By Troy Marek

With 2023 here, all eyes are on the U.S. economy, with anticipation of what’s to come. Inflation and rising interest rates have captured everyone’s attention as we witness an evolving commercial real estate landscape. For the first time in a long while, the industry is experiencing a recalibration impacting both the cost of debt and the pricing of multifamily and commercial properties. Buyers are unable to pay what they could several months ago for assets and must now be prepared to bring additional equity to their deals.

Much of what is occurring may simply be viewed as a type of normalization, or leveling off, after a long period of growth and inexpensive debt. A recent Mortgage Bankers Association’s (MBA) commercial and multifamily lending forecast for 2022 reflects this. The MBA’s predictions included a total annual 2022 commercial and multifamily borrowing and lending decline to $766 billion, representing a 14% decrease from the $891 billion 2021 totals. MBA predicted multifamily lending activity will drop to $455 billion in 2022, which, if confirmed at year-end, is a 7% decline from 2021’s record $487 billion in activity.[i]  As a point of reference, MBA reported $441.5 billion in commercial and multifamily mortgages closed in 2020 and $601 billion closed in pre-pandemic 2019.[ii]

For those seeking to finance multifamily properties (whether affordable, workforce or market rate), the FHFA’s annual volume caps for multifamily loan purchases of Fannie Mae and Freddie Mac are particularly consequential as they are direct indicators of loan deal volume. FHFA designated its 2023 caps at $75 billion for each agency, or a total of $150 billion. In somewhat positive news for apartment property owners, this is notably just a slim decline from 2022’s $78 billion cap for each agency, or $156 billion total.

Banks, which are experienced in working with borrowers in varying economic conditions, are addressing current dynamics with closer scrutiny on credit decisions and an increased focus on the soundness and sustainability of the operations for which they are providing financing. Federal regulators have also been watching bank commercial real estate loan portfolios more closely, especially those comprised of loans on riskier assets or those with payments vulnerable to rising rates.

All of these dynamics will bear implications for those currently seeking financing, or those who plan to source it in coming months. Liquidity remains in the market, however transactions are happening at a slower pace than in recent years and, unsurprisingly, the finance process has become more detailed for borrowers. What resonates today is the importance of commercial real estate owners working with seasoned finance professionals.

Borrowers applying for loans should anticipate their creditworthiness, as well as property and deal specifics, will be evaluated more closely. An owner’s track record of success is also now increasingly important to lenders. Borrowers can expect the economic uncertainty, which is currently making the finance process more cumbersome, to continue for some months ahead. The ultimate hope is that the Fed gets inflation under control and that the slowdown isn’t prolonged.

About the Author

Troy Marek is head of Real Estate Capital Markets for Regions Bank and leads Sabal Capital Partners, LLC, a wholly owned subsidiary of Regions Bank and a national commercial and multifamily real estate lender. Visit www.sabal.com.

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[i] Mortgage Bankers Association, Commercial/Multifamily Lending Expected to Fall in 2022 Due to Ongoing Economic Uncertainty, October 3, 2022, https://www.mba.org/news-and-research/newsroom/news/2022/10/03/commercial-multifamily-lending-expected-to-fall-in-2022-due-to-ongoing-economic-uncertainty

[ii] Mortgage Bankers Association, Commercial and Multifamily Mortgage Bankers Originated $441.5 Billion in 2020, April 15, 2021, https://www.mba.org/news-and-research/newsroom/news/2021/04/15/commercial-and-multifamily-mortgage-bankers-originated-441-5-billion-in-2020-x278968

By Jason Scott

The commercial real estate arena, like the economy at-large, is experiencing some softening.

Of the biggest issues today for both buyers and sellers of commercial real estate are valuations. Rising interest rates have led to negative leverage and buyers simply cannot pay what they could several months ago for a real estate asset. As a result, some have gone back to the negotiating table and transactions have clearly slowed.

