Late Cycle Investors Find Benefits in Bridge-to-Permanent Executions

By Precilla Torres

With cap rates compressing to new cyclical lows, multifamily investors often struggle to find opportunity in—and attractive returns for—stabilized apartment communities. As the hurdles for finding success in stabilized assets grow, many owners are turning to value-add acquisitions. Before we examine how to execute a bridge-to-permanent financing solution that does not compromise long-term ROI, let us examine a few reasons why market participants are turning to value-add and bridge strategies.

The State of Late Cycle Multifamily

First, there is the issue of plateauing rent growth. Down from a cycle high of 5.8% in 2015, rent growth is projected to be 4.1% for 2018 (Reis, Inc.). Apartment operators are starting to realize that they can no longer rely on organic rent growth alone to increase NOI.

Second, it has become clear that we are operating in a rising interest rate environment, at least for the short term. While spreads between multifamily cap rates and the 10-year Treasury yield remains wide in the grand scheme of things, margins are now at late-2005/early-2006 levels (Nareit).

Over the past few years, tightening of the stabilized multifamily market has triggered a flurry of activity in the value-add sector, where opportunities remain attractive. Experienced operators continue to find success in identifying underperforming properties (often in off-market transactions) and unlocking upside through both physical and operational overhauls. As the recession faded, this trend appeared first in the gateway markets but has been in full swing in the in secondary and tertiary cities over the past few years.

Benefits of a Bridge-To-Permanent Solution

No matter what the purpose of your bridge loan, it is imperative that your permanent financing needs drive the loan structure. Your bridge loan’s structure will influence what your permanent take-out financing will look like. Many borrowers realize that working with a ‘one-stop shop’ – that is, a single lender who can provide both the bridge and permanent loan – provides several strategic and financial benefits. By streamlining the due diligence process and underwriting the bridge loan with a permanent agency takeout, a one-stop shop lender can provide more speed and transparency than two separate lenders and loan processes. Financial incentives usually come in the form of reduced fees. Hunt Real Estate Capital’s (“Hunt”) proprietary bridge loan program, for example, typically waives the bridge loan exit fee when Hunt is also the source of the permanent takeout financing.

In summary, a bridge solution can provide the speed and flexibility needed to capitalize on the unique opportunities that arise late in the multifamily cycle. To be in the best position for a smooth transition into a long-term, fixed-rate solution that takes advantage of today’s low—by historical standards—interest rates, consider working with an experienced ‘one-stop’ lender.

For comments, questions or concerns, please contact Dennis Kaiser