Small Deal Q&A: Financing, Investing, Building & Value-Add

The small deal sector of the apartment market can often get overlooked, typically as a result of transactions falling into the $1-million to $20-million range. While the big portfolio deals and trophy properties naturally capture significant attention, there is value in not ignoring smaller properties and the massive volume of deals in this sector suggests savvy investors aren’t.

Connect Media asked Hunt Mortgage Group’s Mark Besharaty to provide insights into the trends driving the small deal space, as we gear up for Connect Apartments on Thursday, Sept. 28 at the InterContinental DTLA.

Q: What is driving deals in this segment of the market and how does it compare to larger deal segments?

A: The large volume of transactions in the multifamily small balance loan space is being driven by safe haven investment needs coupled with historically high occupancy rates in this sector. Multifamily remains the asset class of choice for real estate investors wanting to maintain moderate to strong returns on their investments while reducing overall portfolio risk.

Small balance multifamily properties are often easier to acquire and manage than larger complexes for the average real estate investor. They inherently require less investment capital and the loan qualification process is more streamlined. In particular, the small balance programs offered by Fannie Mae and Freddie Mac provide real estate investors a common underwriting platform throughout all markets in the United States.

The multifamily small balance loan sector is attractive to a wide variety of property investors with varying degrees of experience and sophistication. The largest challenge facing most lenders in this space is related to non-sophisticated investors who do not understand the documentation requirements of securitized mortgage programs. In contrast, borrowers in the conventional agency sector are generally far more familiar with guidelines and programs resulting in a smoother loan execution. Fortunately, both Fannie Mae and Freddie Mac have recognized these issues and are continuously adjusting their small balance loan programs to create a more streamlined process in this market segment.

Q: What are lenders doing to accommodate the small loan deals that make up the bulk of the market?

A: Small balance agency lenders offer a faster and simpler loan process by facilitating some of the more onerous requirements that exist in the conventional agency loan space. For example, the Freddie Mac Small Balance Loan program does not require replacement reserve escrows, which is a requirement of the conventional loan space.   In general, the agency small balance loan programs offer a streamlined 60-to-120-day interest rate lock process and a simplified underwriting process, including abbreviated third-party reports.

A: Where do you see this segment of market headed through the end of 2017 and into 2018?

A: Multifamily properties have been the real estate investment asset class of choice since the last recession circa 2008. In my opinion, strong demand for this product type, along with demand for associated loan programs will continue unabated through the end of 2017.

I am generally leery of taking on the role of the industry Nostradamus in the long-term – especially when “Black Swan” events have the potential to create havoc for the national economy. Several macroeconomic factors have the potential to negatively influence the multifamily asset class. These factors include: overbuilding and over-saturation of Class A multifamily properties in top markets; a spike in interest rates causing reductions in net operating income; or possible detrimental loan conditions resulting from problems in other lending sectors. Financial products are intertwined and contagion from potentially weak lending sectors such as student debt or auto debt, may have a deleterious effect on multifamily lending activity. However, as long as these pitfalls are avoided, I predict that demand for the multifamily asset class will remain strong throughout 2018.

For comments, questions or concerns, please contact Dennis Kaiser