The greater Cincinnati area is among the strongest economies in the region based partly on its population growth. According to the Federal Reserve Bank of Cleveland, jobs grew 2.2 percent from last year, a faster pace than most of the country. This drops the unemployment rate to a 17-year low. Trade, transportation, utilities, hospitality & leisure, along with manufacturing trades contributed to over 70 percent of all new jobs in the Cincinnati metro area.
New job growth and a stimulated local economy are directly affecting construction trends. With nearly $4.5 billion worth of projects under construction, Amazon.com Inc.’s $1.5B air services hub at the CVG airport and $221 million in upgrades by UC Health for the University of Cincinnati Medical Center are spurring demand for the multifamily space.
As one of Ohio’s most affordable apartment markets, rent growth is trending positively, up over 3 percent since last quarter with positive forecasts well into 2023. The number units of under construction has increased 28.6 percent over the last quarter, with investors favoring value-add projects, taking advantage of low interest rates and a variety of lending options.
“It’s important for investors to diversify their portfolios, across markets as well as asset types, to minimize risk. Whether looking to refinance, buy or sell, we work with borrowers throughout the Midwest and our network of lenders allows us to provide multiple options for our clients to best fit their financing needs,” shared Stephen Vegh, Sweetwater Capital vice president of sales production. “Understanding the long term goals of a client heavily influences our recommendations for debt structure. Developers and investors are becoming increasingly interested in non-recourse options, shying away from typical bank lending. Coming out of a construction loan on a multifamily property and into permanent debt, lenders across the board want to see high stabilization of the property.”
Vegh continued to discuss the pros and cons of additional financing options. “Agency debt is placed on over half of all multifamily assets in the nation. Agency financing for multifamily certainly has its benefits, such as lower application fees and closing costs, no lock box, non-recourse, etc. Cincinnati is a standard market in the eyes of Freddie Mac for Small Balance Loans, which means allowing borrowers to obtain up to 80 percent loan-to-value (LTV) with 1.25 percent debt coverage ratio (DCR). Fannie Mae can underwrite up to 65% LTV with 1.35% DCR since Ohio is a pre-review state. Interest rates are ranging from 4.15 to 4.60 percent depending on loan size and affordable rental rates.”
“CMBS lenders are usually well suited for more challenging assets and sponsorships with more interest only opportunities. I have seen CMBS lenders structure debt up to 75% LTV with 1.25% DCR as well. These options are generally coupled with higher application fees, particularly around legal fees, lock box and available as non-recourse loans. Despite the small increase in fees, CMBS remains a great option for borrowers to consider.”
“Life companies tend to follow a more conservative approach, similar to banks. Each company has a different appetite and specific markets they want to work in, most commonly top tier markets with trophy assets. It is a worthwhile option to review as borrowers may see more flexibility around prepayment penalties balanced with lower leverage and limited interest only opportunities. The last two years have seen an influx of private equity players which is a whole different ball game.”
“It’s an exciting market to work within and with positive rent growth, increasing supply and low unemployment rate I’m confident we’ll be able to keep investors interested in the Cincinnati market for years to come.”