoping to capitalize on a sponsor’s desire to hedge risk. We will see if more enter that field,” Quinn said.

Due to the higher interest rate environment, multifamily bridge lending executions are becoming more challenging. For floating-rate bridge loans, the index will increase in lockstep with the Fed Funds rate.

“We recommend that developers and landlords be strategic and selective in this environment,” noted John Choi, vice president at George Smith Partners. “Success in executing multifamily bridge financings will lie with lenders that view the current market as an opportunity to win business and establish programmatic relationships. Cap rates should start to widen over the next several months, while interest rate and economic headwinds should slow transactional activity.”

Despite some volatility, bridge lenders still see plenty of interest from multifamily borrowers.

“Given recent rate increases across the industry, the price gap between bank and bridge financing has compressed significantly,” said Mike Cleaver, managing director at Emerald Creek Capital. “We’ve already seen a shift in more borrowers choosing bridge over more conventional options in the interest of closing time and flexibility. I think we’ll continue to see this in the near term.”

He added that market trends have obviously been unusual across commercial real estate for the past couple of years. While not as dramatically affected as other sectors, he said, recent market data for multifamily isn’t as reliable of an indicator as it’s been in years past.

“With many quality loan requests, we’re really looking for high-quality sponsorship,” Cleaver said. “The more confidence we have in our sponsors track record as an owner/operator and as a borrower, the more comfortable we are assisting on complex transactions and the one-week-close deals.”                            

Written by Sara Havlena

Havlena is the editor-in-chief of Crittenden Real Estate magazine and The Crittenden Report: Real Estate Financing, Retail Tenants Report and the Multifamily Report. She has been an editor with Crittenden since 2007 and worked on a variety of real estate publications during her time at the company covering a wide range of topics from restaurant expansion to real estate developers. She has been the lead reporter and editor of Crittenden’s flagship publication, The Crittenden Report, since 2011. She has a degree in Print Journalism from Cal State Fullerton, and resides in Orange County, Calif.

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