Knowing your options: Lenders must run multiple scenarios to close the deal

The Federal Reserve may have started to reduce interest rates, but the market continues to be tough for borrowers. Experienced lenders are running multiple scenarios on every deal to ensure clients can secure the best capital package possible, according to experts from KeyBank, who recently spoke about the current capital climate — including everything from interest rates to refinancing solutions — at the Bisnow Multifamily Annual Conference in Texas during the Financing, Capital Insights, and Analysis panel. Here are some highlights from the conversation.

Interest rates are hard to predict

The panel moderator asked the panelists to predict the future interest rate environment and how they are strategizing based on interest rate expectations. But all the panelists agreed that it is difficult to predict interest rate trends. This year, the nation’s most reputable financial research institutions have fallen short on forecasting interest rate movements, with many expecting earlier and more frequent rate cuts than ultimately happened. Still, experts expressed confidence in additional rate cuts in 2024.¹

Regardless of where rates are headed, however, it is imperative that lenders can quote a deal in multiple ways to meet the client’s needs. It is important to respond to pricing fluctuations.

“We’re committed to lending throughout all cycles and all forms of volatility,” says Janette O’Brien, KeyBank’s Head of Multifamily Production. “It does nobody any good to sit on the sidelines.” Looking specifically at the multifamily market, O’Brien says the potential options are still unclear as the interest rate environment changes.

During the high-interest-rate environment of the past few years, alternative prepay structures were available, and lenders could customize options to meet an investor’s business plan. “We’re also seeing frequent buydowns with CMBS,” says O’Brien. It remains to be seen what the next chapter is going to look like. All the volatility occurred fairly recently, and there is curiosity about whether buydowns will be used in the future as much as they have been in the recent past, and if the alternative prepay structures will remain something that people will consider.

Use available funding

Over the past few years, private credit funds have raised significant capital. In 2021, private credit funds raised² a record $242 billion, followed by $215 billion in 2022 and $210 billion in 2023. However, despite the historic fundraising, capital deployment has been muted over the past 18 months. Now, those funds are pursuing multifamily core deals.

Panelists said they are seeing these capital sources leaning in and offering other sources of capital in the preferred equity and mezzanine spaces, adding that the deals are typically priced at SOFR 260 to 280.

In addition to accessing this capital, investors are also having to secure interest rate protection in most cases, particularly on non-recourse bridge loans. On ARM loans, on the other hand, investors can buy a cap with the strike rate to get more aggressive proceeds. Ultimately, deciding whether to secure interest rate protection comes down to the strategy that is the best fit for the investor.

All panelists agreed that everybody has a different strategy, a different approach. There is no one right answer. Some banks are going to require caps and some are not. It’s really a mixed bag. For this reason, it is important to run multiple scenarios that price in a variety of options, giving the investor an opportunity to decide the best path forward for their business needs.

Investors want early rate locks on refinancing deals

Satisfying upcoming loan maturities may be the biggest challenge for multifamily borrowers. About $525 billion in multifamily property loans will mature through 2029, according to Yardi Matrix. Property owners are concerned that the high-interest-rate environment will impact refinancing opportunities. To prepare for the volatility, many investors are exploring index locks or early rate locks for agency financing. Investors are also taking advantage of programs that provide incentives for affordable housing. And, of course, many lenders are sizing and resizing loans and monitoring transactions; again, running through several scenarios before deciding and embarking on a path forward.

“If rates are at a level that makes the deal work for them, they will pull the trigger,” O’Brien says. “There have been a lot of different strategies utilized in the last year, but as rates begin to fall, there could be changes to the strategy going forward.” Still, she expects to run through all the possible opportunities for clients, even if the menu of opportunities is changing.

The capital markets have been marked by volatility over the past two years. Although the volatility seems to have subsided — and, even better, rates are starting to come down — investors still have a lot of work to do to secure the best deals possible. Working with an experienced lender and running the potential scenarios can help ensure the best deal happens every time.

To discuss the current market environment and what financing options are best for your next project, connect with Janette O'Brien, or reach out directly to your KeyBank Mortgage Banker.

Visit www.key.com/rec where you can find our expertise in multifamily, affordable and senior housing, and more.