{"id":15498,"date":"2023-04-16T15:38:39","date_gmt":"2023-04-16T22:38:39","guid":{"rendered":"https:\/\/essential.construction\/news\/4-ways-that-recent-banking-failures-will-impact-the-multifamily-sector\/"},"modified":"2023-04-16T15:38:40","modified_gmt":"2023-04-16T22:38:40","slug":"4-ways-that-recent-banking-failures-will-impact-the-multifamily-sector","status":"publish","type":"post","link":"https:\/\/essential.construction\/news\/4-ways-that-recent-banking-failures-will-impact-the-multifamily-sector\/","title":{"rendered":"4 ways that recent banking failures will impact the multifamily sector"},"content":{"rendered":"

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The recent failures of <\/span><\/span><\/span><\/span><\/span><\/span>Silicon Valley Bank<\/span><\/span><\/span><\/span><\/span><\/span><\/span><\/span><\/a> and Signature Bank, among others, have rocked the business and real estate lending world.\u00a0<\/span><\/span><\/span><\/span><\/span><\/span><\/p>\n

The multifamily sector hasn\u2019t been immune from the fallout. Signature was <\/span><\/span><\/span><\/span><\/span><\/span>the third-largest lender of apartment loans in New York City<\/span><\/span><\/span><\/span><\/span><\/span><\/span><\/span><\/a>. In addition to funding proptech start-ups, SVB also <\/span><\/span><\/span><\/span><\/span><\/span>funneled more than $2 billion into affordable housing investments<\/span><\/span><\/span><\/span><\/span><\/span><\/span><\/span><\/a>, according to Bloomberg.\u00a0<\/span><\/span><\/span><\/span><\/span><\/span><\/p>\n

Even apartment executives who don\u2019t work with those banks wonder what\u2019s next.\u00a0<\/span><\/span><\/span><\/span><\/span><\/span><\/p>\n

\u201cWe’ve had two new banks fail,\u201d said Tim Peterson, chief investment officer for Fort Lauderdale, Florida-based developer, builder and manager The Altman Cos. \u201cThere were isolated problems of balance sheet management and focus that you can look at and say, \u2018This isn’t something that happens to everybody.\u2019 But you absolutely have to have your antenna up.\u201d<\/span><\/span><\/span><\/span><\/span><\/span><\/p>\n

As the dust settles, the full ramifications of the banking crisis on the apartment market aren\u2019t fully known and probably won\u2019t be realized until well into the future. But lenders and borrowers in the space have pinpointed four things to watch for.<\/span><\/span><\/span><\/span><\/span><\/span><\/p>\n

Pressure on regional banks<\/span><\/span><\/strong><\/span><\/span><\/span><\/h3>\n

In his <\/span><\/span><\/span><\/span><\/span><\/span>quest to build 10,000 affordable units<\/span><\/span><\/span><\/span><\/span><\/span><\/span><\/span><\/a>, Eddie Lorin is planning to build a project in Las Vegas. But the Alliant Strategic Development founder and CEO is suddenly facing difficulty getting financing.<\/span><\/span><\/span><\/span><\/span><\/span><\/p>\n

\u201cOne of our lenders told me that there’s no way they were going to fund a $100 million construction loan this year after what just happened,\u201d Lorin said. \u201cThey were going to be the land lender and the natural takeout as our construction lender.\u201d<\/span><\/span><\/span><\/span><\/span><\/span><\/p>\n

Now, Lorin has to wait out the volatility and find another source, but finding smaller banks willing to make loans could be difficult, according to many observers. \u201cI think there is going to be less capital available from smaller banks that were funding a lot of real estate transactions,\u201d said Ross Pemmerl, chief credit officer at UC Funds, a debt provider whose specialty is bridge loans.<\/span><\/span><\/span><\/span><\/span><\/span><\/p>\n

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\u201cThe halcyon days of every deal getting financed on the most aggressive terms possible are over.”<\/p>\n

