What Lenders Are Thinking as Multifamily Evolves

Article originally posted on Globe St. on February 25, 2020

SAN DIEGO—Recently the Federal Housing Finance Agency created a new group with the goal of ensuring that both Fannie Mae and Freddie Mac foster a competitive, liquid and resilient multifamily market. “By creating a new group, it speaks to a commitment and dedication to focus on affordability in multifamily,” according to Siobhan Kelly, associate director for multifamily at the FHFA.

Kelly made her comments during a panel session at the recent MBA CREF conference, where multifamily finance was a chief topic due to, no doubt, the insatiable demand for this product. While there are the usual headwinds facing the multifamily asset class, the good news for investors is that its capital sources—both from the public and private sectors—remain confident that they can be managed.

Private Sector Dynamics

In the private sector, competition among the players remains intense amid a push to give it more run room compared with what the GSEs currently enjoy.. “We want to be sure Fannie and Freddie are where they are needed but aren’t crowding out any other sources of capital,” Kelly said.

The active sources of private multifamily capital are the usual suspects but there are signs that some of their value propositions are changing. Moderator Janette O’Brien, SVP and multifamily production manager at KeyBank, polled the audience asking what they thought would be the biggest debt sources in addition to the GSEs in 2020. Fifty-eight percent replied banks, CMBS came in at 18%, life companies at 5% and debt funds at 13%.

In some cases there is room for these providers to grow. Michael McRoberts, managing director of PGIM Real Estate Finance, noted that life companies really don’t have the capacity to dominate more than a 10% market share. At the other end of the spectrum, he added, while there are some regulatory issues going on with banks, it still feels like they will be the biggest player and provider of capital.

A Government Heavyweight

This is not to discount the massive government support for multifamily.

According to Hilary Branson Provinse, EVP and head of mortgage banking at Berkadia, “the red-headed step child not even on the list is HUD.” She explained that there is a limited amount of capital that HUD can put out but “we shouldn’t count out HUD.”

It is the GSEs that remain the industry heavyweights. Their mission, though, is evolving as they inch towards privatization. Deborah L. Jenkins, EVP and head of the multifamily division at Freddie Mac Multifamily, noted that this is the first quarter the GSEs have had the 5 cap. “In looking at the next steps, there is actually progress happening now on the exit train. What we will be looking at is how those steps actually impact the market. Also, we will look at what will the cap be for 2021.”

Rent Control, Other Challenges

Fannie Mae, for its part, has its eye on the growing number of rent regulations around the country. “We are hearing investors make different choices right now” because of these new rules, said Robert G. Levin, SVP, Multifamily Customer Engagement with Fannie Mae Multifamily. “I don’t want to say they will flee markets, but I think they will make different choices. I think we need to continue to watch that. We are trying to figure out ways to expand that pie of affordability.”

It’s not just the GSEs that are watching this issue. PGIM’s McRoberts noted “that this is the year we have to figure out where rent control is going. There are many being put in place by jurisdictions around the country and as a debt lender, it is something we need to be thinking about.”

Another headwind for the asset class, he continued: The significant amount of activity repurposing in urban areas and in opportunity zones. The result has been players are accepting the fact that yields are going to be lower and are thinking about longer hold periods, McRoberts said. They are also focusing on operating properties more efficiently, he added.