September Pulse Check
Friend,
FHA: An alternative to variable-rate bank debt.
A recent article in the Wall Street Journal points to multifamily, following on the heels of office buildings and malls, as the next real estate class to come under pressure from investors and lenders. The problem, βisnβt lack of demand β rents have soared since 2020 β it is interest rates.β Underwritten two or three years ago assuming aggressive rent growth and low interest rates, many multifamily projects now are seeing all of their NOI β and, in some cases, more β go to service debt, with little or nothing left for investors.
Bank CLS and mini-perm rates are typically priced with a spread over an index such as Prime or SOFR, are repriced as often as daily, and carry an all-in rate of the index plus a spread. On September 1, 2020, SOFR was 0.85%, and a loan with a 300 bps spread was priced all-in at 3.85%. Similarly, a loan priced at Prime plus 50 bps would have had an all-in rate of 3.75%.
As of this writing, SOFR stands at 5.31%. A CL or miniperm priced at SOFR plus 300 bps bears an interest rate of 8.31%. A loan at Prime plus 50 bps now is priced at 9.0%.
For multifamily properties coming out of construction or in a mini-perm, rates of 8.5% or 9.0% are punishing, even in the face of strong rent growth since 2020.
At AGM, we are seeing FHA refinance opportunities as borrowers, many new to FHA, are looking for alternatives to variable-rate bank debt. FHA offers β and always has offered β attractive terms for multifamily borrowers. This includes:
- Rates today at 5.75% plus MIP
- 1.176 DSC
- 35-year amortization and a 35-year term
- Non recourse
For market-rate projects built to National Green Building Standards, MIP is 25 bps; otherwise, itβs 60 bps. And reducing your interest rate is actually quick and simple when rates come down.
If you have a multifamily project with a floating rate loan, an FHA refinance may be a great solution to the interest rate problem.