Many are asking about the availability of finance amidst all of the uncertainty. While lending hit record levels during the first half of the year, it has slowed. The Mortgage Bankers Association (MBA) stated in early October that it expects total commercial and multifamily mortgage borrowing and lending to fall to $766 billion this year, down 14 percent from 2021 totals ($891 billion). MBA does however predict a rebound in 2023 lending to $848 billion.[i]

A review specifically at the country’s biggest banks aligns with MBA’s outlook. After record lending during the first half of the year, bigger institutions have certainly become more selective with commercial real estate finance deals. According to Federal Reserve data, U.S. regulated banks financed a record $316 billion of new commercial real estate loans in the six months through June, up 172% from the same period in 2021. Banks were so active during this period that their current slowdown in lending activity is conspicuous.

In addition to rising interest rates, the heightened regulatory environment for banks is contributing to this decline. This summer, regulators informed all U.S. banks they will be watching commercial real estate loans closely through the end of the year in an attempt to quell delinquencies. Examiners are honing in on newly issued loans, those considered riskier categories (for example office, hospitality and retail), as well as those vulnerable to rising interest rates.[ii]

Banks have also been keeping more debt on their balance sheets, with today’s interest rates slowing the issuance of new commercial mortgage-backed securities. A recent Trepp report noted that domestic, private label CMBS issuance slowed sharply in the third quarter as market volatility and higher interest rates stifled lending volumes. At the crux of the slowdown again are climbing interest rates. Trepp notes that the yield from the 10-year Treasury (a benchmark for pricing loans) climbed to 3.62 percent (as of October 6^th) and from 1.76 percent at the start of the year. At the same time, yields required by bond investors from their investments have increased, complicating accurate pricing for loans destined for securitization and stymying borrower demand.[iii]

Borrowers seeking debt amidst these conditions will be met with more challenges than they have in recent years. In general, they should expect interest rates to continue rising and be prepared for lower leverage. They’ll also likely need to bring more equity to the table in order to access debt. While there is still finance available, there are fewer active lenders today and, therefore, less options. If you’re a borrower and you get a reasonable term sheet from a lender, you may want to take it, as liquidity is drying up quickly.

About the Author

Jason Scott is managing director and head of conventional loan production for Regions Bank and Sabal Capital Partners. He may be reached at Jason.Scott@Regions.com.

[i] MBA, Commercial/Multifamily Lending Expected to Fall in 2022 Due to Ongoing Economic Uncertainty, October 3, 2022, https://www.mba.org/news-and-research/newsroom/news/2022/10/03/commercial-multifamily-lending-expected-to-fall-in-2022-due-to-ongoing-economic-uncertainty

[ii] CoStar, Banks with Bulging Commercial Real Estate Loans Face Extra Regulatory Attention, October 11, 2022, https://product.costar.com/home/news/shared/1070929165?utm_source=newsletter&utm_medium=email&utm_campaign=personalized&utm_content=p1&t=eyJhbGciOiJIUzI1NiIsInR5cCI6IkpXVCJ9.eyJjb250YWN0SWQiOiI3NzQ4NTUyMSIsImN1bHR1cmVDb2RlIjoiZW4tVVMiLCJpYXQiOjE2NjU2MDU4MjZ9.qqNxdQx6Pu3tMI3i_CMbD0c_az9WQApl4pNyE6UxtVA

[iii] Trepp, Volatility, Climbing Rates Push CMBS Issuance in 3Q Lower, October 6, 2022, https://www.trepp.com/trepptalk/volatility-climbing-rates-push-cmbs-issuance-in-3q-lower

This month, the team at Sabal Capital Partners was thrilled to receive two prestigious industry awards recognizing the company and its team for market leadership in lending and the multifamily sector.

The first award recognizes Sabal as a top organization for GlobeSt’s annual Influencers in Multifamily Real Estate Awards. GlobeSt reviews a large pool of candidates for these awards, selecting those who are proven, impactful leaders within the multifamily sector. For this particular award, the following team members were recognized for their outstanding contributions to Sabal’s success in multifamily lending:

• Troy Marek, head of real estate capital markets
• Ed Hussey, managing director, bridge lending program manager (formerly head of agency lending)
• Sarah Suther, chief credit officer
• Vartan Derbedrossian, chief fulfillment and servicing officer
• John Maalouf, sizing manager

The GlobeSt award was announced on October 25^th at an awards ceremony held in Los Angeles at the GlobeSt Multifamily Fall Conference.

