Rental squeeze is welcome news for commercial investors

Commercial construction lenders see a spike in interest for multi-dwelling commercial financing

Rental squeeze is welcome news for commercial investors

This article was produced in partnership with RCN Capital.

Karen Surca of Mortgage Professional America sat down with Hunter Ramzy, director of multifamily at RCN Capital to discuss the push towards affordable commercial rental construction and rehab despite ongoing challenges that face commercial new construction in 2022.

Activity is surging right now in the commercial lending end of things.

Just as 2021 proved to be a banner year for commercial lenders, 2022 is shaping up to be moving in the same direction.

According to Hunter Ramzy (pictured), director of multifamily finance with RCN Capital, a distinct housing shortage felt across the US is one of the primary drivers of such renewed commercial activity.

The lack of affordable rental housing inventory has skewed the financing requests that Ramzy is seeing as we enter the new fiscal year.

In particular, the interest from commercial mid-size investors to finance multifamily commercial projects represents one of the main demands coming across Ramzy’s desk.

“The effect on multifamily 2021 was an especially strong year for the multifamily industry coming off of historical levels of occupancy,” Ramzy explained.

“We saw around a 97% to 98% occupancy rate and a year of double-digit rent growth. I think that 2022 will be another strong year for multifamily,” he added.

Ramzy points out that there are several converging factors at play, beyond the obvious housing shortage, that could also be contributing to the explosion in demand from small and mid-size investors for multifamily commercial financing.

What is behind the demand for multifamily rehab and construction?

Outside economic factors are playing a role.

Like any sector, the housing industry is far from immune to the whims of broader macroeconomic factors.

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“Inflationary factors are driving up the construction costs which is another reason I think that builders have continued, and will continue, to do less and less of the entry-level type of home space,” Ramzy predicted.

Just as the latest Consumer Price Index (CPI) spelled an inflationary crunch for the mortgage industry, so did the continued supply chain disruptions at the major ports around the US.

Ramzy outlined how the backup and current undersupply of construction materials is slowing down new construction projects.

While materials are slow to arrive on US shores, the sheer cost of labor and construction materials also continues to increase.

“The rise in construction costs and continued inflation has created another opportunity for investors to come in and rehab apartments, by upgrading individual units and improving amenities for the tenants who live there,” Ramzy stated.

“This helps the overall demand for affordable housing. Only a quarter of the apartments in the US were built after 2000. It is a very aging housing stock for apartments and a high apartment occupancy level,” he continued.

Further hindering construction efforts is the shortage of skilled labor that “is felt throughout all the trades and all industries throughout the country,” Ramzy said.

Construction financing options to fill the gap

RCN Capital is particularly well-positioned to help fill the multifamily construction lending demand.

“We continue to provide permanent debt in the way of a 30-year rental term financing product that will help investors address occupied apartment complexes once they are fully leased and up to a stabilized level after they have been rehabbed,” Ramzy outlined.

Focusing its efforts on the “smaller balance space,” Ramzy described how RCN Capitals programs are perfectly suited to cater to investors interested in the rental space and for small to mid-size commercial multi-family projects.

“We have loans that start at $250,000 for properties down to five units, so we can offer smaller balance products both on the bridge loan and long-term rental financing side to help rehab apartments,” Ramzy said.

Further elaborating, Ramzy highlighted that “these investors can come to us to take out a loan that will provide them this permanent financing which will help if they decide to rehab and ultimately retain the property.”

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RCN Capital’s bridge loans remain flexible, which savvy commercial investors favor.

“Generally, these [bridge loans] are 12 months to 36 months to provide people with rate flexibility as well as a timeline and based on their projects,” Ramzy said.

Looking ahead

RCN has no plans to slow down as we gear up for the year ahead. With expansion in mind, it is broadening its network of brokers across the country.

“We lend across the country and are not designated to a specific metro area. So, this is a good opportunity for us to branch out where we can utilize our existing network of brokers and direct retail investors,” Ramzy reinforced.

Already a presence in Connecticut and North Carolina, Texas, and California, RCN Capital intends to reach a broader network with “more boots on the ground” in these and other areas.

“We are expecting another strong year for multifamily [construction financing] coming off historic levels of occupancy seen in 2021 with a strong continuum of rental growth in most major markets,” Ramzy predicted.

When asked if there is any possibility of a slowdown in the multifamily segment of the commercial market, Ramzy carefully considered his answer.

“Yes, there may be an eventual slowing down a little bit toward the end of the year as interest rates start to rise. We’ll see that the compressed cap rate will be to tick up a little bit and normalize to more historical standards over time,” he answered.

Weighing in current competing factors Ramzy still feels that “it will remain a very strong year overall.”

Hunter Ramzy joined RCN Capital in 2021 as the director of multi-family finance. He is based out of RCN’s Charlotte, NC office and works with the firm’s multifamily bridge and term lending programs. Before joining RCN, Hunter previously worked at Wells Fargo in both its Real Estate Capital Markets and Commercial Mortgage Loan & Securities Finance groups. His experience included CMBS lending, as well as repo lending to non-bank Lenders for CMBS and bridge loans. Before Wells Fargo, Hunter worked for Finance of America Commercial, where he focused on SFR portfolio lending. He began his career at BB&T (now Truist) working in Commercial Credit, as well as the bank’s Asset Resolution Group. Hunter graduated from Virginia Tech with a Business degree in Finance.