Payments are doubling on maturing loans, and one veteran broker says creative refinancing is the answer
While some of the challenges being felt in the residential mortgage space have also carried over to the commercial side, there are also unique challenges commercial brokers are facing.
Many multifamily properties bought or refinanced over the past five years used five-year loans, a structure that made sense when rates were low and stable. However, with residential rates approaching 7%, and commercial ones likely higher, the landscape looks much different as these loans come due.
Owners refinancing this year are often facing rates that have doubled or more from what they locked in five years ago. Rental income on many properties has not kept pace with that increase, or with the rising expenses layered on top of it.
One veteran commercial broker says guiding clients through that math, rather than the mortgage itself, has become the real value he provides.
Michael Muller (pictured top), senior managing director at Eastern Union, has spent 25 years in the commercial mortgage business and said the current reset cycle is squeezing multifamily owners harder than the rate increases alone would suggest.
"Rates are doubling or double and then some, and it's crushing, because the NOI for most of these properties has not doubled and doesn't have to double in order to pay that higher mortgage," Muller told Mortgage Professional America. "But it hasn't kept pace with increased expenses."
Changing rate environment
Muller said the first option he explores with a client is simply going back to the existing lender to renegotiate.
"Their docs may have had a 250, a 275 spread, but that's just not going to work now. You can't pay 6, 7%," he said. "So let's see what the loan could work at. We're doing a lot of that."
When the numbers still don't work at the current lender, Muller looks at moving the property to an entirely different kind of capital, including sources a client may never have used before.
"Perhaps you need to leave the savings bank, and you're able to go get agency debt, or perhaps CMBS, getting Wall Street financing," he said. "It's not a solution for all properties. Typically they're offering five years of interest only, and they're underwriting a little bit more aggressively. While historically I may not tell a client with a $10 million loan who's never taken a CMBS loan to consider that, I may do that."
The value of that move, Muller said, isn't about the rate at all. It’s about buying time.
"He buys himself another five years," he said. "He's cash flowing properly, and he's able to build up equity over the next five years."
That kind of alternative, according to Muller, is more available now than it was a few years ago, as new competitors move into a lending market banks have partly retreated from.
"We're definitely seeing an increase overall in deal volume, lenders' willingness to lend,” he said. “There are new kids on the block, meaning new banks, new lenders, whether it's a mix of savings banks, credit unions and life companies, or debt funds that took significant market share in the last few years and continue to do so, as banks clean up their balance sheets."
Vacancy adds to the squeeze
That rate reset, Muller said, is landing hardest on properties also absorbing new competition in their local market.
"There's a lot of new product that was delivered to market, and the market didn't fill up all those units yet," he said. "So there's higher vacancy. What typically happens is that B and C class properties suffer right away. Rents come down, there's concessions."
Rising costs elsewhere in a property's operating budget are compounding that pressure at the same time, according to Muller.
"That, coupled with increased expenses overall due to increases in energy costs and other overall expenses, is creating some concerns for borrowers," he said.
Muller said the borrowers who come through a reset in the best shape are the ones who are willing to be upfront with what they’re facing. By telling the broker and the lender the truth about their current situation, a customer has a better chance of working through any headwinds.
"The borrowers and investors that fare the best are the ones that when they see an issue, they're transparent," he said. "They're talking to me, they're talking to lenders. Lenders want to know what's going on there. They lent anywhere from 50 to 75 leverage on these properties. If there's a logical solution, they're here to talk to you; they're here to work with you."
This isn't the first time Muller has managed a cycle like this, and the clients that brokers can help through the current challenging market will turn into repeat customers.
"I've been through 2000 through 2009, and the down market lasted much shorter then, but we did the same thing," he said. "We were able to navigate, help clients whose loans matured or ballooned. Those are clients that, 15 years later, they're clients for life. You save their asset. That's what I'm seeing a lot on the multifamily side."
Stay updated with the freshest mortgage news. Get exclusive interviews, breaking news, and industry events in your inbox, and always be the first to know by subscribing to our FREE daily newsletter.