The second award recognizes the accomplishments of Ann Atkinson, our managing director of small loan and market real estate production. Ann was chosen from more than 400 nominees as a winner of Connect CRE’s Women in Real Estate 2022 Awards. Some of Connect CRE’s honorees are chosen as winners in their region, however Ann was selected to win in the national award category. The women recognized for these awards are handpicked for their achievements and inspirational stories. Winners have reached respected positions of leadership within their companies and industry and also act as key mentors to other up-and-comers in various facets of commercial real estate. Ann’s accolade was announced on October 17^th by Connect CRE.

Thank you to GlobeSt and Connect CRE for recognizing our team.

Panelists explored real estate investment and finance in the current economic climate

On September 14^th, Sabal Capital Partners and Mansion Global hosted Real Estate as an Investment in This Current Economic Climate, a live virtual event for commercial real estate owners, investors and brokers. Expert speakers included Ann Atkinson (managing director, small balance loan & market real estate production manager for Sabal Capital Partners, LLC), Jason Scott (managing director, head of conventional loan production for Regions Bank), and Danielle Hale (chief economist with Realtor.com). Lucy Cohen Blatter (editorial director, custom content for Barron’s Group) led the panelists in a robust discussion of the state of multifamily and commercial real estate investment and finance, covering timely topics and challenges including rising inflation and interest rates, the country’s housing affordability crisis, and the availability of finance for today’s deals.

Ann Atkinson led the discussion about the country’s housing affordability crisis, noting that construction of new units continues to target higher income renters, leaving lower income Americans severely underserved. Pointing to a positive, Atkinson explained the continued commitment of agencies Fannie Mae and Freddie Mac to provide liquidity in the marketplace for the finance of affordable rental housing units. She cited the meaningful growth of their goal to finance 315,000 affordable units in 2021 to 415,000 units this year. Both agencies offer several loan products specifically for borrowers seeking debt for affordable multifamily communities. Those options may be accessed through official agency lender partners including Sabal and Regions Bank.

Ann Atkinson also shared pertinent commercial real estate lending statistics with the approximately 800 registered event attendees. She noted that, per the Mortgage Bankers Association (MBA), commercial and multifamily mortgage loan originations increased 19% year-over-year in the 2^nd quarter of 2022 as compared to the same period in 2021, setting another quarterly record. Breaking down increases by asset class during this period, retail lending increased 108%, hotel lending increased by 37%, multifamily lending increased 24%, and industrial lending increased 3%. Decreases in lending occurred in both office and healthcare. MBA is forecasting a slowdown in borrowing and lending during the remainder of the year, however points to improvements in fundamentals and values in recent years that are providing significant support to properties with outstanding loans, as well as continued financing opportunities for properties whose cash flow can support debt.

Jason Scott educated viewers on what he believes to be the biggest macro-level issue impacting both buyers and sellers of commercial real estate today – valuations. Scott spoke in depth about the drastic increase in interest rates over the past several months and their impact on cap rates (which are the percentage resulting from net operating income divided by purchase price). Lower cap rates equate to higher valuations and vice versa, however Scott explained that today’s spiking interest rates have led to negative leverage, or cap rates which are undesirably lower than interest rates. The bottom line is that buyers today cannot pay the same price that they could just a few months ago for a real estate asset. As Scott pointed out, until the market and pricing adjust accordingly, we should all expect multifamily and commercial property sales to slowdown. 

Economist Danielle Hale addressed interest rates also, making the point that cost of capital and other trends happening in commercial real estate (as a result of rising rates), are also happening across other asset class investments, including for-sale housing. She mentioned higher interest rates are, in part, a reflection of economic growth opportunities and, in part, inflation premium. She believes we are not yet done experiencing Fed interest rate hikes and that the U.S. economy will continue to adjust likely into early 2023.

The panelists all agreed that rent growth has been significant across multifamily, but that interest rate hikes and other factors may begin to moderate that growth. Hale noted that single digit rental rate growth is more likely to occur than the double-digit growth that we have been seeing. All panelists believe multifamily is an asset class that weathers storms and that its current fundamentals remain very strong. Atkinson pointed out now is a good time to lock in long-term fixed rate financing.

