South Florida emerged as a hot multifamily market during the past two years, with droves of out-of-staters moving to the region and rents reaching new heights, promising a windfall for developers.
To catch the wave, Henry Torres got a $32.4 million construction loan and started building the 11-story Douglas Enclave, a block north of West Flagler Street in Miami.
Despite the bright market forecast, he worked out a cushion with lender Ocean Bank. He got an option to extend the maturity by a year until next March, keeping the 3.85 percent fixed interest rate he locked in when he scored the loan in April 2021.
It turned out to be a safety net, allowing him to avoid a costly refinancing when interest rates shot up.
“There’s nothing out there at that rate,” said Torres, founder of Coral Gables-based Astor Companies. “Everything is much higher right now.”
It’s a common story playing out across South Florida. From mid-2020 to late last year, developers jumped on the multifamily building frenzy, translating to a record 22,541 units on tap for completion this year. As crews dismantle cranes, give the new buildings a final coat of paint and polish unit fixtures, developers will have to refinance their maturing construction loans with permanent mortgages.
Yet, many will be priced out of the traditional construction-to-perm refinancing path after the Federal Reserve’s nine interest rate hikes over the past year. Instead, they may either take advantage of loan extension options or turn to bridge lenders or equity partners. Over-leveraged developers without any of these options may face financial woes, experts said. Already, project budgets are strained, with cost overruns caused by expensive labor and materials, as well as ever-increasing insurance premiums.
“I don’t think people were expecting the increases we have seen across the board. It’s been a bit of a surprise for developers,” said J.C. de Ona of Centennial Bank. “A lot of people who thought they would refinance, they may not get those proceeds.”
“Domino effect”
Development firms Florida Value Partners and Prestige Companies won’t refinance their $12.4 million construction loan for The Trail in central Miami-Dade County, or their $6.6 million loan for Amelia Plaza in Hialeah.
Instead, they opted for workarounds.
Last year, they put the two-building, 84-unit The Trail under contract for sale. At the time, cap rates were below 4 percent and multifamily projects traded at a roughly 30 percent premium, said Gus Alfonso, of Florida Value.
“We had an ability to kind of lock in a profit, regardless of any future market fluctuation,” he said.
Though Prestige and Florida Value declined to provide details of the deal, sources said Aventura-based Advenir is The Trail’s contracted buyer, slated to pay between $100 million and $150 million once the project is completed this spring.
For their 30-unit Amelia Plaza, with 18,000 square feet of commercial space, the developers extended their construction financing that matured last fall. The mini-perm option comes at a fixed interest rate set two years ago, which the developers declined to disclose.
“Let’s put it this way. It’s below what the current rate would be,” said Alex Ruiz of Prestige. “Perhaps, if we wait a couple more months, we would be able to refinance it at a much lower rate.”
“People will be willing to walk away.
It will create an opportunity for someone else to come in and buy [the project] and move forward.”J.C. de Ona, Centennial Bank
While extension options allow some developers to wiggle out of expensive refinancings, they also bode poorly for banks’ abilities to make new loans. The more borrowers that extend instead of paying off debt, the less liquidity banks have to refinance maturing construction mortgages that don’t have extension options or other fallback plans. Recent bank collapses (see page 28) also may strain mid-sized banks’ deposits, as clients opt to move their funds to big banks or treasuries.
“Banks typically lend as a factor of how much they have in deposits,” said Alex Horn, founder of bridge lender BridgeInvest. “When their deposits shrink … it has this domino effect on really the supply of loans in the market today.”
In a sign that banks’ refinancing abilities are strained, the phones at BridgeInvest have been buzzing, he said. Developers with maturing multifamily construction loans are asking about bridge loans.
The Miami-based firm expects to issue $400 million in bridge loans nationwide this year, with a good chunk of that for South Florida multifamily projects with maturing debt, Horn said.
“That is one of the areas that we are most bullish on,” he said.
Vultures circling?
Could refinancing woes be extensive enough to prompt multifamily developers to sell projects that are recently completed or in construction?
Luis Flores, a developers attorney in Miami, doesn’t see it happening. Lenders would be more open to granting an extension instead of foreclosing on a loan.
“They don’t want to create that negative atmosphere in the marketplace, because that is going to start changing the conversation,” said Flores, of Saul Ewing. “Lenders are very smart about that.”
When developers eager to seize on the multifamily bonanza approached Centennial Bank with requests for highly leveraged loans, the bank turned them down, said de Ona, who is president of the bank’s Southeast Florida division.
“There’s definitely projects out there that I saw that we passed on, that in today’s environment could be considered a bit of a troubled property,” de Ona said. “If the [interest] rate wasn’t at 4 [percent] or 4.5 percent, they weren’t working out all that great.”
If the developers are refinancing now at 5.5 percent to 7 percent, the project won’t meet the minimum debt-service coverage ratio on the perm loan, he added.
Those projects could face financial trouble now.
“People will be willing to walk away,” de Ona said. “It will create an opportunity for someone else to come in and buy [the project] and move forward. … I think you are going to see some of that.”
Boynton Beach-based lender Forman Capital is targeting $50 million to $100 million in preferred equity investment statewide this year, with roughly half of that for South Florida multifamily developments, including for projects with maturing construction loans.
While rents grew at a never-before-seen rate, so have insurance costs, said Brett Forman, Forman Capital’s managing partner.
Premiums rose 15 percent to 30 percent last year, and are expected to jump 50 percent to 100 percent this year, according to Yardi Matrix. Couple that with high interest rates for refinancings and bridge loans.
“That bites them in the business plan,” Forman said. “You may not have a net operating income to satisfy the required loan.”
“Extra pain”
As a merchant developer, The Estate Companies sells its apartment projects soon after completion and stabilization.
But it opted to hold on to its nearly fully leased, 240-unit Soleste Spring Gardens building completed last summer near Miami’s Health District.
“The market has softened for sales and cap rates have gone up,” said Robert Suris, Estate’s managing principal.
Instead, Estate plans to list the project this spring. But if a deal doesn’t pan out, the firm may use an extension option on its Bank OZK construction loan that matures in the fall.
That extension, however, comes at a floating interest rate of roughly 7 percent to 7.8 percent in the current market.
“It’s definitely extra pain. But the good thing about it is our rents have gone up significantly,” he said. “So even though our interest reserves are being consumed at a quicker rate, we are also collecting higher rents.”
At Astor Companies’ Douglas Enclave, Torres isn’t worried about leasing up the property. Roughly 40 percent of the 199 units are taken, and he expects the building to be fully leased by mid-summer.
Yet, the project is roughly 4 percent over budget due to change orders, he said. Thankfully, he extended his mortgage, so he doesn’t have to refinance while dealing with cost overruns.
“Most definitely it’s helping out quite a bit right now,” Torres said. “Banks are anywhere from 5 [percent] to 6.5 percent right now. Not that I had a crystal ball, but I think I might have gotten lucky.”