Small-Balance Lending Could Grow 6% in 2018

Michael Tucker mtucker@mba.org

June 12, 2018


Small-balance multifamily lending could increase 4 to 6 percent this year, reported Chandan Economics, New York, and Arbor Realty Trust, Uniondale, N.Y.

The firms' Small-Balance Multifamily Investment Trends report said sub-$5 million multifamily loan disbursement reached $49.8 billion last year, the highest level since the financial crisis.

"As the macroeconomic and real estate cycles lengthen, approaching their longest durations in post-WWII history, the multifamily sector is generally viewed as having a superior risk-adjusted performance outlook," the report said. "The main exception to this favorable assessment is centered on high-amenity apartment buildings in a relatively small set of oversupplied urban cores. Elsewhere, stable operating income, a structural diversity of capital sources and elevated demand for refinancing from the sector's high indebtedness will support a critical mass of lending activity."

National average cap rates for multifamily properties backed by small-balance loans climbed 14 basis points in the first quarter, rising from 6.10 percent to 6.24 percent, the report said. Cap rates have increased 35 basis points since their apparent low point for this cycle--5.89 percent in second-quarter 2016.

Small-balance cap rates peaked at 7.60 percent in the last real estate cycle immediately after the financial crisis, rising sharply from a data series-low of 5.6 percent that coincided with the commercial real estate market peak in 2007, Arbor/Chandan said. "While nominal small-balance cap rates have increased over the last two years, they remain exceptionally low by historic norms, a reflection of low interest rates and improvements in liquidity," the report said.

The spread between small-balance cap rates and the overall multifamily market increased during the first quarter, largely because the small-balance market is more sensitive to interest rate changes. "For all multifamily, cap rates during the first quarter showed negligible increases," the report said. "As compared to the pre-crisis peak in investment activity, 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 tolerances."

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