Learn how an anticipated economic downturn and the spread of rent control are affecting the multifamily real estate sector.
Until now, the multifamily real estate sector has remained relatively stable. However, as changes permeate the industry, financing for these projects is expected to shift. While these changes aren’t enough to stop developers from working on projects or cause banks to pause lending, they could slow down development in the future. Your commercial realty advisors explain how economic slowdown and rent control are affecting the multifamily sector.
- Economic Downturn
Many lenders are anticipating an economic slowdown in the next couple of years. This would mean slower rent growth and higher construction and labor costs. To protect themselves, some lenders have started to sign deals with lower loan-to-value ratios to lock in 8-8.5% debt yields. While the sector saw loan-to-value ratios of about 75% five years ago, many multifamily construction deals are now sitting at about 65-70%. Additionally, institutional lenders are also facing increased competition from regional lenders, as well as mezzanine debt and bridge lenders. While institutional lenders have the ability to close high-capital deals, it’s important that they strike a balance between being prudent and maintaining their market share.
- Rent Control
Another factor affecting the multifamily real estate industry is the introduction of new rent control measures. For instance, the state of California has recently placed a new cap on rent increases. This limit on rent growth has caused many lenders to look more carefully at developers’ financial protections to ensure that they are reasonable, given the new rent legislation. Rent control measures might also mean that it will take longer for buildings’ income to stabilize. To protect themselves, lenders are making sure that they always have exit strategies in case properties are unable to hit their expected financial benchmarks.
This is how changes in the multifamily real estate market are affecting financing opportunities. Interested in staying up to date with the latest commercial real estate news? If so, then contact the experts at California Commercial Realty Advisors, Inc. Your commercial realty advisors are eager to assist you with all your real estate needs today.