Banks Shaking Off Lending Cobwebs, Starting With Multifamily

Through March and April, the institutional lending market was all but frozen. But as New York City prepares to enter Phase 2 of its reopening, the frost is cautiously thawing. Lending output has increased, showing signs of new life in the market as the city rolls into the summer.

Over the past month, brokers have seen more interest from banks in placing loans, they told Bisnow. Where they have decided to put their financing gives insight into the safest asset classes to come out of this unprecedented event, multifamily top among them. 

“We are definitely on a track back to normalcy. Every day is a little bit better,” Ariel Property Advisors Director of Capital Services Matt Swerdlow said. “We’re placing a lot of loans, which means there are a lot of banks and lenders that are receiving loan requests, and they are entertaining them.” 

Lending is not where it was before the crisis, but movement, especially on the lender side, points to a market that is opening back up.

At the end of Q1, CBRE’s Lending Momentum Index, which measures the number of loans closed nationwide, was at 275, up 4.5% from Q4 and 15% year-over-year. But January was the peak of lending activity; by March, the index was 12% down from its quarterly peak. Banks financed nearly a third of the loans closed in Q1. 

The Mortgage Bankers Association found that mortgage originations nationwide dropped 40% in Q1 compared to the previous quarter, but multifamily loans were up 15% year-over-year. 

“Sixty days ago, you would send out a loan request and you would get no response, you’d get crickets,” said Drew Fletcher, head of Greystone Capital Advisors. “Over the past 30 days, slowly, more banks have started to issue quotes for new deals.”

The change in the market is a result of a combination of economic factors: the reopening of businesses provides increased clarity on the market, rent rolls from the past three months show a picture of which asset classes are strong and economic decisions at the federal level have been made with the goal of spurring lending. 

“Lenders need to make loans. I feel like they worked out whatever issues they had with some borrowers,” Meridian Capital Executive Vice President for Sales Brian Flax said. “Today, it’s close to business as usual, just done in a slightly more conservative lens than before in terms of the way lenders underwrite.”

The Federal Reserve’s decision to drop interest rates to near zero has helped warm up the capital market. Last week, Fed officials said they don’t anticipate a rate increase until at least 2022. 

“The one thing that helped is that interest rates have dropped even further, and now they are staying incredibly low,” Flax said. "So that’s created a vibrant borrowing environment as opposed to a market where interest rates are higher."

While larger national banks still largely remain on pause in terms of commercial real estate lending, smaller regional and community banks have taken a special interest in originating loans on mid-market multifamily properties, Cushman & Wakefield’s Capital Markets Group Executive Managing Director Gideon Gil said. 

“I think it is relative to how the biggest banks are capitalized right now,” he said. “Some have made a decision to pull back completely from CRE and said, 'If it is not an existing borrower, we're not able to look at transactions right now.’ I think these mid-market loans are a good fit for these smaller, regional banks.”

Over the past week, executives from national and regional banks said they are proceeding with caution on taking on any new loan while interest rates are low.

Since the coronavirus pandemic began, most of the debt being originated has been for multifamily refinancing deals. These types of loans have become more frequent in recent weeks.

“Multifamily is still the most in-vogue asset class, anything with a large residential component,” Swerdlow said.

Last week, Signature Bank financed several loans on mid-market multifamily properties throughout the city, including several in Washington Heights, Hamilton Heights and Hell’s Kitchen. Capital One, Community Bank, Popular Bank and Sterling Bank have also originated refinancings on multifamily properties across the city over the past week. 

Nationally, unemployment benefits have helped to buoy rental rates despite the fact that the unemployment rate is at an all-time high, so multifamily has been able to thrive compared to other asset classes amid the pandemic. If rent is coming into a property, banks have an easier time lending on properties, Flax said. 

“I think multifamily is always very desirable for lenders, and that stayed the same through this crisis,” he said.

Other asset classes have also received debt from banks in the past two weeks. Banks have been financing loans on warehouses and industrial properties, which have been able to keep operating amid the pandemic, sources say. 

In the past month, some banks have even originated financing on some properties with a retail component. Bank of America lent $25M to PRD Realty to refinance a retail and office building at 17 West 34th St. that counts Banana Republic as a tenant.

While construction loans have been more sparse, a few big ones have been doled out in New York over the past few weeks. Bolivar Development secured a $70M construction loan for a Harlem apartment building from M&T Bank last month, and a week later, Clipper Equity landed a $386M construction loan from Bank of China and SL Green for a three-tower apartment complex in Greenpoint, Brooklyn.

While interest in lending has increased, some banks are still hesitant to move quickly into lending again, sources say.

Much of the uncertainty that these banks face hasn't gone away. Rent rolls for many properties are buoyed by government subsidies, temporarily increased unemployment benefits and other aid provided through coronavirus relief packages, S&P Global Market Intelligence reported Monday. 

That's partly why national banks like Wells Fargo haven't picked up their lending pace substantially over the past month.

“We have not seen a huge increase in lending. I think people are being cautious,” said Alan Wiener, Wells Fargo's head of multifamily capital. “I haven’t seen the big national companies who do a lot of acquisitions. They’re really not yet back in the market.” 

Eric Orenstein, an attorney in Rosenberg & Estis’ transactional department, said he hasn’t seen an increase in transaction volume, and he doesn't think it will come back for a while. 

“I just don’t see things ramping up in the next two months,” Orenstein said. “There has to be a steady transition back to people working back in the office, people able to transact in a less cumbersome manner, and I think until you have that for a period of time, I just don’t see volume coming back with any regularity."