CRE Mortgage Originations Are Falling. What Does This Mean for Multifamily Investments?
Thanks to the Fed’s extraordinarily hawkish fight against inflation, lenders have recently begun tightening their criteria and requirements for mortgage lending, leading to a decline in CRE mortgage originations.
A decline in commercial real estate (CRE) mortgage originations can have implications for the multifamily sector: In Q1 2023, commercial and multifamily mortgage originations were down by 56% compared to the previous year.
It's important to note that factors beyond CRE mortgage originations, such as overall economic conditions, population growth, and local market dynamics, can influence the multifamily market. While a decline in mortgage originations may present challenges, it's essential to consider the broader context when assessing the multifamily sector's outlook.
Here's what a decline could mean for multifamily investors.
#1 – Reduced Financing Availability
Because lenders may be more cautious or conservative in extending commercial property loans, securing loans for new multifamily construction or acquisitions might become more challenging. Multifamily developers and investors may have fewer financing options and tighter lending standards.
With the reduced financing availability, investors and developers may look elsewhere for financing opportunities outside of traditional lending. This may include:
- Private equity;
- Crowdfunding;
- Mezzanine financing;
- Collaborations and partnerships with other investors; and
- Seeking out specialized lenders with expertise in multifamily properties.
By diversifying their sources of financing, investors and developers can increase their chances of securing the necessary funds for their projects.
#2 – Decreased Transaction Activity
Lower mortgage originations might lead to a decline in overall transaction activity in the multifamily market. Buyers may find it harder to obtain financing, which could reduce the number of property acquisitions. Sellers might also be affected as potential buyers face more obstacles in securing loans, resulting in a slowdown in sales activity.
With a limited supply of multifamily properties, the competition among investors for available opportunities may intensify. This could result in higher purchase prices and compressed cap rates, which could reduce potential returns on investment.
#3 – Slower Multifamily Development
If financing becomes less accessible or more expensive, developers may scale back or delay multifamily projects. This could potentially impact the growth of the multifamily sector and limit the availability of new rental units.
Investors looking to enter a new area but are unsure of the development opportunities can take precautions by assessing factors like:
- Population growth;
- Job market trends;
- Demographic shifts; and
- Rental demand.
These elements can help investors and developers make informed decisions about their projects' viability and potential profitability.
#4 – Potential Rental Market Impact
If the decline in mortgage originations limits the supply of new rental units, it might increase demand for existing multifamily properties. This could increase rental prices, especially in markets with strong population growth and limited housing supply.
In these situations, higher-income individuals or households often have more options to choose from in terms of newer, upscale multifamily properties. On the other hand, lower-income individuals or households may face a shortage of affordable housing options. This can exacerbate affordability challenges and inequality within the rental market.
Additionally, acquiring existing multifamily properties may become more competitive with fewer completed mortgage originations. Investors looking to expand their multifamily portfolios may face increased competition from other investors, potentially driving up property prices. This can impact investment yields and potentially make it more challenging to find attractive investment opportunities.
#5 – Stabilizing Property Prices
The impact of a decline in CRE mortgage originations isn’t all bad news. A decrease in mortgage originations could potentially contribute to stabilizing multifamily property prices.
With reduced financing availability, less speculative buying may lead to a more balanced market. This could benefit investors and renters as property values become less volatile and rental rates stabilize.
This can provide a more predictable investment environment for multifamily real estate investors. It reduces the risk of sudden price declines or rapid increases, allowing investors to make more informed decisions and develop long-term investment strategies.
Investor Takeaway: Stay Patient, Think Long-Term
Understanding the impact of lower CRE mortgage origination in the multifamily sector is crucial for multifamily investors navigating the current market.
The decreased availability of financing for new construction projects has implications for the rental market. Investors should carefully consider these market dynamics and adapt their investment strategies accordingly.
A patient and long-term investment perspective will be valuable in a market where transaction activity may be slower. Investors should conduct thorough market analysis, assess risks, and seek opportunities in stable and desirable locations.
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