Indeed, the supply of multifamily finance looks set to meet
the demand from developers, owners and investors in this
space. But there are some unknowns on the horizon, and what
they will mean for originations in the long term is unclear. Most
pressing of these is the direction the new FHFA director will
take the GSEs under the Trump Administration—namely, the
latter’s plan to end the government’s conservatorship of Fannie
Mae and Freddie Mac.
A STRONG LENDING ENVIRONMENT
Those uncertainties aside, the multifamily lending environment
at the moment is undeniably strong. Even the rise in interest
rates is, at best, having only a slight effect.
In the third quarter of 2018—the latest data available—the
Mortgage Bankers Association reported that “rising interest rates
took some wind out of the market’s sails, with the 10-year Treasury
yield starting the quarter at 2.87% and finishing at 3.05%, and the
two-year Treasury starting at 2.57% and ending at 2.81.” The CMBS
and bank lending markets were hardest hit, but lending backed by
multifamily properties and for the GSEs “continued to grow.”
MBA also reports in its 2019 Commercial Real Estate Finance
Outlook Survey that commercial and multifamily mortgage
originators expect 2019 to be another strong year in lending
activity. More than half of the top commercial/multifamily
firms (55%) expect originations to increase in 2019, with one-
in-eight (13%) expecting an overall increase of 5% or more
across the entire market. When forecasting just their own firm’s
originations, nearly two-in-five (38%) expect to see an increase
of 5% or more in 2019.
Freddie Mac, for example, is expecting to have posted a record
year in originations for 2018 and it expects 2019 to be relatively
on par, says Deborah Jenkins, head of multifamily operations at
Freddie Mac. This is, not surprisingly, a reflection of the activity
in the market. “We are probably looking at 3% growth for the
market overall based on MBA numbers,” she says. “The demographics remain favorable in terms of renting versus owning.
Multifamily will continue, in our view, to be the preferred investment type in commercial real estate.”
THE MARKET-BY-MARKET ISSUE OF SUPPLY
This is not to say that all deals will secure funding. Like with commercial real estate in general, multifamily is very much a market-by-market story, with supply playing the lead role.
In its outlook for 2019, Fannie Mae warns that while the overall multifamily market is expected to remain positive, a wary eye
must be kept on the amount of supply coming on line. With
453,000 new apartment units to be delivered this year, “there
will be some markets that are winners and some that are losers,”
For instance, Boston, Chicago and New York City will see more
supply than demand this year, the GSE has determined. These
markets “will not have enough job growth to absorb all of the
units coming on line,” she points out.
Markets that have a lot of demand and not enough supply
include Las Vegas, Phoenix and Orlando. “Las Vegas was poster
child for the housing crisis and as a result a lot of developers have
not been active,” Betancourt says. There will be demand for
about 6,500 units but only about 2,000 are coming on line this
year. The numbers vary somewhat but expect to see a similar
story play out in Phoenix and Orlando, she says.
OPPORTUNITY ZONES OFFER NEW POSSIBILITIES
Opportunity Zones may change the supply-demand dynamic as
investment ramps up in these census tracts.
“The Opportunity Zone program appears to be attracting significant amounts of capital, and many investors we have spoken to
have mentioned multifamily as perhaps the best property segment for investment under the program,” says Cory Loviglio,
Quantitative Strategist for Ten-X Research.
How much affordable housing can pencil in for these areas
remains an open question. Loviglio notes that affordable housing
is being affected by elevated construction costs—specifically the
rising cost of materials and labor—not just land or taxes. And in
more rural areas, there already tends to be fewer apartment
buildings so it appears less likely that they will be inserted into
spaces dominated by single-family housing. “Nonetheless, the
program should add to housing stock judging by the attention it
has already drawn from investors, specifically those with multifamily interest,” he says.
There are other factors, such as prime access to transit, for
developers to consider as well. One area Loviglio cites is Jamaica,
Queens, which “has already attracted plans from multiple opportunity funds thanks to its public transit infrastructure.”
REFORM AND THE FUTURE OF THE GSEs
Given their mandate for affordable housing, one would expect
the GSEs to be all over these new opportunities. And they probably will be. But the uncertainties around their direction should be
factored into developers’ plans.
In mid-January, government officials said they were starting to
work on a plan to move the GSEs out of their decade-long conservatorship. According to published reports confirmed by an
agency spokesperson, Currency Comptroller Joseph Otting—
selected by President Trump to serve as acting director of the
FHFA—indicated that Treasury and the White House are
expected to release details on a housing plan that will include
details about reform.
KIM BETANCOURT | FANNIE MAE
ARE STILL LOW
AND THERE ARE A
LOT OF LOANS WITH
THREE- TO FIVE-YEAR
TERMS REMAINING. ALL THE
NEW SUPPLY WILL ALSO NEED PERMANENT
FINANCING. THAT SHOULD KEEP THINGS
MOVING IN THE CAPITAL MARKETS.