To access the full recording of the recent roundtable, which includes in-depth Q&A between the audience and panelists, visit https://bit.ly/3RBT1v9

On Wednesday, September 14^th, Sabal Capital Partners joins Mansion Global in Real Estate as an Investment in This Current Economic Climate, an educational roundtable designed for multifamily and commercial real estate owners and investors. Experts and economists will lead a vibrant discussion about the shifting real estate landscape, covering timely themes and issues including inflationary pressure, rising interest rates, the geopolitical landscape and climate change. The session will inform and provide today’s apartment and commercial real estate owners and investors with insight into how best to navigate the challenges of the day, while sourcing and accessing the financing necessary to keep real estate transactions moving forward.

Our roundtable panelists include:

Ann Atkinson, Managing Director, Small Balance Loan & Market Real Estate Production Manager for Sabal Capital Partners, LLC (a wholly-owned subsidiary of Regions Bank)

Jason Scott, Managing Director, Head of Conventional Loan Production for Regions Bank

Danielle Hale, chief economist with Realtor.com

Lucy Cohen Blatter, editorial director, custom content for Barron’s Group

Who should attend:

Current and prospective owners and investors in U.S. multifamily and commercial real estate properties; Multifamily and commercial real estate brokers; and anyone interested in the state of multifamily, commercial real estate and finance.

Instructions to attend:

The virtual event starts at 1:00pm eastern / 10:00am pacific and is free for all those interested. To attend, simply register here.

By Ann Atkinson

The nation’s housing is in a state of crisis. New supply of for-sale homes, particularly in the first-time starter home category, continually fails to meet demand. This, coupled with recent interest rate rises, is pricing many would-be buyers out of homeownership. The impact on monthly mortgage payments of the 2.0 percentage point hike in interest rates from December 2021 to mid-April 2022 alone is equivalent to a 27% jump in home prices[i] (and rate hikes obviously didn’t stop in April).

Many who were in the market for a new home just months ago have been forced back into the rental arena where prices are also rising. According to CoStar data, recent growth for 4- and 5-star apartments was 13.5% year-over year in the first quarter of 2022, more than five times the 2.5% annual average in 2015-2019; rents for moderate-quality, or 3-star, units were up 12.1% in early 2022 from a year earlier, more than three times their pre-pandemic 3.8% average; and rents for 1- and 2-star units rose 5.9% year-over-year in the first quarter of 2022, well above the 3.5% growth rate averaged in 2015-2019.[ii]

The uptick in construction of new multifamily units is somewhat promising. Starts hit a 30-year high in 2021 with 474,000 and continued into the first quarter of 2022 with 124,000, however the majority of new units have added supply almost exclusively at the upper end of the market, with rents generally out-of-reach for low- and moderate-income households.[iii] For the first-time ever, median rents in the 50 most populous U.S. metros is more than $2,000 and in no state, metro or county in the U.S. can a worker earning the federal or prevailing state or local minimum wage afford a modest two-bedroom rental home at fair market rent by working a standard 40-hour work week.[iv]

With new apartment supply targeting higher income Americans, lower income Americans are severely underserved. Demand far outweighs supply. Thus, the health of the country’s existing affordable units is key and the industry must do what it can to keep this supply available to renters. As a nationwide lender with a core specialization in the finance of workforce and affordable apartment properties, Sabal is committed to serving this segment of the rental marketplace. Our team offers a suite of debt solutions for borrowers looking to purchase, refinance and/or complete sustainability-focused improvements to affordable apartment properties across the country.

Exploring all available finance options can be daunting for borrowers, but our team is here to assist. Whether you’re looking for a long-term fixed rate or short-term hybrid ARM, we provide the most competitive options in the market. We also regularly help borrowers navigate all sustainability focused finance programs, to take advantage of incentives and better rates when possible. Contact us today and we’ll help you get started.

About the Author

Ann Atkinson is Managing Director, Small Loan and Market Real Estate Production for Sabal Capital Partners, LLC, a wholly-owned subsidiary of Regions Bank, overseeing production across the nationwide lender’s Freddie Mac and Fannie Mae loan programs. Visit www.Sabal.com.

