But bankers and investors are raising renewed concerns that fierce competition for deals, a run-up in apartment prices, and an expected jump in interest rates in the years ahead could spell bad news for banks that hold multifamily loans on their balance sheets. Others are questioning the role of the government in providing cheap financing to large investors while financing for small affordable rental housing has declined.
At a multifamily conference in San Diego this week, debate raged over whether a jump in new construction and increased demand for apartments are laying the groundwork for a multifamily housing bubble. Some of the comments sounded astonishingly like those made by bankers before the housing bust.
"It does require everybody being reasonable and not pushing things too much because that's when the party ends," said Steven Holmes, Morgan Stanley's executive director of commercial real estate lending. "Eventually the punch bowl will move again. When I go home at night, I worry about things changing."
Jeffery Hayward, a senior vice president of the multifamily mortgage business at Fannie Mae, said that as private capital comes back into the market, lenders need to be mindful of maintaining strong underwriting standards.
"I hope we learned our lesson because we can ruin a very good thing," said Hayward. "I think a lot of people are on higher alert than they've ever been."
Banks held 29.5% of the $847 billion in outstanding multifamily mortgage debt at Sept. 30, down from 30.5% a year earlier, according to the latest data from the Federal Reserve Board and Trepp LLC.
But Fannie Mae and Freddie Mac remain the largest sources of multifamily financing. Fannie provided $33.8 billion in multifamily financing last year, up 38.5% from a year earlier, while Freddie provided $28.8 billion in financing, up 42% in the same period.
To be sure, multifamily lending represents a mere 6% of the government-sponsored enterprises overall volume, which is dominated by residential lending. The GSEs tend to have low delinquency rates, in part because of credit standards and loss-sharing agreements that typically require lenders share one-third of losses on delinquent multifamily loans.
Still, Jamie Woodwell, vice president of commercial real estate research at the Mortgage Bankers Association, says that since the housing downturn investors have flocked to the least-risky investments and that after U.S. Treasuries, having a government guarantee "comes second."
"The government pie has brought a lot of investors into the market," he says.
A big concern among multifamily lenders is the impact much-anticipated GSE reform could have on the marketplace. Though it is hard to know when lawmakers will take up the issue, market watchers speculate that GSE reform could force Fannie and Freddie to shrink their presence and that there are no guarantees that banks and other players such as life insurers would step to pick up the slack.
Hugh Frater, the chief executive at Berkadia, a large commercial lender, said at the San Diego conference that that GSE reform could potentially hit the industry hard.
"We've enjoyed the profitability of the GSE business, and there is the expectation that there will be a change two to three years from now," Frater said. "Mortgage banking will be less profitable without the agencies."
Housing advocates, though, believe that the GSEs are distorting the marketplace.
Judith Kennedy, the president and chief executive of the National Association of Affordable Housing Lenders, said if there is a bubble, it is concentrated entirely in the top end of the market. Financing of small affordable rental units has declined significantly, she says, because Fannie and Freddie are focused on funding properties with 100 units or more. Meanwhile, 90% of rental housing in the U.S. is concentrated in properties with fewer than 50 units.
"Financing of small affordable rental properties increasingly relies on nonprofit lenders that have virtually no access to the secondary market," she says.
Monte Redman, the president and CEO at the $17-billion-asset Astoria Federal Savings in Lake Success, N.Y., also questioned why Fannie Mae and Freddie Mac have such an outsized presence in multifamily lending given that they remain in conservatorship, funded by taxpayers.
"They should be dealing with low- and moderate-income housing where the market needs liquidity," says Redman, whose bank concentrates on smaller loan sizes from $3 million to $5 million. "When there are so many other lenders putting these loans on their balance sheet, the need for them to be there is nonexistent."
Redman agrees that apartment lending has become very competitive, pushing up overall prices, but he says lenders are still maintaining strict underwriting standards. He also differentiates between the rent-controlled and rent-stabilized markets in New York, where vacancy rates are at 1%, compared with other geographic markets.
A key indicator of multifamily lending is capitalization rates, an indirect measure of how fast an investment pays for itself. Multifamily cap rates have stabilized for the past year with average cap rates at 6.2% in the third quarter. While low, cap rates have not dipped to the 5% level seen in 2005 before the last multifamily downturn.
A looming concern is that the increased demand for apartment buildings has spurred new construction, which has ramped up dramatically in the last two years. Multifamily housing starts hit 330,000 units in December, up from just 53,000 units in late 2009, said the MBA's Woodwell.
Matthew Anderson, a managing director at Trepp LLC, says low cap rates mean investors are paying higher prices for properties that are generating less income, which could be justified in some geographic areas, if there is a belief that income growth will return with an improved economy and rents could rise further.
But there is little historical evidence to suggest that rents will rise fast enough to offset the downside risk from higher interest rates.
"The worry about a bubble is twofold," says Anderson. "Really the sheer prices people are paying for apartments may be unsustainable and if a property suffers some setback and income falls, then the high valuation may not be justified."
Taken a step further, apartment owners could go into default if the rental income does not support the debt service.
"You can end up with a double-whammy where all sorts of new construction come online at the same time that demand is softening and then you'd have a plunge in occupancy rates and rents at the same time you have excess supply," Anderson says.