Bison Financial Group principal, David Repka, was recently interviewed by a national commercial real estate publication to discuss his views on where the single-family residential lending market is headed in 2021....
Q: What are your predictions for single-family rental lending going forward?
David Repka: I have been active in the commercial real estate business since 1985 and have not seen a caterpillar turn into a more beautiful butterfly in the eyes of investors like single-family rentals. Portfolios of rental houses as an investment class have gone from a beaten down and disrespected asset class to a must-own asset class. Pre-Great Recession portfolios of rental houses were for investors just starting out in their careers until they could afford to buy “real investment properties” like an apartment complex or mobile home park. Post-Great Recession they now are the must-own asset class of institutional players like Starwood and Blackstone. Scattered-site single-family rentals and purpose-built communities of homes built for rent are viewed as “horizontal apartments” with much greater “tenant stickiness” than traditional apartment communities. Tenants enjoy the lifestyle and stay longer than in traditional rental apartments. Capital will continue to pour into this sector.
Q: What will be the biggest trends/changes in single-family rental lending going forward versus years past?
David Repka: Lenders first got comfortable with the quality and durability of the cash flows generated from portfolios of scattered site rental houses. Going forward lenders are willing to take more risk by financing the construction of build-for-rent communities.
Q: How will underwriting change for these loans going forward?
David Repka: Lenders will continue to take more risk. They will add risk by providing more leverage, funding properties at Certificate of Occupancy with no income in place, funding ground-up construction and funding inexperienced borrowers.
Q: What type of single-family properties and projects will lenders target? (class, location, size, number of units)?
David Repka: Top 100 MSAs in a blend of primary, secondary, and tertiary markets. The sweet spot is workforce housing for “neighborhood heroes” like nurses, first responders, teachers, government workers, etc. with dependable and reliable monthly income. Small markets, rural markets, and markets with an over-concentration on any one industry will find it hard to attract financing. Lenders are biased to strong sponsors with 5 or more assets to be financed, a meaningful track record in the space, and solid post-closing liquidity.
Q: What will be the typical leverage on these deals?
David Repka: Leverage on acquisitions and new construction projects with top out at 80 to 85% of cost subject to 60 to 65% of the as-completed value. Leverage on stabilized portfolios will top out at 75% LTV.
Q: What will be the typical interest rates?
David Repka: Non-bank lenders will offer interest rates on non-recourse construction loans and heavy-lift rehab loans starting at Libor plus 600bp. Stabilized properties will be financed at fixed rates in the 4s and 5s depending on LTV and dollar amount. Risk-based pricing applies: best rates for larger pools with lower leverage and strong debt coverage.
Q: What will be the typical debt yield for this property type? DSC?
David Repka: For stabilized properties debt yields of 7.5% and higher will be required. Look for DSC of 1.2 to 1.25 on stabilized properties.
Q: How much recourse will lenders require?
David Repka: Non-Recourse construction loans will still require completion guarantees and in certain cases an interest carry guarantee. Non-Bank permanent lenders in the single-family rental space offer non-recourse terms for loans over $1 million. Smaller loans (under $1 mm) and higher leverage loans are more often full recourse to the borrower.
Q: What will be the hot markets for SFRs this year? What markets will lenders shy away from? Why?
David Repka: Hot markets will be Florida, Texas, Arizona, and the Carolinas. The media has reported that over 1,000 people a day are moving to Florida, some have commented that this has been understated and the true figure is closer to 3,000 people a day. Cold markets: There will be continued flight from very dense urban markets to suburban markets and Southern, warm weather, low state income tax markets. An unintended consequence of Covid-19 is that people that can work from home will work from home. A person that was paying $4,000 a month to live in a cramped urban market in the Northeast can rent a beautiful detached, purpose-built rental home in a Built-for-Rent Community with a state-of-the-art home office for $2-2,500 a month.
Q: What will lenders look for from sponsors when underwriting? (certain net worth, liquidity, number of other properties, etc.) How has this changed since the pandemic?
David Repka: Construction lenders and heavy-lift rehab lenders will want their borrowers to have a net worth at least 100% of the loan amount with post-closing liquidity for 10-20% of the loan amount. Permanent lenders will require net worth of at least 25% of the loan amount and post-closing liquidity for at least 5% of the loan amount. The ideal borrower will have 3 to 6 months of post-closing cash reserves to pay debt service on their portfolio if there is another Covid-19 problem that impairs cash flow and their tenants ability to pay rent.