ADVERTORIAL THE TIME FOR MULTIFAMILY TRANSACTIONS IS NOW A conversation with Jared Sobel of Walker & Dunlop illustrates why lack of certainty on the future direction of the debt markets can be a powerful incentive to lock in rates. I n today’s multifamily arena, borrow-ers are advised to lock in deals as soon as possible due to constantly shifting interest rates and market dynamics. One month, a deal might be under-written at a spread above the 10-year Treasury, and the next month, the rate could change significantly. A statement from a Federal Reserve official or a posi -tive jobs report from the Bureau of Labor Statistics can cause substantial swings in the Treasury yield within hours. To combat the ebbs and flows of the capital markets, lending experts are ad-vising their clients to take the deal now — if it pencils out. “We encourage our sponsors not to think ahead or backwards, or focus too much on macroeconomic forces,” says Jared Sobel, senior managing director of Walker & Dunlop. “We take a more micro approach and don’t try to time the market to get every dollar possible, but instead do what needs to be done to minimize risk.” “We are pragmatic — enough so to tell our clients that if 20 basis points on an interest rate is the difference between a deal being successful or not, then it’s best not to transact,” he adds. in a few years at a better position in the market, with fewer prepayment pen-alties than in the past. This approach helps borrowers avoid the need to raise more equity, protecting longstanding relationships. In this “higher for longer” interest rate environment, multifamily bor-rowers are opting for five-year debt. Sobel says that more than 75 percent of his team’s deals fall into this category, as Fannie Mae and Freddie Mac have made their five-year multifamily loan products more attractive. Borrowers are also deciding to buy down their interest rates, which Sobel predicts will continue for the foresee-able future. “Rate buydowns make the equi-ty raise easier by reducing the total amount of equity ultimately needed,” says Sobel. “The agencies themselves have become more aggressive on rate buydowns to help stabilize the mar-ket.” New Multifamily Deliveries Underwriting Structures Walker & Dunlop offers flexible capi -tal structures to help borrowers avoid making additional capital calls, which could unsettle their investors. Financ-ing can be underwritten in a way that allows the borrower to sell or refinance The influx of new construction in the Northeast’s top multifamily markets is creating downward pressure on rents, which is challenging for existing prop-erties. As new units come on line, they com -pete aggressively for tenants, often of-fering similar or better amenities at comparable prices to older properties. This competition unfortunately com-presses rents and increases vacancy rates for older assets, especially in the region’s top multifamily markets. “We stress the importance of evaluat-ing the impact of nearby new construc-tions when considering new invest-ments or managing existing loans,” says Sobel. “While the rate of workforce housing in middle markets is at a cycli-cal high, our team has seen more new construction, Class A deals than ever before, especially in New York and New Jersey.” If you take a step back, it makes sense — borrowers can buy a new construc-tion deal at a cap rate that is a mere 200 to 250 basis points higher than it was in 2020 and 2021. Interestingly, cap rates for these newer assets now have smaller spreads compared to workforce housing deals, which, according to So-bel, have not experienced compression over the past two years. Complicating matters is that many Class A mortgages in the region are controlled by banks. These financial in -stitutions are navigating these supply waves while also contending with mar-ket forces beyond their control. Rebound in Deal Flow? For the multifamily investment sales market to regain momentum, it’s no secret that there needs to be a realistic alignment between buyers and sellers. Investors are looking for value, and until sellers adjust their price expecta-tions, investment sales activity will re-main sluggish. “A more aggressive stance from banks in terms of foreclosures could also instill a sense of urgency among sellers, potentially leading to more transactions,” says Sobel. Every Deal Matters Walker & Dunlop recently arranged a $110 million construction loan for this 246-unit multifamily project at 880 Atlantic Ave. in Brooklyn. Following the loan closing, the borrower, EMP Capital Group, noted that the firm’s ‘collective expertise and strong relationships provided us with a seamless process that guided financing to completion.’ From a high-level perspective, Walk-er & Dunlop is a publicly traded com-pany with a long list of institutional capital clients. The company is one of the larg-est commercial real estate finance and advisory services firms in the United States. Walker & Dunlop consistently ranks at the top among Fannie Mae’s DUS lenders and Freddie Mac’s Optigo network of seller/servicers. The company is multifaceted and has a team dedicated to private clients and family offices that own fewer assets and who might need smaller financing transactions. “Our approach has to be the same no matter the size of the deal or the assets under management of the borrower,” says Sobel. “The future of the real estate lending world is providing a service to every client. We want to grow with our clients by providing them with re-sources and capital, giving them every opportunity to succeed.” In August 2022, around the time when interest rate hikes were beginning to unfold, Walker & Dunlop arranged $388.4 million in construction financing through Bank of America for The Brook, a mixed-use development in downtown Brooklyn. The market was and continues to be a core area of business for the firm, which noted at that time that it had played a part in financing nearly 35 percent of the recent developments in the borough’s downtown area. 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Northeast Real Estate Business June / July 2024: Page 22
