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Among New York’s Institutional Lenders, Multifamily Tightens And Retail Is On The Outs

New York City

Transaction volume might be down for multifamily in New York City, but it remains the preferred asset class of banks and other institutional lenders.

Continued bullishness on stabilized apartments comes as lenders turn a warier eye toward retail, as the growth of e-commerce has changed the attractiveness of brick-and-mortar stores, Marcus & Millichap broker Andrew Dansker said.  

Banks have also noticed a slowdown in multifamily rent growth, and are starting to account for the mounting number of rent concessions landlords are offering tenants. 

Dansker works with clients to secure commercial debt financing for property types like  multifamily, office, retail and hospitality. He has increasingly seen retail become a harder sell for lenders, who are underwriting greater vacancy estimates or shying away from retail entirely. 

“Changes in the e-commerce landscape have made an impact on leasing, and banks are reacting to that,” Dansker said. 

He has also seen lenders change their strategies to match the rent slowdown in multifamily. Rents grew at the slowest annual pace on record in Brooklyn and Queens, and among the slowest rates ever seen in Manhattan, according to StreetEasy’s Q3 Market Report. To maintain rent rolls, more landlords have offered months of free rent to prospective tenants. Banks have started taking these net effective rents into consideration when determining the size of loan proceeds awarded to borrowers. 

Lower net effective income will result in overall proceeds tightening, Dansker said. 

Marcus & Millichap broker Andrew Dansker

Multifamily lending is down among savings banks, the dominant players in the New York City market. In Q2, New York Community Bank originated around $500M in commercial real estate loans in the city, a 37% drop in multifamily lending year-over-year and a 53% decline in overall commercial real estate lending. Dansker attributes the drop in activity to banks responding to the overall decline in sales volume. 

“Some of the savings banks are tightening their spreads to compete with the limited volume of transactions,” he said. “That may continue going forward.”

Going into 2018, the potential for rising interest rates from the Federal Reserve could trigger a boost in sales activity. Most of the loans done in New York in the last few years were at a maximum level of value based on net cash flow in relation to loan cost, Dansker said. If, going forward, rents are flat or soft, but the cost of loans goes up, borrowers could have trouble refinancing at the levels at which they bought a property, and may be forced to put in equity to refinance or sell. 

One funding option that continues to grow is the alternative financing landscape, as regulations like Dodd Frank and Basel III continue to put a cap on institutional lenders' commercial real estate activity. 

“There are a lot of investors who are unable to find equity investments at a basis that they like and have shifted to debt strategies,” Dansker said. “I get a phone call two or three times a week from a new entrant into the private lending space. That market is getting more crowded.”

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