Brooklyn real estate financing faces frenzy of activity amid maturing loans, Dodd-Frank revision

August 16, 2018 By Matthew Dzbanek, Director – Capital Services David Baruch, Senior Analyst – Investment Research From Ariel Property Advisors
Matthew Dzbanek. Photos courtesy of Ariel Property Advisors
Matthew Dzbanek. Photos courtesy of Ariel Property Advisors
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The U.S. economy has gained considerable momentum in recent months, paving the way for the Federal Reserve to continue tightening monetary policy 2018. While rising borrowing costs could suppress loan origination, an avalanche of maturing mortgages, revisions made to the Dodd-Frank Act, and a growing pool of eager, smaller lenders should keep borrowing activity buoyant in Brooklyn.

A tight labor market and firming inflation has the Fed confident that the economy can withstand the impact of higher rates. Gross domestic product grew by 4.1% in the second quarter, significantly above the first quarter’s 2.2% and the strongest growth since the third quarter of 2014. After raising rates for a second time this year in June, the Fed has penciled two more rate hikes in 2018, with the next likely to emerge at its September meeting. This should put upward pressure on rates and eventually lead to even higher borrowing costs on consumer and business loans.

The 10-year Treasury yield, which influences everything from mortgage rates to corporate loans, has hovered around 3% in recent months as political turmoil overseas joined concerns that tariffs between the U.S. and its major trading partners will slow global growth. These trade tariffs should put additional pressure on Treasuries as inflation erodes the value of the fixed payments made on the bonds.

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At between 4.0%-4.5%, interest rates on five-year multifamily loans are roughly 50-75 basis points higher than where they were a year ago. Despite the uptick, however, interest rates remain historically low, which should keep the landscape for lending favorable.

Demand has been particularly strong for multifamily properties in Brooklyn in 2018 as its growing appeal as a “work-live-play” destination attracts both private and institutional investors. Brooklyn enjoyed banner activity in the first half, recording $1.54 billion in sales, the highest of any sub-market, according to Ariel Property Advisors’ “Multifamily Quarter In Review.” For our exclusive report, click on http://arielpa.com/report/report-MFQIR-Q2-2018

While Brooklyn’s lofty dollar volume was mostly attributable to the $904.61 million Starrett City Portfolio, the largest sale year-to-date in New York City, all three volume metrics increased on an annual basis and the 39 transactions comprised of 79 buildings were the highest of any sub-market.

In 2013 – the beginning of the most recent real estate cycle – Brooklyn saw 1,059 transactions consisting of 1,440 properties totalling $4.3 billion in gross consideration, according to Ariel Property Advisors’ Investment Research Division. These properties were likely financed by acquisition loans, with the 5-year maturity the most common at the time. It has therefore been a busy year for Brooklyn because as loans mature, investors typically choose to refinance or sell their properties, and the buyers of these assets often seek financing to fund their purchases.  

Brooklyn, the most populous borough, has dominated commercial lending activity in recent months. In the month of May it snared 42% of all of New York City’s transactions. Moreover, seven of the top eight neighborhoods for financing were situated in the borough, with the zip codes encompassing South Bushwick/East New York; East Williamsburg/North Bushwick/North Bedford-Stuyvesant; and Prospect Lefferts Gardens/Flatbush/East Flatbush ranking in the top three, according to the Commercial Observer, citing data from lending database Actovia. In addition, these three areas comprised 18% of all New York City’s mortgages.

Changing Landscape Of Lenders

Real estate financing has picked up this year as the investment sales market gained momentum. During 1H18, Brooklyn’s entire market saw 526 transactions consisting of 685 properties, totaling approximately $4.28 billion in gross consideration, according to Ariel Property Advisors’ “Brooklyn 2018 Mid-Year Sales Report.” For our exclusive report, click on http://arielpa.com/report/report-APA-Brooklyn-mid2018-Sales-Report

In 2015, banks pulled back after federal banking regulators cautioned them about overexposure to the multifamily asset class and its impact on their financial stability. Lenders also erred on the side of caution due to the Dodd-Frank Act, which was put in place as a safeguard in the aftermath of last decade’s recession. Lenders tended to be conservative about the amount of assets they were servicing and holding on their balance sheet due to increased government scrutiny.

However, following a similar bill that passed in March, the U.S. House of Representatives recently voted to dismantle part of the Dodd-Frank Act. The bill relaxes regulations for all but the largest U.S. banks, raising the level at which banks face the tight oversight spelled out in Dodd-Frank to $250 billion in assets, up from the current $50 billion. Due to this increase, banks are expected to become much more active in the lending arena.

As more and more people call Brooklyn home, institutional and private investors will likely continue to seek mortgage financing in New York City’s biggest borough. While it has undoubtedly become more expensive to finance real estate transactions, loosened regulations should open the lending spigot wider. With the guidance of an experienced mortgage broker, an investor can obtain financing via smaller institutions that are more than eager to extend credit at competitive rates.

 


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