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Tim Peterson<\/p>\n

Chief investment officer, The Altman Cos.<\/p>\n<\/div>\n<\/div>\n\n<\/div>\n

After the collapse of SVB and Signature, rating agencies like Moody\u2019s <\/span><\/span><\/span><\/span><\/span><\/span>flagged potential issues at smaller banks<\/span><\/span><\/span><\/span><\/span><\/span><\/span><\/span><\/a>. With regulatory and <\/span><\/span><\/span><\/span><\/span><\/span>political scrutiny<\/span><\/span><\/span><\/span><\/span><\/span><\/span><\/span><\/a> on small and mid-size banks increasing, Lorin thinks more will pull away from the apartment market.\u00a0<\/span><\/span><\/span><\/span><\/span><\/span><\/p>\n

Others agree. \u201cThe regional banks provide significant support liquidity to the apartment sector, particularly here in New York, with Signature providing $4.4 billion in multifamily lending last year,\u201d said Michael J. Hurley Jr., managing partner of New York\u2013based law firm Cassin & Cassin LLP. \u201cSo I think you’re going to see a bit of a pullback from regional banks providing loans to the multifamily sector.\u201d<\/span><\/span><\/span><\/span><\/span><\/span><\/p>\n

Development concerns<\/span><\/span><\/strong><\/span><\/span><\/span><\/h3>\n

Any small bank slowdown could impact apartment executives across the board, but developers, as Lorin\u2019s example showed, could be most exposed. \u201cI see [things slowing down] more in construction lending and value-add renovation dollars,\u201d Pemmerl said.<\/span><\/span><\/span><\/span><\/span><\/span><\/p>\n

Even if smaller banks are making construction loans, they\u2019re not getting very aggressive in this environment, according to Peterson. He said a lender recently told him that it originated enough loans in 2021 and 2022 to get its required returns. As it result, it didn\u2019t need to be as aggressive in 2023.<\/span><\/span><\/span><\/span><\/span><\/span><\/p>\n

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\u201cYou\u2019ve got approximately $25 billion of maturing multifamily securitized loans maturing in \u201823.\u201d<\/p>\n

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Michael Hurley<\/p>\n

Managing partner of New York\u2013based law firm Cassin & Cassin LLP<\/p>\n<\/div>\n<\/div>\n\n<\/div>\n

\u201cThe halcyon days of every deal getting financed on the most aggressive terms possible are over,\u201d Peterson said. \u201cWe\u2019re returning to the days where there is traditional underwriting and banker skepticism.\u201d<\/span><\/span><\/span><\/span><\/span><\/span><\/p>\n

On the affordable side, where developers need their financing lined up to get tax credits, the banking issues could hit especially hard. \u201cIf you’re competing with tax credits, unless you have everything buttoned up and tied up, it’s going to be scrutinized more,\u201d Lorin said.<\/span><\/span><\/span><\/span><\/span><\/span><\/p>\n

CMBS volatility<\/span><\/span><\/strong><\/span><\/span><\/span><\/h3>\n

Although the larger multifamily market didn\u2019t see volatility in the days after the bank collapse, the commercial mortgage-backed securities and collateralized loan obligation markets experienced some turbulence.\u00a0<\/span><\/span><\/span><\/span><\/span><\/span>\u201dThe first quarter has seen some of the lowest activity in the CMBS\/CLO market I can recall, which we attribute to rising interest rates and volatility in CRE valuations,\u201d\u00a0Pemmerl\u00a0said.\u00a0\u201cThis combination of interest rates and market uncertainty results in investors requiring larger spreads, pushing underlying spreads, in turn squeezing returns.\u201d\u00a0<\/p>\n

The volatility in the securitized world matters to a new crop of lenders that have emerged over the past half-decade.<\/span><\/span><\/span><\/span><\/span><\/span><\/p>\n