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[i] Joint Center for Housing Studies of Harvard, The State of the Nation’s Housing 2022, https://www.jchs.harvard.edu/state-nations-housing-2022

[ii] Joint Center for Housing Studies of Harvard, The State of the Nation’s Housing 2022, https://www.jchs.harvard.edu/state-nations-housing-2022

[iii] Joint Center for Housing Studies of Harvard, The State of the Nation’s Housing 2022, https://www.jchs.harvard.edu/state-nations-housing-2022

[iv] National Low Income Housing Coalition, Out of Reach 2022: The High Cost of Housing, https://nlihc.org/sites/default/files/oor/2022/OOR_2022_Mini-Book.pdf

by Matthew Stoehr

As is true for many businesses, cybersecurity has become an area of focus for commercial real estate lenders. A once slow adopter of technology and automation, the real estate finance industry has modernized over the past several years and, because of that, must take measures to prevent security breaches and protect customer data.

In a recent report on cybersecurity, McKinsey & Company identified three current security-related trends which directly impact businesses and must be addressed to ensure borrower data is protected: 1) growing on-demand access to ubiquitous data and information platforms, 2) increased use by attackers of sophisticated tools like artificial intelligence, machine learning and automation to launch advanced offensives, and 3) the ever-growing regulatory landscape and the gaps in resources, knowledge and talent that are outpacing cybersecurity.[i] All three increase the likelihood that a lender may experience a breach, making cybersecurity crucial.

Fannie Mae and Freddie Mac have begun to address lending security concerns in a multitude of ways through data control, compliance management, SOC-2 compliance, appraisal processes, apps, and other means. Lender partners, including Sabal Capital Partners and Regions Bank, are required by the agencies to meet their cybersecurity mandates. Non-agency lenders face similar cybersecurity challenges and must find their own paths to addressing them.

One security concern for all lenders is the systems provided by third-party vendors which help power the technology behind their lending and servicing platforms. In order to optimize security, a lender must make sure all vendors are also compliant with security mandates. The management of vendors, no matter how paramount to overall security, can however become an administrative challenge.

SOC 2 compliance is another area of focus. Essentially an auditing procedure that ensures your service providers securely manage your data to protect the interests of your organization and the privacy of its clients, SOC 2 certification is issued by outside auditors. The process is costly but provides essential peace-of-mind to both lender and agency.  

Because data for rent rolls and other critical information is pulled during the appraisals process, this is another security focus. Like lending data, appraisals data must be secured with similar controls. A borrower’s data is ultimately only as secure as its weakest link.

Costs run high with all of these measures and established lenders are better able to absorb them than others who may find them too prohibitive to bear. Regardless, the answer to addressing many security concerns is automation. By its nature, automation must be thoroughly tested and it thus brings controls and efficiencies into the lending process. A manual environment without controls is one ripe for inconsistencies. Automation also provides reporting and monitoring functions, facilitating successful interaction between auditor and lender, and reducing costs. Automation leveraged well within security systems will also detect, notify and remediate any security breaches.

All of this may seem just a concern for lenders, but a borrower should care about the security measures employed by their lender. The more invested a lender is in terms of security, the more peace-of-mind to borrower. No borrower wants their private data concerning real estate holdings, guarantors, property, appraisals or loan transactions being accessed by hackers. Additionally, the more secure a lender is, the more time it will have to focus on the business of servicing its customers and their loans.

Matthew Stoehr is Chief Technology Officer of Sabal Capital Partners, LLLC, a wholly-owned subsidiary of Regions Bank. Contact Stoehr at Matthew.Stoehr@Sabal.com, visit www.Sabal.com.

