The race to finance apartment buildings has become more competitive as more debt funds move in and offer interest rates that now make them more attractive compared to more established options.
Short-term debt fund loans used to be wickedly expensive. They offered a useful alternative to borrowers unable to obtain traditional, short-term bank loans for their residential development or transition plans. Debt funds could also help borrowers looking to leverage more conventional lenders’ loans. But the interest of investors looking to diversify their real estate strategies and place money on the leverage side has brought debt funds dry powder, and they are now also offering interest rates low enough to be a sensible alternative to a short-term loan from one Bank to offer. Institutional investors from around the world invest money in private equity debt funds, and debt funds use this capital to securitize the mortgages they issue as Collateralized Loan Obligations (CLOs).
This enables debt funds to offer interest rates that are only slightly higher than the interest rates offered by banks – in addition to the highly indebted debt funds that have always existed.
“The debt fund business just exploded over the past year,” said Kyle Draeger, senior managing director of capital markets at CBRE Multifamily, who works in the company’s Boston offices.
Debt funds are busy doing business
Debt funds have been busy so far in 2021 – and roughly matched their pre-pandemic volume. Intermediaries, including companies like JLL, Eastdil, and Meridian Capital, had commercial and multi-family mortgages totaling 29.7 billion in the first half of 2021, up from $ 24.3 billion in 2019, according to data from the Mortgage Bankers Association (MBA), based in Washington, DC, was the biggest year ever for these type of lenders
“A variety of different sources of capital have proven profitable to invest in commercial mortgages,” said Jamie Woodwell, vice president of research and economics at MBA. “They have large pools of capital for these investments.”
Bond funds now offer attractive rates on short-term residential loans, typically only a few hundred basis points above the London Interbank Offered Rate (LIBOR).
“If you’re a borrower who doesn’t need that much money and needs a transitional loan, you can get a spread [from a debt fund] that’s LIBOR plus 200, ”says Draeger. “If you need 80 percent funding, you can get something in the 300s.”
That is more than a whole percentage point less than the interest rates that were common for debt funds a few years ago.
Many investor-driven loan funds have created a new way of raising capital in order to provide more credit. They are now pooling mortgages and selling them as CLOs to Wall Street bond investors. For example, the MF1 REIT, a purely multi-family REIT debt fund, has a CLO of $ 2.25 billion as of September 2021.
Banks, which traditionally dominate the short-term financing of residential real estate, usually offer smaller loans that often cover up to 60 percent of the cost of a housing project. For these smaller loans, banks still offer the lowest interest rates. “Banks can do mid-100 spreads if they like a business and the leverage is low enough,” says Draeger of CBRE. “The banks keep these on their books so they can offer really low spreads.”
Some debt funds are considering longer term home financing options – but the vast majority of the mortgages offered by debt funds are short term loans such as mortgage loans. B. Two-year loans with the option of three one-year renewals.
“There are various groups who are thinking about offering longer-term financing – but mostly still in the planning phase,” says Draeger. “The actual deals are currently still pretty much exactly zero to five years for transitional properties.”
These debt funds are fueled by large investors who just want to put money into real estate.
“Most of them are institutional investors such as pension funds and foreign sovereign wealth funds,” says Draeger. or checks for $ 50 million. “