Multifamily Players Wait To Exhale As Clock Ticks Down On Expected Rate Cut

As the multifamily market counts down the days until an expected rate cut in mid-September, some are playing the waiting game while others are diving into a variety of creative stopgap funding mechanisms to keep deals moving.

Cranes are still up in Dallas-Fort Worth, and the multifamily industry continues to attract capital and equity investment despite wariness from traditional banks. 

But sourcing financing is a lot tougher than it used to be, and political and financial turmoil is giving lenders the jitters, according to panelists at the Bisnow DFW Multifamily Annual Conference last week at the Hilton Anatole Dallas.

“It's, as we've all said, a little bit rocky in these times,” Billingsley Co. Vice President of Finance Sean Tracey said. “Survive to ’25 was the theme of last year, but it might be till 2026 these days.”

A lot of hopes are being pinned on the Federal Reserve cutting interest rates in September, the first of what is expected to be several reductions. S2 Capital, which operates its real estate investment platform throughout the Sun Belt, has been biding its time by channeling extensive capital into adding value to properties to get into position for refinancings when cuts happen.

S2’s house view is that the Fed has between 75 to 200 basis points to play with over the next six months, particularly given recent personal consumption expenditures price index numbers showing inflation has fallen from a high of 7.1% in June 2022 to about 2.5% in July. July's unemployment rate of around 4.3% is also in line with targets set by the Fed in March as a benchmark for lowered interest rates.

“With all that, we think that the Fed has some room to lower rates over the next six months,” S2 Capital Vice President of Acquisitions Ryan Everett said. “Obviously, what happens now globally, domestically, will impact that even further, as it seems like there's even more volatility in the market.”

Bisnow’s event came a day after what some panelists called “Japan Black Monday,” in which Japanese stocks saw their biggest single-day rout since the 1987 crash and the Dow lost 1,000 points, with losses fanned by less-than-stellar U.S. payroll data in late July and concerns the Fed might have delayed rate cuts for too long. 

The market recovered almost 800 of those points by week’s end, but the volatility spooked some investors and keyed up hopes for an even bigger cut than the expected 25 basis points in September.

Some investors are also raising alarms about potential political manipulation around the election, according to KE Andrews Director Tony Trahan.

“All of that causes uncertainty, which investors don't like because you can't underwrite correctly,” he said. “We're looking at a lot of different deals that we're willing to commit to because they pencil, but the large [limited partner] coming in is not willing to make it work. So it's just a tough time right now.”

KeyBank Vice President and Mortgage Banker Amber Rao said she is seeing a number of alternative prepay structures being quoted, especially for new construction and refinance deals, in conjunction with the Department of Housing and Urban Development. Those deals front-load heavy prepayments, offer light prepay penalties midway or on the back end of the loan, and allow refinancings or sell-offs sooner than normally possible. 

Multifamily owners are also seizing on buy-downs or paying upfront to lower interest rates, alternative financing from debt funds, tapping into private equity and considering C-PACE, a low-cost financing alternative that helps property owners support the cost of energy or water-efficient upgrades, such as LED lighting, new HVAC systems, cool roofs and windows and low water flow.

“And you're going, ‘Okay, that doesn't sound very sexy,’” said Glenn Silva, chief operating officer for Lone Star PACE. “Well, it isn't. But what it does is it saves on the consumption of energy and allows for attractive financing long term, typically 20, 25 years, 30 years in duration, to be put into that cap stack.”

Last year, Lone Star PACE gave just over $89M in financing to projects. This year, it is on track for about $250M.

Tracey said the best loan-to-cost construction financing he has seen in 18 months was just over 60%, spurring a scramble for private credit and preferred equity lenders to fill out the capital stack. 

Los Angeles-based Tides Equities is attempting to buy itself out of hot water that way. Tides amassed a $7B multifamily portfolio in Dallas and other Sun Belt locales by taking out floating-rate loans when interest rates were negligible, only to see its debt service blow up when the Fed hiked rates.

With many of its properties in distress or facing foreclosure, Tides is now attempting to shore up its investments by assembling $69B in private equity, a move that could leave its original investors in a lurch.

“What they're doing is they're bringing that out to the market as a [preferred] package, and Tides has been all in the news doing that last year, but we've seen a lot of those different deals,” Trahan said. “That's a creative way to cover their capital call, [but] all the equity is basically wiped out from the original guys.”

Despite a more hardscrabble fight for financing, DFW continues to attract capital, Everett said, pointing to investment firm KKR last month snapping up a portfolio of 18 multifamily real estate assets from Quarterra for $2.1B, including some in Dallas. AvalonBay has also been active in the metro.

“I think that's obviously a kudos to DFW and what we provide as a metroplex, kind of a world-class and leading job hub, population growth and good schools,” he said. “Everything that we have that attracts that capital will continue to kind of be a tailwind for that.”

So long as all goes as expected with interest rates next month and investors begin deploying their dry powder, strong multifamily fundamentals should buoy the market, panelists said. Some are already getting started in anticipation of better days ahead.

“We are again reentering the space after kind of sitting on the sidelines for a while during the negative leverage phenomenon,” said Tom Noble, chief operating officer for national real estate investor and lender Archway Capital. “The last six to nine months, we've been very active in multifamily financing in DFW.”

CORRECTION, AUG. 19, 4 P.M. CT: A previous version of the story contained an inaccuracy about the nature of C-PACE financing. It has been updated.