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Report: An Increase in Multifamily Underwriting

Thomas Foley

Higher interest rates, sidelined capital and economic uncertainty have put a crimp in commercial real estate deals. Despite this, data company Archer.re reported a significant increase in national underwriting activity for multifamily properties during October 2023.

Using data from its proprietary technology platform, Archer reported the following:

  • Underwriting activity increased from 1,019 to 2,083 from August through October
  • The main focus continues to be core-plus and value-add multifamily properties
  • There is broad-based interest, with higher concentration in the Carolinas, Colorado, Texas and Pacific Northwest

“The key insights that we’re taking away from the data is just how much more underwriting is necessary in the current environment to get to a closed deal,” Archer.re’s Co-founder and CEO Thomas Foley told Connect CRE. He explained that the historical norm involved 50 underwriting processes leading to one closed deal; “It’s exploded to between 250 to 500 underwriting processes leading to one closed deal.”

Source: Archer.re

Additional Underwriting Drivers

Foley explained that the three drivers leading to an increase in underwriting activity were that:

  • More deals are coming out of the summer months, with buyers and sellers pushing for a year-end closing date.
  • More owners are examining increasing debt and insurance costs and considering selling as an out.
  • There is difficulty in penciling returns that make sense. This is “causing a significant increase in deals needing to be underwritten, to find one that is attractive and transactable,” Foley said.

All About the Geography

Foley commented that the interest in some geographic regions is generally due to significant rent growth, leading to more supply. Even with that supply, “they still have demographic trends, cost basis and rent-to-buy ratios in their favor,” he said.

On the other hand, other markets, like coastal markets, are experiencing greater headwinds. In these regions, “insurance costs have become so unaffordable, many investors have redlined those until the insurance market softens,” Foley commented.

Overall, Foley said he anticipates an ongoing increase in underwriting capacity. “It seems pretty clear that the debt markets will continue to present challenges for investors, lenders and brokers,” he said. Furthermore, “anyone who wants to close a deal going forward will be at a disadvantage if they don’t incorporate the newer tools available,” Foley added.

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