WeaveReport South Florida Multifamily

DEBT OPTIONS IN TODAY’S MARKET

MU LT I FAM I LY I NVE S TMENT | SOUTH F LOR I DA T E AM

The Federal Reserve’s actions to combat historically high inflation rates dominated 2022 and will continue to be the driving force in commercial lending in 2023. The Federal Reserve moved the Fed Funds rate 450 basis points over the last 12 months, driving up floating rate borrowing costs and creating a domino effect of capital repricing throughout the industry. As 2023 begins there are encouraging signs that the capital markets are adjusting to the new higher rate environment. The gap between cap rates and borrowing costs continues to narrow and we are seeing decreasing instances of negative leverage. A key trend into 2023 will likely be the widening gap between short term, floating rates and longer-term fixed rate borrowing costs. Fed action and concern over a possible 2023 recession have dramatically inverted the yield curve, leading to significantly higher short term borrowing costs versus longer term durations. Treasury rates also dramatically increased over 2022 but have trended lower since, supporting attractive fixed rate loan options. Fixed rate borrowing spreads have also decreased 20+bps from their Q4 highs and term (5 – 10 year) loans are pricing in the low to mid 5% range. The result is longer duration, fixed rate borrowing costs averaging 200 – 250 basis points lower than floating rate options. Multifamily remains a favored asset class among lenders with the highest level of both equity and debt liquidity in the CRE space.Agency, Bank, Insurance and Debt Fund lenders remain engaged in the market, although at widely differing levels of pricing and leverage. Multifamily fundamentals remain healthy relative to other CRE asset classes, with rent growth and occupancy forecast to remain strong. Also, Florida remains a favored market for both equity and debt capital. Dislocations across the debt markets have contributed to increased interest in Agency financing . Overall lending caps for Fannie Mae and Freddie Mac for 2023 total $150 billion ($75 billion each), with 50% of this amount reserved for “mission driven” lending (loans with some affordability component). Lending spreads at the start of Q1 are 20 – 25bps lower than where they averaged in Q4 2022. These lower spreads combined with a pullback in treasury rates should notably increase the appeal of agency loans relative to other sources. Fannie Mae, Freddie Mac, and HUD remain the de-facto lenders for stabilized Class B and C properties as well as those located in secondary and tertiary markets. Debt Funds remain the source for the highest leverage in today’s market. Lending spreads have stabilized in the +325 to +400 range for loans between 65%-70% LTC while higher leverage options are generally +400 and greater. The continued rise in the SOFR index has driven overall debt fund rates in excess of 7.5%, weakening demand for these loans. However, debt funds remain the single best source for high leverage, shorter duration, interest-only acquisition financing. Debt fund loans remain a compelling option for borrowers with high conviction in their business plans and a clear 18- to 36-month exit strategy. Federally mandated reserve increases and concern over a possible 2023 recession have moderated Bank appetite for new CRE loans. Tighter regulatory scrutiny has also resulted in higher debt yield and DSCR requirements, depressing average proceeds. For borrowers that are able to access bank loans, they remain among the cheapest sources of financing available, with pricing typically 150-200+ basis points inside of debt fund executions (though at lower leverage). Life Companies largely moved to the sidelines during H2 2022, as volatility in rates combined with historic production levels earlier in 2022 lead to very little motivation to pursue new business. New allocations for 2023 have created significant re-engagement from Life Co lenders for both lower leverage, fixed rate loans as well as higher leverage, floating rate opportunities. Lower leverage (58% - 62% LTC) life co bridge loans generally price 20bps+ inside of traditional debt funds. Interest Rate Outlook . 2022 opened with SOFR at 0.05% and the 10-Year US Treasury at 1.50%. The following 12 months saw the largest and most rapid increase in borrowing costs in over 40 years. As we enter 2023, SOFR stands at 4.35% with current market consensus projecting SOFR topping out at 5% - 5.25% during H1 2023. Once that “peak rate” is achieved the Fed is projected to pause and reassess their policy in relation to inflation and overall economic impact. Longer term and fixed rate borrowing costs are governed by US treasury rates. Treasury rates peaked at over 4.2% during Q4 2022 but have since trended lower with the 10-year currently ranging between 3.45% - 3.6%. The forward curve projects the 5-, 7- and 10-year treasuries to all trend gradually lower through 2023. This should push many borrowers to consider fixed rate options versus floating rate loans during the first half of 2023.

LENDER TYPE BANK

GSE (FANNIE/FREDDIE)

BRIDGE (LIFECO + DEBT FUND)

Recourse

Full, Partial, or Non-Recourse

Non-Recourse

Non-Recourse

Up to 75% LTV (DSCR loan constraint currently limits to 55%- 65%)

Leverage

Up to 65% LTV (DY limits to 50-60%)

Up to 75% LTC

Loan Type

Fixed or Floating rate

Fixed or Floating rate

Floating rate

Term

Floating: 3-5 years Fixed: 5-7 years

7, 10, 12 or more years

3 +1+1

Prepayment Lender Fees Interest Only Amortization

Flexible

Yield maintenance / Defeasance

Flexible

0.50% origination

Par

1.0%-1.50% origination, 0.25% ext

Half to full term, depending on leverage

Half to Full term, depending on leverage

Full term

25 to 30 Years

30 years

N/A

Index

SOFR, Prime or Swaps Fixed: 1.60% to 2.3% Floating: 1.60% to 2.2% Fixed 4.90% to 5.50% Floating: 6.10% to 6.70%

Treasuries or SOFR Fixed: 1.65% to 2.30% Floating: 2.0% to 2.7% Fixed: 5.15% to 5.80% Floating: 6.50% to 7.20%

SOFR

Up to 65% LTC: 3.0% to 3.75% Up to 75% LTC: 3.75% to 4.5% 60% - 65% LTC: 7.5% to 8.25% 70% - 75% LTC: 8.25% to 9.0%

Spread

Rate

(i) Can rate lock at application. Generally lowest cost of capital for new construction assets.

(i) Supplemental loan available after 12 months with improvement in NOI.

(i) Will provide future funding to fund capex.

Comments

DENNY ST. ROMAIN Vice Chairman T 305 586 2032 dennis.st.romain@cushwake.com

CHARLES CRAPSE Senior Director T 786 792 5215 charles.crapse@cushwake.com

ALEX KUPP Director T 813 204 5351 alex.kupp@cushwake.com

7