COVER STORY, MARCH/APRIL 2012

MONEY FOR MULTIFAMILY
This is a great time for multifamily lending. What will the next year bring?
By Lindsey W. Marcec

Thanks to steady demand drivers, as well as built-in exit strategies courtesy of Fannie Mae and Freddie Mac, lenders favored multifamily over other asset types through the recession. As the economy shows signs of improvement, will multifamily continue to be lenders' favorite property type? To answer that question, Northeast Real Estate Business recently spoke to four professionals entrenched in the markets: Jason Pendergist, head of Commercial Term Lending-East for Chase; Stewart Campbell, senior vice president with Berkadia in New York; Brandon Beatty, senior underwriter with the Boston office of Tremont Realty Capital; and Drew Anderman, senior vice president in Walker & Dunlop’s New York office.

The consensus from our panel of experts was unanimous: The financing climate is the best it has been in recent history for well-located, well-performing multifamily product in the Northeast. Read the Q&A below to find out exactly what they had to say.

NREB: Overall, what are your thoughts on multifamily in the Northeast right now?

Anderman

Anderman: We see a lot of product up for financing in the Northeast, and the overall macro answer is there is a ton of liquidity available. Financing companies like Walker & Dunlop are very active. Local banks are very active. The insurance companies are very active. The only way the environment has changed from 12 or 18 months ago is that there’s more liquidity now. Rates are at historic lows.

Pendergist: The multifamily market is strong due to a growing population and an under supply of moderately priced rental housing throughout the region. As the economy continues to improve, we expect to see an increase in household formations and a shortage of housing stock, resulting in continued low vacancy rates for rental housing with growing upward pressure on rents — all of which should drive strong NOI growth throughout the region.

Beatty: As a sector in general, multifamily is a favored asset class among lenders, and it will be for the foreseeable future. Demographic trends and strict underwriting standards for residential mortgages will continue to drive demand for rental housing. Mortgage credit conditions remain extraordinarily tight, even for creditworthy borrowers.

Campbell: In terms of well-performing properties in well-performing submarkets, there’s never been a better time for multifamily. With rates being what they are, everybody wants to be in multifamily if they are an active lender. That being said, there are things you need to worry about if you are not in one of those primary or secondary markets: We are seeing weakness in tertiary markets due to unwillingness of lenders to go there or because of an economic climate that isn’t quite as good.

NREB: What are the strengths and weaknesses in the various categories of multifamily properties, such as luxury, affordable or senior housing?

Beatty: Senior and student housing have unique demand generators that deserve special attention. Senior housing in particular has the wind at its back from a demographic perspective: The aging baby boomers will continue to increase demand for this product type. Student housing benefits from similar trends; as enrollment grows at universities, so does the demand for quality student housing. Additionally, many institutions are looking for private sector investment in student housing to meet this demand because of pressure on endowments.

Pendergist

Pendergist: Our focus is on the widest segment of the market — the market-rate properties — as they tend to have the most consistent cash flows throughout the cycle and have generally been the most consistent performing assets over the long term. Luxury product can be tricky: They tend to outperform during market upswings and then underperform during downturns. With appropriate leverage, these properties can survive the cycles, so we often see lower advance rates on this type of project. Senior housing tends to behave more like an operating business than a real estate investment, so we don’t see many of these deals.

Campbell: Luxury has been performing quite well for some time. Money has been chasing that product for a while. The market-rate housing, where we do most of our work, across the country is performing extremely well. And with the specialty stuff, all ships are rising.

NREB: What are your expectations with regard to the availability of capital for multifamily projects in the next year or two?

Beatty: Capital for existing properties will be plentiful in the near term. New construction is a different story, and capital availability will vary by market and the number of new deals in the supply pipeline. Multifamily is the unicorn of asset types — it has the ability to attract construction financing, but that will wane as supply grows. In Boston alone, there are currently 4,500 units approved. It is highly unlikely that market demand will be able to absorb that kind of addition to the existing supply of housing.

Campbell: I think the prognosis is very good. The banks are very active — and are becoming even more active. The government-sponsored enterprises (GSEs) are very active. It remains to be seen what the political solution will be for the GSEs, but, as long as they remain viable, it provides very good liquidity for the product. Existing properties are on everybody’s wish list. New construction is hard to come by, but it’s loosening and it loosens first for the biggest and most liquid buyers.

Pendergist: More traditional bank lenders, insurance companies and the GSEs are entering the market looking for quality assets owned by quality operators in quality areas. Lenders will be forced to differentiate themselves on service, certainty of execution and overall value to customer.

NREB: What do you expect in terms of interest rates in 2012? How will this compare with the interest rates seen in the last couple of years?

Anderman: Rates will stay low for the rest of the year. I’d bet they won’t get much lower, and they’ll go up after the election.

Campbell: I think there’s enough pressure from Europe that we’ll keep our Treasury in the same range. But, if the economy stays on the projection we seem to be on, at some point, rates just have to go higher. We’ve been saying it for years, but, at some point, it has to happen.

NREB: What are you seeing today in terms of underwriting requirements and what do you predict will happen in the next year or so?

Beatty: Multifamily did not go unscathed during the recession, but was one of the few real estate asset classes where debt was still available — largely the result of the GSEs. Today, there is more competition among institutional investors for multifamily loans, particularly from life companies offering attractive rates for lower leverage deals. Additionally, the CMBS market has opened up considerably in the last year or so, and is starting to take some risk that the GSEs will not. This spells more capital availability for the sector as a whole.

Pendergist: We see consistent underwriting on stabilized properties throughout the region. Most lenders seem to have learned the folly of attempting to project rents when forecasting NOI, as those projections quickly fall apart at the first sign of economic instability in the market. All lenders seem to be taking a similar approach at forecasting NOI by analyzing actual rents with the more conservative of actual or market expenses.

NREB: What factors could affect the capital markets? What do our readers need to watch in the coming months?

Anderman: Readers should watch what’s happening in Europe, what’s happening with the stock market, and any changes in employment. Large, macro events that could move the market one way or the other are the things to watch for the next 6 months.

Beatty: Macro economic conditions remain the biggest threat to capital market liquidity. Increasing interest in the absence of real wage growth, for multifamily in particular, will put substantial pressure on valuations.

Pendergist: One of the greatest correlations in our business is between vacancy rates and unemployment rates, as higher unemployment reduces the universe of potential renters. I would encourage readers to stay abreast of anything that could impact the job recovery in the region and, given all that is going on with the economy, there are plenty of moving pieces that could speed up or slow down job growth in the U.S.

Campbell: It’s a great, great time to be in multifamily. The things you want to look out for are property operations. We’re seeing some line items, like sewer, increase. Real estate taxes are something to monitor, too. Overall, we’re in a growth mode and rents will continue to rise as long as you’re in good markets.

©2012 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 553-9037.