It seems that uncertainty is the only thing certain for 2023 so far. Developers are faced with a volatile market and many questions about what the future may hold in terms of economic conditions. Mark Dean, Head of Affordable Production at NewPoint, was asked to shed light on market conditions and what affordable housing owners can do to position themselves for success.
In what ways has the ongoing economic instability affected the debt markets?
What represents the most significant hurdle to the lending market?
MD: I don't necessarily consider this a threat – just something we have to deal with that's a headwind – and that's interest rates. Rising rates have been a primary driver in unbalancing the sources and uses of funds – debt service is more expensive, and as the rate influences DSCRs, ultimately, it impacts loan sizing. In terms of where we are heading from here, I think that short-term rates will continue to increase as the Fed battles inflation. While there is no direct correlation to long-term rates, I don't see much relief on that front either. In short, we expect to see rates increase over 2023, albeit at a slower pace than what we saw during the second half of 2022.
What measures has NewPoint implemented to provide borrowers with a greater range of options?
MD: We're trying to stay abreast of what's happening in the industry and are developing products to support the future needs of the space – the NewPoint Impact suite is an excellent example of this ethos in practice.
NewPoint Impact is very entrepreneurial in that it seeks to provide a solution that balances the sources and uses problem many properties and developments are faced with. In addition to offering a creative, effective way to plug gaps in deals, these products accommodate non-traditional amortization schedules. Interest-only options allow developers to get deferred fees paid off or can provide cash flow to service subordinate debt. This level of interest-only is unique to NewPoint Impact – it is not something we see in the competitive landscape.
What will be the most prevalent loan strategies for affordable housing borrowers in 2023?
MD: With a general sense of uncertainty and risk aversion in the marketplace, many borrowers are going to be looking for forward rate locks or commitments. NewPoint has made concerted efforts to become a market leader in those areas. We also expect to see high demand for any programs – such as FHA or NewPoint Impact offerings – pushing the envelope with amortization and interest-only.
What lending trends do you anticipate for 2023?
MD: One trend we saw at the end of 2022, and I expect it will continue into 2023, is the retreat of bridge lenders and the use of bridge financing. There is a great deal of outstanding bridge debt with very low rates. As that starts to mature and deals struggle to exit into much higher rates, there will be some opportunities for stronger developers sitting on the sidelines with cash. I expect this to manifest particularly strongly with naturally occurring affordable housing (NOAH) assets where there are fewer subsidies to help take out the bridge. If they do hold and refinance at a higher rate, there will need to be some form of an expense reduction plan to mitigate the higher debt service costs.
What advice do you have for borrowers for the coming year?
MD: 2023 will be another year of uncertainty and volatility, and I'd encourage borrowers to look at all avenues for bringing certainty to a transaction. Work with a lender and loan program where you can get to fixing a rate as quickly as possible – a deal that pencils and makes sense today may not balance out 30 days from now. Speed and certainty through the application, commitment and rate-locking process are more critical than ever.