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[i] McKinsey & Company, Cybersecurity Trends: Looking Over the Horizon, March 10, 2022, https://www.mckinsey.com/business-functions/risk-and-resilience/our-insights/cybersecurity/cybersecurity-trends-looking-over-the-horizon

By Ed Hussey

One thing that’s become clear is that the last two years catalyzed mass movements of renters now able to work remotely, out of expensive coastal metro markets – many in search of more space and larger units. Specific markets such as Denver, Atlanta, Charlotte and metros within Texas and Florida were widely reported recipients of these mass population migrations. A recent examination of financials for Freddie Mac multifamily loans, which calculated 3.50% growth in year-over-year NOI nationally, attributed NOI growth rates of 8.45%, 5.90% and 5.73% to the Mountain, South Atlantic and Southeast Central regions respectively due to the pandemic’s migration effects.[i]

However, the movement of renters into different markets is not the only thing causing rental rates to increase. Inflation is driving up operating costs across the board, with rises in everything from gas, labor, building supplies, insurance and utilities all contributing.[ii] Unwavering demand for rentals plays a key role as well, with problematic dynamics in the for-sale housing marketplace pushing many would-be buyers back into the rental sector. In addition to expensive home prices, recent interest rate rises instated by the Federal Reserve have also priced many who were home shopping just a couple months ago, out of home ownership.

Recently, some developers with on-the-board new construction projects, as well as owners of current apartment communities undergoing maintenance and renovations, have noted that building materials may be one cost starting to level off, allowing more projects to come in on budget. However, it could also be that they’ve gotten better at planning for higher priced materials. And, because the multifamily sector remains so hot, it’s easier today to ask your lender or equity provider for additional funds to cover material costs, because obtaining both higher rental rates and low occupancy is a given for the foreseeable future.

It’s true that most apartment rents are increasing. Prices on the other hand appear to be softening. The rising interest rate environment has caused cap rates, in turn, to increase. Some buyers in the process of transactions have been forced to renegotiate with sellers as they can no longer, due to higher interest rates, get the same financing. Buyers today simply can’t pay as much as they could just a couple months ago. Luckily financing is still available, in general. While some of the more aggressive lenders have slowed or stalled their lending activity because of the volatility in the market, the more conservative lenders remain in the game, better able to hedge risks. The agencies – including FHA, Fannie Mae, and Freddie Mac – are prime examples.

The agencies also happen to be some of the industry’s larger proponents of ESG, a movement which continues to grow in momentum the U.S. A recent study of ESG found that, of the three ESG categories, sustainability is the primary focus today for investors. Additionally, the study found that LEED-certified multifamily assets were shown to garner 3.1% higher rents and pointed out that GSEs (like Fannie Mae and Freddie Mac) have established significant incentive programs for apartment assets that satisfy green building certifications and efficiency metrics. Incentives include lower interest rates and additional loan proceeds.[iii]

Both the Fannie Mae and Freddie Mac sustainable finance incentive programs target multifamily owners who facilitate property enhancements that improve efficiency in both the energy and water saving categories. For owners whose properties also qualify as affordable, the incentives and rates provided are even greater. The bottom line is that sustainability and the overall interest in ESG will continue to grow in the apartments sector because tenants want to reduce their Earth impacts and are willing to pay more to live in efficient communities. Additionally, investors are looking to increase allocations in ESG investments, including real estate.

Finally, with asset repositioning being one of the best ways to increase apartment community yields today, the owners that incorporate energy and water efficiency enhancements into their repositioning plans will not only be able to increase their rents, but many will also be able to access a lower financing rate, in another boon to their ROI.

About the Author

Ed Hussey is Head of Conventional Agency Lending for Sabal Capital Partners, LLC, a wholly-owned subsidiary of Regions Bank, overseeing production across the nationwide lender’s Freddie Mac and Fannie Mae loan programs. Visit www.Sabal.com.

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[i] Trepp, Multifamily Net Operating Income Growth Across the Country: Trepp’s Round-up Part Two, June 15, 2022, https://www.trepp.com/trepptalk/multifamily-net-operating-income-growth-trepps-final-round-up-part-two

[ii] Multifamily Executive, Multifamily Industry Navigates Rising Costs, July 5, 2022, https://www.multifamilyexecutive.com/business-finance/business-trends/multifamily-industry-navigates-rising-costs_o

[iii] Cushman & Wakefield, Green is Good: The Impact of Sustainability on Real Estate Investment (Part  Three: Multifamily Performance), https://www.cushmanwakefield.com/en/united-states/insights/green-is-good-series

