New Debt Structures and Products Emerge for Multifamily Borrowers

Berkadia and Knight Frank will present a webinar on Sept. 24, titled Navigating Global CRE Equity and Debt Markets. Knight Frank’s Global Head of Capital Markets Neil Brookes will be joined by Knight Frank’s Partner Lisa Attenborough to share an overview on the current global debt market.

Brookes will then be joined by Berkadia’s EVP – Production and Capital Markets Hilary Provinse, Senior Managing Director Chinmay Bhatt of Berkadia JV Equity & Structured Capital, and Knight Frank’s partner Alasdair Pritchard for a roundtable discussion on global debt, equity and what’s to come in the year ahead. In advance of the webinar, Provinse provides a U.S.-focused preview below:

What new debt structures or financial products are emerging in the multifamily sector? How are these innovations helping investors manage risk or improve returns? 

In the multifamily sector, new debt structures and financial products are emerging to help investors manage risk and improve returns. One significant trend is the increased availability of short-term fixed-rate debt (3- and 5-year terms) from life insurance companies. These products, driven by robust short-term annuity sales, offer lower coupons compared to floating-rate loans, making them attractive to investors. 

Additionally, Freddie Mac’s structured products, specifically Q-deals and ML-deals, are gaining traction. These products facilitate third-party securitization opportunities, helping to recycle capital and free up space on third-party lenders’ balance sheets. By pooling and securitizing loans, these deals create more liquidity in both conventional multifamily markets (Q-deals) and targeted affordable markets (ML-deals). This approach allows smaller institutions like Community Development Financial Institutions and local banks to participate, enabling more efficient mortgage pools and opening opportunities for sponsors with smaller portfolios to access capital and contribute to the multifamily market. 

How are agencies like Fannie Mae and Freddie Mac influencing debt financing in the multifamily sector? Are there any new programs or changes in agency policies that investors should be aware of? 

Agency lending offers competitive market rates and affordable financing options across all markets and market conditions. Terms, features, and underwriting have adapted to various conditions, enabling borrowers to continue to refinance and acquire assets in any rate environment. Recent adaptations include a shift to short-term fixed rate debt with flexible prepayments that mimic the optionality floating-rate debt offers while enabling borrowers to move away from expensive rate caps or 35-year amortization to increase proceeds in a rising interest rate environment. Agencies remain focused on workforce housing and regulatory (FHFA) goals for specific affordability targets.  

Property condition is a critical focus for agencies when assessing new transactions and the condition ratings of sponsors’ existing assets. The appraisal process has seen increased emphasis on “appraiser independence” to ensure unbiased valuations. Heightened instances of suspicious activity and fraud have led to stricter diligence requirements, particularly for new or less experienced sponsors and transactions involving brokers. Despite elevated quote times due to high inflows and additional diligence, underwriting and timelines post-application remain under the control of the lender, providing a competitive advantage. 

As the investment sales market improves, agencies are aggressively competing for business and increasing their pipelines to meet market needs. This competitive drive is evident as they strive to adapt to market conditions and provide tailored solutions to borrowers, ensuring continued relevance and competitiveness in the commercial real estate sector. 

What role are non-traditional lenders, such as private equity firms or debt funds, playing in the multifamily debt market? How do their terms and conditions compare to traditional lenders? 

Non-traditional lenders, such as private equity firms and debt funds, are playing an increasingly significant role in the multifamily debt market, especially as traditional banks scale back their involvement. These lenders often focus on shorter-duration, floating-rate loans, providing borrowers with greater flexibility to exit the loan as they execute their business plans or as market fundamentals improve. Additionally, private equity firms have been active in acquiring insurance company portfolios, allowing them to offer a variety of credit products alongside the longer fixed-rate durations typically associated with insurance company loans. 

The most active lending sources in the multifamily sector remain the Agencies, life companies, and debt funds, as banks continue to prioritize existing relationships and navigate the current market cautiously. Debt funds, mortgage REITs, and other non-bank lenders have stepped in to fill the gap left by traditional banks. These non-traditional lenders can offer shorter loan terms, reduced call protection, and flexible underwriting standards, including minimal occupancy requirements, which are not typically offered by the Agencies. However, borrowers are still challenged by floating rate coupons starting at 8% due to the current SOFR rate. 

With the current debt market conditions, what strategies are multifamily investors employing for refinancing existing properties? 

Multifamily investors are currently favoring short-term fixed-rate loans with flexible prepayment options to maintain refinancing flexibility if interest rates drop or if they decide to sell the asset, although with yields having recently fallen, we are seeing some increased demand for longer-term debt. The market is experiencing a slowdown in new unit deliveries, projected to decrease from 560,000 in 2024 to 328,000 by 2027, according to Yardi. This is driven by both property market fundamentals and the current capital markets environment. Investors are seeking “time” to navigate these conditions, anticipating that overbuilding now will lead to a shortage of new units in the future. 

Click here to register for the webinar.