Atlanta’s Multifamily Borrowing Sector Sees Renewed Hope as Interest Rates Dip

Atlanta Residents Hopeful Amid Interest Rate Changes

In the bustling city of Atlanta, a wave of hope is washing over the multifamily borrowing sector following last week’s interest rate cut by the Federal Reserve. With the Fed signaling that it expects to reduce rates even further, many borrowers feeling the strain of underwater loans are starting to believe they can hang in there until 2025.

A Shifting Landscape

At the recent Southeast multifamily summit held at the Atlanta Marriott Buckhead Hotel & Conference Center, industry experts gathered to discuss the implications of these shifting financial tides. Among them was Ken Wood, the Regional Manager of Red Oak Capital, who shed light on the current borrowing climate. “You’re seeing a lot of loans that are almost finished with construction, and the bank’s like, ‘Get it off my books,’” Wood said, indicating a growing urgency from lenders amid rising defaults.

While the office sector has taken center stage as a major source of distress in commercial real estate, multifamily properties have started to show signs of trouble too. According to data from CRED iQ, about 11% of multifamily CMBS loans were delinquent in August, a sharp rise from just 3% in January. With approximately $57 billion worth of apartment loans potentially drowning due to the less-than-stellar conditions, many investors are getting anxious.

New Paths: High-Interest Bridge Loans

As borrowers find themselves in a bind, many are leaning toward high-interest bridge loans as a temporary solution. These loans serve as a lifeline, allowing them to settle debts with their nervous lenders. Wood highlights that his firm is currently originating loans at interest rates between 10% to 11%. Borrowers, recognizing that further rate cuts might be on the horizon, are saying, “Alright, I’ll take that bridge for a year, because I think we’re going to be sub-six, maybe even five and a half next year,” while the current rates hover around 6.5%.

Freddie Mac and Fannie Mae: Tightening the Reins

While lenders such as Freddie Mac and Fannie Mae continue to spark funding, they are tightening their lending standards after facing challenges with fraud. Recent criminal activities, including a massive $119 million mortgage fraud case involving Fannie Mae loans, have prompted these organizations to demand more from new borrowers. In fact, borrowers are now encouraged to partner with seasoned developers, a sharp change from the past where newer developers could secure loans more easily.

“I’ve had two deals recently in the last two weeks where it was what we call an emerging sponsor, maybe their first deal. Two or three years ago, Fannie, Freddie would rubber stamp that deal,” said Todd Robinson, a commercial real estate attorney. “Now they’re requiring that the general partner bring in an experienced operator.”

Challenges in Older Workforce Apartments

In addition, Freddie and Fannie have become hesitant to lend to older workforce apartments. Developers aimed at upgrading these properties are now facing hurdles securing capital for the necessary renovations. With many older buildings, particularly those built in the 1970s, falling out of favor, financing challenges are becoming pronounced. Robinson stated, “Just in my world, I mean, working on anything with the ’70s in front of it is just like so taboo.”

Looking Towards the Future

The recent rate cut has rekindled optimism among developers who might now feel encouraged to commence new projects, even amidst a flood of new apartment constructions in the Southeast. Experts believe a decline in new development will ultimately lead to a revival in demand as rentals become scarce.

“We have to absorb that and have rents at the bottom and see some kind of growth before equity starts showing up,” remarked Patrick Chesser, Senior Managing Director at Mill Creek Residential. As the multifamily sector braces for what lies ahead, only time will tell how lenders, borrowers, and renters will navigate the changing landscape of Atlanta’s real estate market.