Getting into ready position - by Shallini Mehra

The ever-changing rent regulations continue to pose challenges for New York City landlords.  The combination of these laws with the higher interest rate environment has reduced values in some cases by 20 to 40%, with some assets now worth sub-debt levels. Many of the shorter-term loans coming due will require a significant paydown in order to be refinanced. In addition, the Fed still has additional rate hikes planned in 2023.

This market uncertainty has forced regional banks to pull back on overall lending and run a more conservative underwriting process. Historically, these banks allowed rate lock at application and now they are floating the rate until closer to closing to mitigate their interest rate risk. This makes it more difficult for borrowers to underwrite debt levels and equity requirements, leaving them in a state of flux.

Meridian is advising clients who have traditionally borrowed from regional banks and who have loans coming due, to expand their lending roster to include the agencies, CMBS, private lenders, and insurance companies. In the past, agencies only offered longer-term products, whereas today, borrowers can obtain a five-year loan with full-term interest-only payments.

“Once third-party reports are back and credit has cleared, clients are in a position to index lock with a comfortable 30-to-60-day window to closing,” said Judah Hammer, a managing director at Meridian Capital Group. “This gives the borrower flexibility and puts them in a ready position to take advantage of and lock-in the loan rate if the treasuries dip.”

Shamir Seidman, a senior vice president at Meridian, said, “CMBS, which traditionally lends on larger commercial assets, has shifted, and will now lend on smaller properties and has become an attractive option for multifamily assets.” Shamir recently secured a refinance from bridge to permanent for a mixed-use asset featuring a 65% loan-to-value and underwritten with a 1.25 debt service coverage ratio. Granted, CMBS rates are 50 to 75 basis points higher than traditional banks, but this can be balanced out with higher proceeds, more interest-only, and non-recourse.

On the investment sales side, the gap between sellers’ asks and buyers’ bids is starting to narrow. The deals we are working on currently are with motivated sellers who are unable to refinance or ready to sell due to management fatigue, negative cash flow and frustration with the rent laws. Cash is always king, and those with moderate leverage will have an easier time staying afloat until rates come down.

Whether you are getting ready to buy, sell, or refinance, getting into a nimble, ready position is key to success over the next 12 to 18 months as we see more distressed deals, foreclosures, joint ventures, and creatively financed deals—including owner financing and preferred equity. After all, vacancy in New York City remains below three percent and there continues to be a shortage of housing. Multifamily will continue to remain a secure and resilient asset class.

Shallini Mehra is a managing director at Meridian Investment Sales, New York, N.Y.