Navigating the Changing Landscape of Commercial Financing: Insights from Gil Figueroa
In today’s volatile economic landscape, multifamily investors face unique challenges in securing favorable financing. I recently sat down with Gil Figueroa, a seasoned commercial loan broker, to discuss the current state of the multifamily loan market, focusing on key trends and actionable strategies for investors.
Interest Rates and the Fed’s Impact
Interest rates have been highly unpredictable over the past 90 days, causing concern among investors. Gil noted that while rates recently broke through a critical threshold not seen since 2022, it’s the Federal Reserve’s future guidance that will truly dictate the movement of rates. Multifamily loans, which are tied to the 10-year treasury yield, may not see immediate relief even if the Fed lowers short-term rates. Instead, investors must remain cautious and plan for rate fluctuations in the future.
Stricter Underwriting and Hurdle Rates
Lenders are also taking a much more conservative approach to underwriting. Gil highlighted that lenders are focused on the borrower’s ability to handle rate increases and often apply a “hurdle rate” — an interest rate 1% higher than the actual rate — to ensure borrowers can manage future increases. Investors approaching loan maturities may face the challenge of injecting additional capital to refinance, as I experienced with one of my own properties.
The Effects of Rent Control
Rent control laws, particularly in California, have significantly impacted the underwriting process. Lenders who previously based loans on future market rents are now more conservative, relying on current rents to determine loan amounts. New investors face even more barriers, with many banks unwilling to lend to first-time buyers without a strong track record of property management in rent-controlled environments.
Preparing for the Worst
Gil stressed the importance of preparing for worst-case scenarios. Investors should stress-test their portfolios and be realistic about their properties’ cash flow and market conditions. Some strategies, like opting for interest-only loans or adding Accessory Dwelling Units (ADUs), can help investors maintain cash flow in this challenging market.
Final Thoughts
Multifamily investors need to adapt to the shifting landscape of commercial financing. With interest rates fluctuating and lenders tightening their requirements, having a well-thought-out plan and working with experienced professionals is crucial for long-term success.