Steady Rise In Small-Balance Lending

Small-balance multifamily lending–between $1 million and $5 million–slipped during the third quarter but remains on a record-setting pace for the year, reported Arbor Realty Trust and Chandan Economics.

Small-balance multifamily lending fell 3.1 percent during the quarter, but lending volume through the first three quarters was 7.3 percent higher than during the same period last year, the reports said.

“Preliminary analysis for the fourth quarter shows the small balance market on track to surpass last year’s record level of activity,” the Small-Balance Multifamily Investment Trends Report said.

Last year’s $47.6 billion in small balance lending volume was the highest since the 2008 financial crisis, surpassing the previous year’s $44.9 billion record by 6.1 percent.

Chandan’s model forecasts a “sustainable” small balance lending growth rate between 4 and 8 percent for 2017 and 3 to 6 percent in 2018–unchanged from previous projections.

“As the macroeconomic and real estate cycles lengthen, the multifamily sector is generally expected to outperform other property types,” the report said. But it noted one possible exception to this favorable outlook: amenity-rich apartment properties in a small set of oversupplied urban cores. “Elsewhere, relatively stable operating income, a structural diversity of capital sources and the increase in multifamily refinancing needs indicate a critical mass of lending activity,” the report said. “The potential for an adverse shock to multifamily liquidity from radical housing finance reform remains conjectural given the current balance of priorities in the nation’s capital.”

The report said cap rates for multifamily properties backed by small-balance loans remained virtually unchanged in the third quarter, declining just 5 basis points to 6.0 percent.

Cap rates have increased marginally since last year and are 12 basis points higher than third-quarter 2016. Small-balance cap rates peaked at 7.6 percent immediately after the Great Recession, rising sharply from a 5.6 percent low during the last commercial real estate market peak in 2007. While small-balance cap rates have inched up from their recent low point, they remain low by historic norms,” the report said.

“The spread between small-balance cap rates and the overall multifamily market declined slightly in the third quarter, following five consecutive quarters during which the spread widened,” the report said.