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By Russell Phillips

The senior housing sector faced challenges during the height of the pandemic. Illness was widely reported among residents and staff, and restrictions increased inside the nation’s facilities. Additionally, many families chose to keep elder parents and relatives living with them, rather than allow them to reside in senior housing. A reduced demand for units followed and investor interest, transactions, finance availability, and new construction all slowed. However, market fundamentals have bounced back as restrictions lessen and demand tailwinds persevere.[i] Additionally, while rising interest rates are causing concern among all involved in senior housing, lenders, borrowers and investors alike remaining bullish on the sector overall, as the pandemic continues to recede and another surge of baby boomers is on the horizon.[ii]

The sentiment of lenders active in senior housing is on the upswing. However, lenders’ willingness to finance is somewhat based on the senior housing asset and loan types in question, in part because recovery in asset sub-sectors varies. For example, the National Investment Center for Seniors Housing & Care (NIC) released research in March 2022 indicating demand for assisted living properties is bouncing back after a pandemic-related drop. [iii] On the other hand, the Omicron variant caused COVID-19 cases to spike at the beginning of the year, seemingly stalling the occupancy recovery in skilled nursing facilities. Occupancy in these facilities remains low compared to the pre-pandemic February 2020 level of 86.1%.[iv]

Financing trends and options for senior facilities

Owners of assisted living and skilled nursing facilities can explore numerous paths to finance. Three agencies offer finance solutions for these properties – Fannie Mae, Freddie Mac and HUD. Fannie Mae and Freddie Mac financing is designed specifically for existing, stabilized and purpose-built senior housing properties. Benefits of these offerings include customized solutions, flexible yield maintenance periods and competitive pricing. Loan terms are typically 5 to 15 years and may be fixed- or variable-rate. Borrowers seeking to begin a financing relationship with either Fannie or Freddie may contact us directly for information.

HUD offers financing via FHA Section 232/223(f). Eligible properties must have been completed or substantially rehabilitated at least three years prior to the date of the firm commitment application. Fixed-rate and non-recourse, the program supports borrowers comprising a single asset and single purpose entity (either for-profit or nonprofit). Rates are determined by market conditions at the time of the rate lock. Given the potential pitfalls, and sometimes rigid process, of FHA/HUD financing, we encourage borrowers to contact us for guidance and to explore the finance options available based on financial projections.

In addition to facilitating agency provided financing, Regions Bank offers on-balance sheet lending options for senior housing and/or skilled nursing facility owner/operators, primarily in the form of construction, bridge and short-term loans. Notably, as facility occupancy and operating incomes have fluctuated during the pandemic, bridge financing has become an ideal option for many borrowers seeking a short-term debt solution as a conduit to future Fannie, Freddie or HUD longer-term permanent financing.

The team at Regions Bank is happy to assist any borrower interested in any of these agency and bank loan options.

Russell Phillips is Managing Director of Real Estate Capital Markets for Regions Bank, a nationwide senior housing, multifamily and commercial real estate lender. Visit www.regions.com or contact Russell about senior housing finance options at Russell.phillips@regions.com or 813.226.1138.

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[i] JLL Research, Seniors Housing & Care: Investor Survey and Trends Outlook, Spring 2022, https://www.us.jll.com/en/trends-and-insights/research/seniors-housing-care-investor-survey-and-trend-outlook

[ii] NIC Notes: Insights in Seniors Housing & Care, Financing Market Faces Headwinds, Rides Tailwinds, May 11, 2022, https://blog.nic.org/financing-market-faces-headwinds-rides-tailwinds 

[iii] NIC Notes: Insights in Seniors Housing & Care, Skilled Nursing Medicare Mix Increased Significantly Due to Omicron, March 31, 2022, https://blog.nic.org/skilled-nursing-medicare-mix-increased-significantly-due-to-omicron

[iv] NIC Notes: Insights in Seniors Housing & Care, Assisted Living Demand Bouncing Back Relatively Swiftly, March 17, 2022, https://blog.nic.org/the-pandemic-weighed-on-assisted-living-demand-is-bouncing-back