Small-Balance Multifamily: Sizable and Resilient
While new-builds and top-of-the-line, large-scale developments typically attract the most buzz in the multifamily world, the vast majority of apartment properties in the United States have fewer than 100 units. These smaller properties play a vital role in delivering affordable and workforce rental housing inventory to the U.S. population. While the commercial real estate industry may refer to this sector of the multifamily market as “small,” make no mistake, “small” multifamily is not insignificant or inferior — it’s sizable and resilient.
As other commercial real estate sectors paused during COVID-19, smaller multifamily properties and small-balance lending thrived. What does the future hold for this market?
The Small Multifamily Market Defined
The small multifamily market is highly fragmented with no clear definition of what constitutes “small” among capital sources. Generally, market statistics define the “small” multifamily sector by at least one of two measures:
- Unit count between five and 99 units; and/or
- Principal loan balance at origination between $1 million and $10 million
Strong Demand and Operating Fundamentals
While the pandemic negatively impacted many areas of commercial real estate, with offices, retail shops and hotels largely shuttered across the U.S., the multifamily market remained resilient. Despite the past year’s challenges, multifamily rental rates increased, cap rates decreased and valuations increased. Heading into the second half of 2021, investment and lending activity is not only back to pre-COVID levels but is actually on pace to exceed peak levels experienced in 2019. The small multifamily sector is no exception.
Accounting for roughly 85 percent of apartment inventory in the U.S., small multifamily properties play an essential role in combating today’s affordable housing crisis. As the largest contributor to our nation’s affordable and workforce housing stock, small multifamily presented a unique advantage during the pandemic relative: comparatively steady rent collections. Many renters in affordable and workforce housing income brackets found their bank accounts bolstered by the three rounds of COVID-relief stimulus checks. While increases in delinquency have been a reality for nearly every property regardless of size or class, affordable and workforce housing (Class B and C) assets still managed to maintain low vacancy rates. Their Class A counterparts, on the other hand, saw an increase in vacancy due to new supply, millennials moving back home and renters seeking less expensive housing options due to reductions in household income.
Sustained Liquidity and Investment Potential
With the uncertainty around COVID, commercial banks, private equity and other capital sources paused in early 2020, while Fannie Mae and Freddie Mac filled in the gaps by fulfilling their mission to provide liquidity and promote market stability for the multifamily housing market. For loans of $1 million to $7.5 million, GSE lending made up a full quarter of 2020 lending, representing $13.9 billion of a total of $55.7 billion originated across more than 3,000 capital sources.
Mid-2021 has presented a very different picture than summer 2020. The debt markets beyond Fannie and Freddie have rallied and are full throttle ahead, providing valuable liquidity back to the market. As a result, funding uses are shifting from refinances to acquisitions, demonstrating how multifamily finance — including small-balance lending — is a sector with a quick rebound, delivering stability and opportunity in both good times and bad.
Given the continued economic optimism, low interest rates and abundance of capital, we expect the multifamily market, small and large, to be a top performer in 2021 and 2022.
The Future of Small-Balance Lending: Q&A with Alison Williams
Having originated debt and equity for more than $3 billion in large commercial real estate transactions, Alison Williams brings her client-centric perspective to small-balance lending through her new role as senior vice president and chief production officer with Walker & Dunlop. Formerly a senior director with Walker & Dunlop’s Capital Markets team, Williams’ experience structuring highly customized financing solutions for a wide range of large commercial real estate investors and property types offers a fresh perspective to the largely volume-focused small-balance lending sector.
Here Williams shares her thoughts on the future of small-balance lending at Walker & Dunlop and the prospects for smaller properties in the multifamily sector.
Q: Who is — and will be — the typical borrower in this space?
A: There is no typical buyer in small multifamily properties. Buyers range from entrepreneurial, high-net-worth individuals interested in building a portfolio and creating generational wealth to large real estate firms with portfolios expanding from coast to coast.
Q: What are the friction points in small-balance lending?
A: Regardless of the investor’s familiarity with the marketplace, the small multifamily lending landscape remains deeply fragmented and difficult to navigate, with more than 3,000 different lending sources providing liquidity in the $1 million to $10 million range. Investors need resources and a true debt partner who can help them execute on their business and investment strategies. That’s why Walker & Dunlop is augmenting our capabilities in this sector. We’re hiring bankers and brokers with a proven track record in deals both large and small — people who’ve seen it all and understand how to navigate financing complexities. This framework promises borrowers certainty of execution and an overall smooth financing experience.
Q: Let’s talk about technology. How are innovations streamlining the process — and changing the game?
A: In today’s fast-paced world, time is priceless. Borrowers need strategic partnerships that offer a highly personalized customer experience while delivering real business value through everything from knowledge, tools and insights to business-plan-specific debt options. Not only must these partnerships deliver tangible value, but such delivery must be fast, efficient and customizable to accommodate any borrower’s schedule or preference. This is where technology comes in.
As we’ve seen in other industries, digital innovations will give way to automation, artificial intelligence (AI) and advanced analytics. Tools are emerging that put information in one place and automate time-consuming and repetitive tasks such as filling out forms. In the single-family space, in particular, there has been steady innovation in how people find and finance their homes. Being as broad and dynamic as it is, we believe the small-balance multifamily lending sector is poised for the next digital revolution.
Walker & Dunlop is working on exciting new offerings in this area to streamline processes and augment deal underwriting and decision-making methods — all while delivering a transparent and frictionless experience to our borrowers. What this means for our employees is more time to focus on delivering a highly personalized client experience and, for our borrowers, less time spent working through underwriting and closing requirements, and more time to focus on achieving their investment and operational goals.
Q: What do you see ahead in terms of performance and growth?
A: I believe the multifamily sector is positioned for favorable performance and growth in 2021 and beyond due to favorable debt markets, stable investment fundamentals and the surge in demand for affordable housing which is proving to be immune to market fluctuations. As the multifamily market continues to grow and technology continues to transform the customer experience, Walker & Dunlop’s focus on small-balance multifamily lending positions us well to help clients navigate the evolving landscape.
— By Alison Williams, senior vice president & chief production officer, Walker & Dunlop. Walker & Dunlop is a content partner of REBusinessOnline. For more articles from and news about Walker & Dunlop, click here.
 Freddie and Fannie Mae small-balance loans are capped at $7.5 million and $6 million, respectively, and generally focus on properties with 150 units or fewer.