Q&A – Multifamily Real Estate News

Steven Caligor, Executive Vice President and Head of Real Estate and Healthcare, BHI. Photo by Shahar Azran via BHI

As interest rates continue to rise, multi-family investors need to be more creative in securing financing on acceptable terms. To find out how lenders have changed their approach to commercial real estate and which multi-family transactions have the best chance of being financed today, Multi-Accommodation News contacted Steven Caligor, executive vice president and head of real estate and healthcare for the commercial bank BHIthe American division of Bank Hapoalim.

How has the latest interest rate hike changed BHI’s lending strategy for the next 12 months?

Caligor: We have always been a common sense lender, focused on moderate leverage, cash flow and quality sponsors. This will always be our main loan profile. However, as rates skyrocketed during the year, we improved some elements of our origination and underwriting.

These include: greater “stress tests” of debt service coverage ratio (DCSR) over the term of the loan and exit value to ensure successful exit at maturity; additional reserves – interest or construction carrying costs – integrating the forward rate curve; request more frequent construction budget updates; resizing or shrinking loan proceeds in cases where rising interest rates have limited debt service capacity; and shortening loan terms to avoid locking in fixed rates for an extended period and/or offering sponsors a variable rate pricing option.

The sponsor becomes a primary lending center in terms of reputation, experience, and liquidity. Sometimes we will ask for increased guarantees at the start of the loan which will decrease as the project progresses and certain conditions are met. In times of recession, there is usually a “flight to quality”.

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In terms of asset classes, we focus on stabilized properties in the residential and industrial sectors, the construction of multi-family residential, hotel and mixed-use properties and bridge installations with low value-added projects.

Federal Reserve Chairman Powell predicts an economic slowdown and an increase in unemployment to a level typically associated with a recession. What is your economic forecast?

Caligor: I foresee recessionary trends ahead due to the interest rate situation and the rising cost of living. However, I am not sure that unemployment will reach past recessionary levels. The economy has already started to slow slightly, but demand for basic services remains strong, which can support employment in many industries. While companies may downsize, it may not be consistent across industries.

Powell also indicated that a housing market correction is on the horizon. What impact does this have on BHI’s valuation of the multi-family properties and transactions it decides to finance?

Caligor: We will stick to primary and proven areas of densely populated residential markets and limit transactions in tertiary submarkets. This strategy allows us to avoid entering transitional markets or new demographic trends in certain states.

We focus on well-established major metropolitan or suburban markets with strong long-term drivers of multifamily, such as proximity to major business markets, ease of transportation, high-end amenities, and thriving neighborhoods with amenities. lifestyle, i.e. stores, outdoor spaces, restaurants, education. and entertainment.

We evaluate the project based on sponsor liquidity, project loan-to-value and loan-to-cost ratio, debt servicing capacity, and also assess the feasibility of “exit”. Concretely, at maturity, will there be a funding gap and what is the probability of a successful exit with full refinancing? We aggressively sensitize projected market rents or future sales prices in exit analysis.

We are tracking legacy COVID-19 trends that increase the long-term marketability of the project, such as home offices, parking, neighborhood amenities, play areas, recreation rooms, grill areas, gymnasiums and swimming pools, movie theaters, rooftops, etc. .

READ ALSO: 5 key financing strategies for home developers

What can you tell us about the current demand for debt from multifamily investors/owners?

Caligor: We have clearly seen a decline in deal submissions due to three major factors. The first is the rate environment, which impacts the investor’s cash yield, increases the cost of carry, and may reduce loan proceeds to comply with certain industry DCSRs. Second, the recent expiration of 421-a, which impacts the tax incentives that came with that product. Third, there are increases in basic operating expenses (boilers, new elevator regulations, etc.) that may exceed rent increases.

We’ve also seen non-bank lenders use mezzanine debt or B-notes to enter the multifamily space to fill gaps in the debt pile, as many banks have cut advance rates or increased lending levels. personal guarantee. While this creates activity in the market, it can also stress ownership as the combined interest cost of carry increases in this scenario.

How do you think the demand for this type of credit will evolve in the coming year?

Caligor: I believe we will see more construction of new, high-end multifamily products in major cities as well as in suburban areas near primary markets. As for NYC, we are already seeing robust construction activity in places such as Westchester, Jersey City and Queens, to name a few markets.

Prior hyper demand for stabilized properties may diminish as valuations decline given expense loads. For sponsors, the goal is to attract residents who may have purchased a home rather than rent in previous periods and to attract long-term tenants who have either scaled up, sought ease of living or living near work, education or transportation.

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Name three things borrowers should know about multifamily financing in the last quarter of 2022 and into 2023.

Caligor: Be prepared for a price increase, possibly an inferior product and higher reserves or personal guarantees. Discuss your long-term plans and exit strategy with your lender early on. Expect building plans and budgets to be closely scrutinized.

Some experts say the best deals happen during market downturns or disruptions. Do you agree?

Caligor: During downturns, there are long-term investment opportunities for sponsors with cash and previous experience of economic downturns. These tend to be the more stable sponsors that have a scale of operations and infrastructure already in place. We will see many “generational” deals with established players looking to convert older properties to new uses and adding mixed-use components – grocery, medical, light commercial, etc.

We remain close to our existing relationships and are also looking for new blue chip sponsors as other banks begin to reach lending limits resulting from recent consolidations or mergers.

Can you give us some examples of the types of loans that BHI currently finances?

Caligor: Some of our recent transactions have involved financing multi-family projects in Jersey City, Harlem and Yonkers. We provided a $25 million post-construction bridge loan for a 110-unit project in Jersey City; a $57 million construction loan for a 160-unit, multi-family transit-oriented development on 126th Street; and a $62 million construction loan for a development in Yonkers with 180 units. All three are located in high-growth or booming areas, which is critical for today’s lending landscape. The development in Yonkers, where we have financed several phases, is also a high-end project with the type of amenities and outdoor spaces that are highly desirable for attracting new tenants.

Steven Caligor is Executive Vice President and Head of Real Estate and Healthcare for BHI Commercial Bank, the US division of Bank Hapoalim. Bank Hapoalim offers its customers access to a wide range of products and services available through its banking and non-banking subsidiaries. Not all products and services are provided by all Affiliates or are available in all locations. All credit products are subject to credit approval. Nothing contained herein should be construed as a loan commitment by BHI or any of its affiliates. The matters discussed herein express Mr. Caligor’s personal views and are not necessarily those of BHI or its affiliates.

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