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What’s Driving Multifamily’s Small Deal Sector Today?
Greystone & Co., Inc.’s Jason Gaffner will be speaking at next week’s Connect Apartments in Los Angeles as part of the Transactions Series. He shares a few insights into a key lending segment, the $1 million to $20 million sector, in our latest 3 CRE Q&A.
Q: What are the biggest trends driving the small loan sector today?
A: Apartment rents nationally are still growing, but the pace is slowing. From January to May, rent growth has fallen to 2% year-over-year from 2.5% in April, marking the steepest YOY rent-growth decline in Yardi Matrix’s monthly report in more than six years. Much of the growth is concentrated in small cities and towns this year, as job numbers are climbing, and people are fleeing larger and more expensive cities for more affordable ones. We have also seen treasury yields on an upward trend, bringing interest rates with them but cap rates have been slow to follow.
Q: What are the opportunities and challenges in the $1-$20M deal sector?
A: The challenge is finding appropriately priced opportunities. In Southern California, it is still uncommon to see properties trading over a 5% cap; making it very difficult for investors to generate significant returns. Sponsors are increasingly turning to secondary markets in search for higher yields. The top 25 largest year over year rent increases in May were in small-sized cities. There are also opportunities in smaller more rural communities, but there is a lack of aggressive lending available for these types of transactions.
Q: How are those considerations being addressed?
A: Fannie Mae and Freddie Mac are doing their best to provide aggressive rates for secondary and tertiary markets. They have introduced discounts for affordability and environmentally-friendly initiatives. The affordability calculation is based on the property location, rents and unit mix. If a property qualifies for the discount, the rate can be reduced by as much as 40 bps. The green program allows for additional loan dollars to perform upgrades that will reduce water consumption and improve energy efficiency. These discounts are on top of any related to LTV, DCR or location.
For comments, questions or concerns, please contact Dennis Kaiser
- ◦Financing
