Small Balance Lending Volume Sets Record in 2017

Small balance multifamily lending reached $49.8 billion during 2017, reported Chandan Economics and Arbor Realty Trust.

Small balance lending–loans between $1 million and $5 million–equaled $47.6 billion in 2016, the previous high point since the financial crisis.

“The baseline model points to continued strength in [small balance multifamily lending] activity in 2018, with growth in lending adjusting to a sustainable pace of 3 to 6 percent,” the Chandan-Arbor Small Balance Trends Report said.

Cap rates for multifamily properties backed by small balance loans held steady in the fourth quarter, declining just 3 basis points to 6.1 percent. Cap rates have increased marginally since their most recent low in 2016 after peaking at 7.6 percent immediately after the financial crisis. “While small balance cap rates have inched up from their recent nadir, they remain low by historic norms,” the report said.

The spread between small balance cap rates and the overall multifamily market declined slightly during the quarter, but the widening gap that emerged over the last year remains. “Compared to the pre-crisis market peak when the erosion of risk pricing saw the spread between small balance and all multifamily narrow to less than 30 basis points, current premiums for small assets are within historic norms,” Chandan and Arbor said.

Debt yields for small balance loans held steady throughout 2017, reflecting “marginal” increases in both loan-to-value ratios and cap rates, the report said. At current levels, debt yields are only slightly above post-recession record lows.

“Offsetting any rise in the cost of financing and upward pressure on cap rates and debt yields, the favorable balance of supply and demand for smaller assets outside the urban core should sustain property income growth over the current investment time horizon,” the report said. “While the broader real estate market has shown signs of softness, small balance investment activity and liquidity are insulated in part by this cycle’s increase in aggregate agency support. Barring a downturn in the economy, a policy misstep by the administration or the sudden emergence of comprehensive housing finance reform as an immediate priority, the overall lending environment for small cap properties is projected to remain stable.”