Chad Hagwood of Lument advises multifamily borrowers against trying to time the market.
This article originally ran in Southeast Real Estate Business. Interview by John Nelson
Multifamily borrowers are hopeful that the stars will align with favorable interest rates when they go to finance their acquisition, refinancing or other endeavors. Chad Hagwood, senior managing director and Southeast regional director at Lument, cautions against betting on such volatile variables as interest rates in the margins of the deal.
“Hope isn’t a strategy,” says Hagwood, who leads Lument’s Southeast region out of Birmingham, Ala. “If the deal hits your numbers today, then what are you waiting for? We have a saying in the South: Pigs get fat and hogs get slaughtered.”
Hagwood says that overreaching by timing the market — meaning timing the 10-year Treasury yield or other benchmarks to hit a certain threshold before transacting — isn’t a sound approach at the surface since deals take 30 to 45 days to close, if not longer. Instead, he advises his clients to transact whenever the numbers pencil out or to begin working their deals months or even years before loan maturities (or other capital events) so they can capitalize on any downward rate movements along the way.
“You have to think ahead because as efficient as we think we’ve gotten, things can sometimes still take longer to get done today,” says Hagwood. “The biggest mistake that I see is clients waiting too long and holding back the process.”
Southeast Real Estate Business recently caught up with Hagwood to discuss trends in the multifamily lending space, as well as Lument’s activity across its array of loan programs, including Fannie Mae, Freddie Mac, HUD, the wider capital markets and its own balance sheet. The following is an edited interview:
Southeast Real Estate Business: Multifamily investment sales have been down for the past couple years. Do you think pricing needs to come down for transactions to take place in earnest?
Chad Hagwood: In certain cases – Yes, and some downward movement in rates would be helpful. I do think a lot of folks are purposely sitting on the sidelines. The summer slowdown this year is real, and there’s clearly a lot of trepidation with what’s going on overseas. Interest rates are fairly volatile, and I think that has a lot more to do with the price of oil than anything else.
To some degree, there’s still this unrealistic hope of interest rates getting ‘back to normal,’ and people are using 2021 as a frame of normalcy. We’re just not going to see that again. Five to seven years ago simply aren’t a realistic frame of reference when you look at things holistically. Rates are attractive today in the overall scheme of things as far as I’m concerned, they’re just not as attractive as they were. Interest rates were never meant to be free, but at one point in time they came pretty close.
SREB: Can you give us a snapshot of how aggressive (or not aggressive) Fannie Mae and Freddie Mac are through the second quarter for multifamily deals?
Hagwood: Both of the agencies are eager to transact. They are extremely competitive, with some of the most competitive terms out there for multifamily. There are plenty of really good deals getting done across the board with the agencies.
SREB: How popular are HUD’s 221(d)(4) and 223(f) loan programs currently for borrowers?
Hagwood: They are both very in demand. There is a strong need and desire for the 221(d)(4) product as it’s very attractive construction program, especially for someone that’s owned their land for a long time. Rates are very attractive for that product, as well as the 223(f) program for refinancing. FHA has done a remarkable job of streamlining the process and making it more efficient to get transactions done, more so than at any other time during my career.
SREB: What are some of the advantages for borrowers that choose deals done via Lument’s balance sheet?
Hagwood: The bridge product is very popular for acquisitions, repositioning, and value-add opportunities, though there are fewer of those deals right now. It’s also popular for borrowers who need a business plan turn, since not everyone wants to take on permanent debt out of the gate. The advantage of the balance sheet loan is the flexibility to work around the borrower’s business plan versus the lender’s.
There is efficiency with it, especially when borrowers are at the tail end of that process rehabbing their business plan, and they want to roll into another one of our permanent products, regardless of whether that’s agency, CMBS or life company debt. After working on the same property or client for a couple of years, we know the deal like the back of our hand, so it does make it a much more seamless process.
SREB: Generally speaking, are there any underwriting practices proving popular with borrowers today?
Hagwood: There’s certainly a lot more interest in shorter-term deals — whether that’s five or seven years — versus longer-term deals. That can be for a variety of reasons: it might be due to the borrower’s hold period; they might like where rates are or they see opportunities with dispositions in a shorter time period. It’s more borrower-specific than anything.
What’s interesting to me are the bullet maturities with the guys that never sell anything. They’re taking longer term deals and putting it right back to bed. They’re getting their cash outs from the proceeds, they’ll get their appreciation and they’ll do it all again in seven to 10 years. They don’t question today’s rates as much as shorter term borrowers.
Also, we’re showing borrowers interest rate buy-down options on every deal. It doesn’t work on every deal but for some deals it makes total sense.
SREB: How would you assess the health of the multifamily market from a supply-demand perspective?
Hagwood: It’s market-specific. My home of Birmingham more than holds its own versus many markets. Supply and vacancies are relatively in check. New development has been healthy but somewhat constrained. You have to dig deep to find good stories in other metros. Some markets are overcrowded, as if every developer in America woke up at the same time on the same day with the idea to build the same product. We’re very fortunate in Birmingham to have a healthy balance to where owners can get good rent bumps.
SREB: Are there any other storylines you’re keeping your eye on in the last half of the year?
Hagwood: Capital is available. The demand is there to get the money out the door, not only from the lender’s perspective but also the ownership’s perspective. We don’t have a shortage of capital, which is good.
Also, no matter the market or property type, rent collections seem to be lagging relative to normal periods. It doesn’t matter if it’s in Alabama or California, people are paying a little slower these days.
And it’s important to note that real estate is a marathon, not a sprint. If you’re a bad actor or trying to take shortcuts, the skeletons will come out of the closet sooner or later. We’ve seen a reckoning for some of the bad actors in our industry lately, which I don’t think is a bad thing at all. The wheat will always separate itself from the chaff.
SREB: Are there any recent deals in the Southeast that Lument has closed that you’d like our readers to know about?
Hagwood: We put out a very nice bridge loan on a property in the Birmingham area with a borrower that wanted out of its bank debt. They wanted to get rid of their preferred equity, finish lease-up and go permanent with their debt. We structured a package that was very attractive to allow them to do all those things: Stop the pay rate on the preferred piece and get off the recourse for the bank loan. There are deals out there that work, and we’ve done a few of those type deals in the past 12 months.
