Commercial Lending Trends – May 2022

IN THIS GUIDE

Federal Reserve expected to raise rates again.

The Federal Reserve has raised the Federal Funds Rate by 0.5%. This is the highest interest rate hike in 20 years. This already follows a .25% increase in March. Raising interest rates is a response by the Fed to get a handle on soaring inflation.

Inflation is now at a 40-year high in the U.S. The Consumer Price Index (CPI), a tool used to measure price changes over time for goods and services, was 8.5% higher than it was this time last year. The inflation is largely a result of uncertainty with the Ukrainian war and a supply-chain disruption in China due to their coronavirus lockdowns. There are expectations that the interest rate will be lifted even further, with some experts expecting the Fed to target 2% by May 2023 and 2.9% in early 2023.

The Fed’s response is affecting the indexes on which variable interest rate mortgages are based. Borrowers with variable-rate loans are seeing their monthly payments increase and may seek to refinance into fixed-rate mortgages before rates climb further. 

In addition, higher interest rates could lead to thinner cash flow margins for investors. This can push them to get more creative and look at options like interest-only loans to decrease the total loan payment and maintain a higher level of cash flow.

Owner-occupants get a 30-day head start over investors at FHA foreclosed property auctions.

The Federal Housing Administration (FHA) has announced that it is giving priority to owner-occupant buyers, approved nonprofits, and government entities in foreclosed property auctions. These entities have 30 days to bid on properties before the auction is open to investors. This expansion on the Claims Without Conveyance of Title (CWCOT) program will go into effect immediately.

The goal is to increase the supply of single-family housing available on the market. The supply of affordable housing has been restricted recently, making it difficult for families to compete in the current real estate market. Until the implementation of this policy, investors were purchasing foreclosed properties and reselling them at a higher value. The FHA hopes that the CWCOT will lead to at least 50% of these properties being purchased by owner-occupant buyers, approved nonprofits, and government entities.

This is just one step the current Administration has taken to ease the effects of rising housing costs on families. In April, the Administration and FHA announced the option to extend any unpaid mortgage on an FHA loan to a 40-year loan term. These actions aim to ease the burden on families looking to purchase a home or stay out of foreclosure. In addition, the new extension to CWCOT takes away any slight advantage investors have in the real estate market over owner-occupant buyers.

Good news for multifamily investors – vacancies are down and rents are up.

Rental vacancies spiked to 7% at the beginning of the coronavirus pandemic as people felt uncertain about the future and moved in with family. As the economy recovers and adjusts, vacancies have since seen a consistent decline. Currently, the vacancy index stands at 4.6%, up slightly from the low of 3.8% in August.

While vacancies are down, meaning fewer housing and apartments left unrented, rent prices continue to rise. Year-over-year rent growth is at 16.3%, with most of the increase taking place in the spring and summer of last year. 

Through the first four months of 2022, rent prices have increased by 2.5% with the busy season for the rental market still looming ahead. While 2021 saw some of the biggest spikes in rent prices, 2022 still stands to be a promising year for investors seeking to take advantage of these current trends.

This trend does not appear to be regional, with 93 of the 100 largest U.S. cities seeing a month-over-month rent increase. Although Sun Belt Cities, like Miami and New Orleans, have seen a more consistent upward trend in rent prices, almost all cities are experiencing a rent increase throughout the year.

Increased college enrollments make off-campus housing a solid investment.

The onset of the coronavirus pandemic created a shockwave through the higher education sector. Students began studying from home, while many chose to take a year or two off until they could return to campus. As things begin to regain some semblance of normalcy, college enrollment numbers are rebounding.

This increase in college enrollment brings to light the current student housing crisis. Top-tier universities are struggling to find housing for all their students. U.C. Berkeley is one university that has been facing this crisis for some time. Currently, they only have enough space to house one-fifth of the student population. U.C. Berkely is not alone in this battle. There are some reports of universities having to house students in nearby hotels for the semester.

The student housing crisis has created a unique opportunity for investors to diversify their portfolios by offering student housing. Student housing generally does not track the economy, making it a reliable investment when student enrollment is on the up.

A joint venture between Chicago’s Core Space and Harrison Street paid $21.5 million in January for a third of an acre across from U.S. Berkely. They then built a 232-bed, 87-unit student housing project. These ventures are proving to be fruitful when targeting top universities facing the severe student housing crisis.

Lower-income neighborhoods may see more investment dollars coming their way.

The Biden-Harris Administration plans to modernize the 1977 Community Reinvestment Act, which currently only adheres to lending options from physical branches. The existing rule in Community Reinvestment Act requires banks to lend to lower-income groups in their areas. This has created a loophole for online lending institutions as they have no branches that abide by this policy. 

As online banking and lending become more common, the 1977 Community Reinvestment Act may be revisited to allow for fair lending to small businesses and people in low-income neighborhoods.

In a prepared statement by the Federal Reserve, Vice Chairwoman Lael Brainard stated “Today’s proposal seeks to expand access to credit, investment, and banking services in [low- and middle-income] communities”. This could lead to a large influx of investments in areas that have otherwise remained largely underdeveloped.

While this may serve as a benefit for investors looking to operate in relatively untouched markets, there are further implications that come along with modernizing the 1977 Community Reinvestment Act. If this proposal goes through, it means that online lenders may be regulated in the same way that banks are. We will keep an eye on this to see where it goes.

 

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