James P. Flynn, CEO of New York-headquartered Hunt Real Estate Capital, believes 2020 will continue to provide a strong environment for multifamily lending and transactions. Though this may be good news for borrowers, it does mean competition in the market will also remain strong.
Flynn addresses these points and elaborates on ORIX USA’s acquisition of the Hunt Companies’ commercial real estate financing subsidiary in the Q&A below.
Finance Insight: What commercial property sector will experience the most activity in 2020, and why?
Flynn: Multifamily should continue to be the most active commercial real estate sector in terms of financing activity. The MBA forecasts that multifamily lending will top $395 billion in 2020, a 9 percent increase over 2019 activity. That figure represents nearly 60 percent of the total commercial real estate activity forecast for 2020.
With the Fed signaling no change to borrower costs for the year, the consensus seems to be a continued period of interest rates near historic lows. Multifamily owners and operators will continue to take advantage of this environment to rehabilitate, refinance and refine their portfolios.
Of course, the other side of the equation is the growth in multifamily demand drivers. These drivers have remained strong, though they’re now moderating a bit. While millennials increasingly examine homeownership, affordability issues are curtailing widespread adoption. Tight labor markets will support wage growth, so this is an area to watch closely. This will be another strong year for unit deliveries, though we are seeing a trend of developers shifting from urban to suburban opportunities. In general, we expect vacancy to trend slightly upward during 2020, while rent growth will slow from 3 percent down to the mid-2 percent range. That being said, we did see sales price per unit increase roughly 10 percent from the fourth quarter of 2018 to the fourth quarter of 2019 — indicating extremely strong demand remains for this asset class.
FI: What is the biggest challenge you anticipate in 2020?
Flynn: Competition — the multifamily sector has no shortage of capital providers. This presents different challenges, depending on the asset. For a borrower looking to finance a stabilized property with a seven-, 10- or 20-year agency loan, the biggest challenge is purely competition. If that asset is of an older vintage, we have seen this competition create a bit of a stretch in underwriting in certain cases. The older the asset, the greater the likelihood that capital issues may arise. We still want to see how a borrower plans to maintain an older asset that is going to need some work over the next 10 years — a period when there is relatively high risk for either an increase in operational costs or a slowdown in rent growth. Is there enough available capital upfront or in reserves? We will continue to maintain our high credit standards, and strong sponsors are the key to getting comfortable with these types of transactions.
For shorter-term financing on transitional assets, we are seeing this competition manifest into spread compression. There are some aggressive lenders out there taking greater chances than we are willing to consider, given the potential reward. It is not about taking the risk; it is about earning the proper return for that risk.
FI: Where do you see the biggest opportunity for your company in 2020?
Flynn: We are in a unique position at the moment as Hunt Real Estate Capital was recently acquired by ORIX USA. The acquisition combines the financial strength of ORIX USA and the complementary product offerings of ORIX Real Estate Capital brands, Lancaster Pollard and RED Capital Group, with Hunt’s leading presence in the multifamily industry. Ultimately, this means we have the opportunity to create a top-tier national real estate lender with the capital, skillset, and product range to provide investors and developers with more flexibility than traditional bank lenders. Hunt’s portfolio of products and geographic footprint complement those of Lancaster Pollard and RED Capital Group, and our combined leadership has the expertise required to forge these three groups into a single, cohesive, full-service entity.
FI: What is Hunt’s lending strategy for 2020?
Flynn: One area we are looking to expand is the non-agency front, particularly bridge lending on all asset classes. Integrating into the ORIX platform will help us expand this business line. That being said, I don’t expect the focus of our bridge program to change much. We like multifamily, and we tend to focus on the light and moderate transitional assets in the middle market in terms of both asset quality and loan size.
As multifamily prices continue to rise and cap rates continue to compress, we will also be working to grow our mezzanine and preferred equity platforms to offer our best multifamily clients options for additional leverage on their transactions. The financial strength of our new parent company will enable us to explore the possibility of providing corporate-level financing as well.
We are also excited to continue building out our technology platform, which will empower clients to make faster, better-informed decisions. Our well-received customer loan application and processing portal has already sped up the process considerably, but we are now looking at how to use data to get borrowers to apply faster with automated sales comps, soft quoting and pricing.
— Interview by Nellie Day. This article is posted as part of REBusinessOnline’s Finance Insight series, leading up to MBA CREF 2020.