Rising Bond Yields

At the risk of sounding like a broken record: bond yields keep rising with inflation continuing to surprise to the upside and the Fed Funds futures market now pricing in a maximum Fed Funds rate of 5%; the 5-year and 10-year treasury bond yields are up to the highest levels since 2008 at 4.34% and 4.13%. As a reminder, the 10-year was at 2.59% on August 1 and 1.64% at the beginning of the year. Staggeringly large moves over such short periods! It comes as no surprise that the real estate market is having trouble adjusting to these moves.

Real Estate Loan Market 

Loan rates and leverage continue to worsen, with loan rates starting in the high 5%/low 6% range at 1.20x minimum DSCR (equating to a debt yield of approximately 9% and maybe 55% LTV); modestly higher interest-only leverage at an 8% debt yield is available with an interest rate around 7%.

Nobody knows where rates will actually top out; we suggest borrowers plan for interest rates continuing to rise and manage their risk accordingly.

Equity

With loan sizing continuing to shrink as a result of debt service coverage tests at higher interest rates, deals of all sorts are requiring substantially more equity. As such, we are seeing much greater demand for:

• Preferred Equity or Mezzanine Loans: Looks like junior debt with an accrual rate of 13-15% and a current pay rate of 6-8%;
• Joint Venture Equity: an equity partner provides 50-90% of the required equity with a negotiated waterfall structure for splitting the profits.

Are you concerned about how the industry changes will affect you and your investment? We can help with that! Call or email us to get started.

Around 25% of all professional jobs in North America will be remote by the end of 2023, according to recent reports. Characterized as the most significant societal change in the U.S. since WWII ended, this shift to remote work will impact the working population of all ages. Under-occupied and outdated office properties are now seen as prime targets for multifamily investors.

These empty office suites present several options for multifamily owners to increase their portfolios. However, there are several things investors should look into before embarking on an adaptive reuse project.

While concerns regarding building, mechanical, and electrical systems can pose a challenge, choosing a contractor with experience handling adaptive reuse can ensure quick and solid work.

Read this helpful article to learn more about why multifamily adaptive reuse is gaining popularity and how you can take advantage of the opportunities it offers:

In the multifamily market, it's important to understand not just where people are moving, but their reasons for doing so. The multifamily landscape is changing, especially since hybrid and remote work is becoming the norm. Longterm city dwellers are moving to the suburbs in increasing numbers.

Multifamily owners and developers are adapting as housing growth has led to strong gains over the past two years. Overall occupancy and net effective rents last year were also above pre-pandemic levels.

This upward trajectory is expected to continue as economic conditions trend toward a housing shortage, and strong fundamentals will keep real estate investors engaged. Trends now indicate an opportunity for multifamily developers to increase housing availability where people want to live.

Read the article by Multihousing News to learn more about multifamily migration patterns and where people are being drawn: