The chief economist for the National Multi Housing Council said the strength of the recovery of the multifamily portion of the commercial real estate market has attracted both debt and equity capital to finance these properties.
“But our latest survey finds that capital is largely targeted at top-tier properties in core markets and not widely available throughout the U.S.,” said Mark Obrinsky.
The results show that only 17% of NMHC’s first-quarter 2012 survey participants felt capital was available for all property types in all markets.
While the debt financing index fell to 65 from 74 for the fourth quarter 2011, Obrinsky explained that any score above 50 means more people surveyed responded that they felt the markets were improving in the period in question from the prior period.
In the most recent survey, 34% said debt financing conditions had improved in 1Q12 over the prior quarter, while just 4% said they got worse.
The equity financing index grew to 62 from 60, with one-third of respondents feeling this capital was more available in 1Q12 over 4Q11, while 9% stating it was less available.
NMHC does not ask survey participants what sources are out there, but for the multifamily sector, much of the funding comes from Fannie Mae, Freddie Mac and the Federal Housing Administration, sources which are not available for most other forms of commercial real estate lending. Other sources include commercial banks and life insurers.
Demand for rental housing should continue to grow, Obrinsky said, as younger households move into the housing market and these people have a greater preference for renting.
A recent report from Fitch said favorable demographics and a limited new supply of rental housing would ensure that this market will not overheat.
Prices of multifamily properties which have sold recently are off of their low points seen in late 2009, but are also 25% below what they were at their peak.
Fitch cites U.S. Census data which projects the renter population (those between 20 and 34) to grow to 70 million by 2025 from 66 million now.
Commercial mortgage banker Beech Street Capital is based in Bethesda, Md. The company is slightly over two years old and is a Fannie Mae DUS lender, a Freddie Mac Program Plus seller/servicer, and a Federal Housing Administration MAP and LEAN lender. Grace Huebscher is the co-founder, president and CEO and a former Fannie Mae multifamily executive. The first year the company did $1 billion in loans and over $2.2 billion the second. So far this year, it has done over $1 billion.
Michael Edelman, senior vice president, production management at Beech Street Capital, said the company gets most of the funding for its deals from those three sources and in the above order. The market is robust and healthy right now, with Fannie/Freddie/FHA controlling about 80% of the market.
Back in 2005 and 2006, the majority of these deals were done through Wall Street conduits. Comparing today’s lending environment to back then, terms on today’s transactions are significantly more conservative, he said.
On the other hand, terms on Fannie Mae/Freddie Mac multifamily loans have remained consistent over the last 15 to 18 years. The government-sponsored agencies spent the mid-2000s on the sidelines, unable to compete with the aggressive terms offered by commercial mortgage-backed securities lenders. Now the shoe is on the other foot, Edelman noted.
End investors have come to like the creditworthiness of the Fannie/Freddie/FHA deals. The delinquency rate for the Fannie/Freddie loans is in the area of 25 to 40 basis points, while for multifamily CMBS, it is in the area of 900 bps, he said.
“There is no incentive for them for them to be super-aggressive to write more business. They are happy filling the market need and they don’t have to chase market share because they own the market share now,” Edelman said.
The agencies are steady market players, he added, whereas the CMBS conduits come out when the market is hot but leave when things cool.
Within the multifamily market, he said the student housing area (properties built on or near college campuses) has become hot as of late as more state-run schools turn to private providers to meet a need.
At the other end of the spectrum, seniors housing has also seen growing demand as baby boomers age.
As for the future of Fannie Mae and Freddie Mae, Edelman said multifamily lenders are “concerned and positioning themselves for what the future holds.”
There are rumors that the GSEs’ multifamily businesses will be spun out from their residential businesses if those were to be shut by the government. Plus, he noted there are other capital providers able to occupy the space (and the FHA program is not going anywhere).
“There will be other lenders there, we just got to pick the right ones and we’re keeping our eyes open to see which way that goes,” Edelman said.
