Multifamily Borrowers Seek an Exit From Bridge Debt While Navigating Volatility

There is tremendous nationwide demand for housing and a critical shortage of housing supply — a combination that should create a red-hot investment market. However, economic uncertainty, an increase in tariffs on raw materials, and interest rate volatility have crippled many deals. At Bisnow’s Dallas-Fort Worth Multifamily conference, Patrick McFarland, senior mortgage banker at KeyBank, talked about strategies to help multifamily borrowers find a path forward, build a capital stack, and work through the macroeconomic challenges.

Strategies for Exiting Bridge Loans

Since the Federal Reserve Open Market Committee began increasing interest rates back in 2022, multifamily borrowers have been trying to stave off higher borrowing costs. With high hopes that rates would fall in 2025 — a trend that popularized the industry idiom “survive to 2025” — multifamily borrowers have been securing short-term bridge debt to avoid higher interest rates. “The number one trend I've seen over the last year or two is borrowers wanting to get out of existing bridge loans,” says McFarland. It isn’t easy. McFarland has seen deals come through two to four times before there is enough equity in the deal and rates are low enough to transition into a permanent financing solution.

Specifically, McFarland has seen this trend unfold on many loans that were placed in 2021 or 2022, many with maturity dates in 2025. Value-add deals are some of the hardest hit; however, the challenge is industry-wide. Counter to the hopes of many who took out short-term debt to “survive to 2025,” many of the bridge loans from that era will still not pencil out today, largely because interest rates have not come down significantly as the industry had hoped they would.

As a result, lenders are looking at a wide range of alternative loan structure options. McFarland has closed many different types of bridge loan exits this year, with structures ranging from CMBS to Agency to traditional balance sheet loans, despite the challenges. Other less traditional newcomers to the capital stack include preferred equity, popular right now due to its comparably low cost of capital. C-PACE financing is another attractive option, as are tax-exempt bonds, now being used outside their traditional context to fund both refinances and new ground-up construction.

For many borrowers, it comes down to identifying which pieces of the capital stack can be most easily added or adjusted to make the numbers work. Looking at a wide array of options is essential. While “extend and pretend” may have worked in the first half of this decade, most debt holders are no longer amenable to simple extensions of a maturing loan.

Combatting Tariffs in Construction Capital Deals

While housing demand is sky high, lack of supply persists because it has been difficult for quite some time for developers to make their numbers work. Tariffs have just made matters worse, forcing many multifamily developers to hit the pause button on new construction projects due to increased and less predictable costs. Institutional equity specifically has moved to the sidelines related to new development, and the main stakeholders transacting currently are family offices that choose to offer the capital to withstand the heightened risk. Although many developers rely primarily on domestic building materials, there is still some exposure to foreign markets. The National Association of Home Builders estimates that about 7% of all building materials come from foreign markets, totaling about $14 billion worth of goods. In addition, finishing materials like appliances are also often imported. While these factors might not be a big component of the overall cost of the deal, they put pressure on construction margins, which are already thin following several years of organic construction cost increases.

Often overlooked, according to McFarland, is the increasing cost of construction labor. According to many developers, immigration trends could constrain the growth of the construction workforce. Many estimates show that mass deportation will decrease the existing labor workforce by as much as 30%, leading to higher building costs and worsening the housing crisis. “If people aren't talking about it that much now, I think that they will be soon,” says McFarland. The pricing uncertainty related to all these factors is a primary reason why new construction deals have waned in the first quarter.

KeyBank doesn’t focus primarily on construction lending; however, the bank will go the extra mile for strong borrowers and established relationships. “We’re looking at strength of sponsorship,” says McFarland. “We don’t do a lot of construction lending, but we will do it where we have a strong relationship.” This year, the bank funded a large construction loan with an international developer, one example of a deal that can move forward under the right conditions. “There are generally several metrics that we take into consideration,” adds McFarland.

Every Deal Is a Challenge — But Some Do Get Done

According to the panel, the macroeconomic environment is the biggest challenge for multifamily borrowers today. In the current environment, it isn’t uncommon to see interest rates jump 50 basis points before closing due to market volatility. “Rate volatility has been a real killer,” says McFarland. Other lenders have had clients pause to wait out the current environment. Or, lenders look at deals that are supposed to be stabilizing, but 90% of concessions remain in place or insurance costs are skyrocketing at renewals. These factors can hurt a financing deal.

Despite the challenges, McFarland’s office is working hard to make deals pencil under even the most difficult circumstances. Often, McFarland has relooked at deals that didn’t work last year, and today, they are finally penciling, in large part thanks to the stabilization in rates. “We’re getting business done,” said McFarland.

While the market may be challenging today, there is a lot of optimism. McFarland has confidence that rates will stay down, acquisition and construction activity will ramp up, and the dry powder sitting on the sidelines will finally be deployed.

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To discuss the current market environment and what financing options are best for your next project, connect with Patrick McFarland, or reach out to your KeyBank mortgage banker directly.

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