What's on the horizon for real estate investors?

Specialist lender's CEO gives low down on market trends

What's on the horizon for real estate investors?

Real estate investor lender Lima One Capital is navigating the housing sector’s choppy waters much like everyone else in the industry.

With high interest rates dominating the market amid the looming threat of a recession, the South Carolina-based firm is inevitably feeling the pinch, but as CEO and president Jeff Tennyson (pictured) pointed out to Mortgage Professional America (MPA), business has been more resilient than expected.

“We haven’t seen a meaningful reduction in demand - our pipeline continues to stay pretty. Real estate investors are certainly feeling the effect of interest rates increasing just as everyone else, but there’s still a demand for new construction, particularly infill,” he said.

Having originated more than $5 billion in business purpose loans since 2010, Lima One Capital now offers investor clients four primary products – fix and flip, new construction, DSCR (Debt Service Coverage Ratio) and small balance multifamily.

With some of the larger home builders pulling back, the company is focusing less on large developments and more on smaller, entrepreneurial real estate investors who specialize in renovating urban-based infill properties and who are solely reliant on friends and family for equity.

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Lima One Capital, which specializes in rental rehab and new multifamily construction, is currently providing capital for these real estate investors at much lower rates than they could expect to obtain on a standalone equity raise from friends or family.

The company originated $600 million in loans for the second quarter and, despite the turmoil, Tennyson believes Lima One is still on track to generate between $2 billion and $2.5 billion for 2022, although growth expectations have been pared down since the start of the year.

“Six months ago, we probably expected to continue to grow at the levels we’ve grown over the last two to three years. That’s now going to be pulled back a bit and overall growth and demand will flatten. But today we don’t see a material change in any of our real estate investor demands from the product perspective. Our concern is the financial ability of those investors to continue to invest at the rate they had been investing in the current economic environment,” he said.

That concern is directed more at inexperienced investors, or as he calls them “the brand-new fix and flipper”.

He said: “We’ve seen a much softening demand from those who just want to get into rental property, that’s something we have seen decline pretty materially. But the experienced real estate investor still needs the support and the capital to make their business operate,” Tennyson said.

According to figures from analytics firm GlobalData, construction output is expected to grow 2.4% this year and reach $1.94 trillion. Nonetheless, this is lower than expected (down from 4.5%) due to interest rate hikes and rising material prices.

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However, growth has largely been due to the rapid expansion in the residential housing space, which made up for contractions in all the other sectors.

But although there is evidence that residential developers are responding to the affordability crisis by building cheaper multifamily units, inventory remains sluggish amid a record fall in mortgage demand due to high interest rates.

“We have had some inventory come on line, but not an adequate amount to cover the demand of six months ago. Instead of a 30 to 45-day inventory, which we were at probably nine months ago, we’re at a two to two and a half months and that is still a historically low level, getting closer to normalcy,” he added. “That’s why you’re seeing a lot of the large home builders pull back on large developments, but while demand is not as high as it was nine months ago (when there was a 3% interest rate), it’s going to continue to be high because people need a home to live in.”

As for the immediate future, he said he expected investors will have to provide more cash in order to strike a deal.

“We have pulled back on guidelines; we have lowered our LTVs to adjust for the uncertainty of what values will look like a year, 18 months, or two years in advance,” he said. “As guidelines tighten down, investors will be required to bring more liquidity to the closing table.”

Despite this, he said he was confident larger national lenders like Lima One Capital would continue to provide “stability and support” for real estate investors, “even with higher interest rates”.