In Q2 of this year we’ve seen a major shift in lending requirements resulting in significantly lower debt proceeds relative to the past few years. An increase in first year debt yields from 4% to 6% has forced many buyers into renegotiations of purchase prices and in some cases, has forced buyers to back out of deals completely. As the bridge market continues to increase in volatility, operators are once again being forced back into fixed agency debt leaving many brokers and sellers underwhelmed by their asset’s adjusted price tag.
In recent years, Bridge loans have become a staple product for acquisition teams trying to stay competitive in the bidding process. They are an interest only, variable rate debt product that provides proceeds based on future projections. Alternatively, traditional lenders like Freddie and Fannie underwrite using trailing financials making it a much more conservative debt option when compared to forward looking bridge loans. The purpose of a bridge loan is to do exactly what the name suggests, provide a “bridge” into traditional agency debt once a property has been stabilized, and a value add plan has been completed. In recent years however, as inflation soared, so did the net operating incomes of multifamily assets resulting in much higher purchase prices. Inflation has been so prevalent, that in many cases operators did not have to implement value add plans to see a substantial return. In this environment, higher leveraged bridge debt products provided acquisition teams the ability to reach sellers' increasing expectations of sale prices in a boiling hot market. Now that inflation is tapering due to the FED’s monetary restrictive policy to raise rates, highly exposed bridge lenders have collectively adjusted for the increased risk. The good news for apartment investors now is that purchase prices must adjust down to the liquidity of debt proceeds while NOI is continuing to grow.
This leaves a tremendous amount of opportunity to buy appreciating assets at significant discounts using lower risk, fixed rate debt. Sellers with large balloon payments coming due soon will have little choice but to exit at a much lower purchase price than what they could have fetched just a few months ago. QC capital’s second fund, QC Capital Fund II, is currently being registered with the intention of capitalizing on these opportunities. If you are interested in learning more about this fund and our other 506(c) opportunities, you can learn more here.