The economy is picking up and the real estate industry is reacting to growing demand for space and changing interest rates. The multifamily industry is looking at a good year with predictions for job growth and less competition from single-family homes as interest rates increase. Apartment and condominium projects are expected to do well in the Northeast, in particular, because the cost of single-family homes is prohibitive in so many markets.

To get an overview of the current multifamily transactions in the Northeast and predictions for 2005, Northeast Real Estate Business (NREB) recently spoke with lenders active in the region: Steve Wendel, executive vice president and managing partner in the Boston office of Berkshire Mortgage Finance; John Cannon, senior vice president and managing director with GMAC Commercial Mortgage; John Manginelli, senior vice president with KeyBank Real Estate Capital; David Goldfisher, director of Northeast originations with LaSalle Bank Real Estate Capital Markets; Daniel Edrei, director of origination with Meecorp Capital Markets; Richard Monfred, managing director with MMA Financial LLC; and Ernest DesRochers, senior vice president and managing director with NorthMarq Capital, Inc.

NREB: What multifamily loan products are particularly popular right now?

Wendel: Interest-only loans are particularly popular as a device to capture maximum current cash flow. Along the same lines, floating-rate loans, often with an option to convert to fixed-rate, are currently popular for the same reason.

Berkshire Mortgage Finance Headquarters: Boston Active: Nationwide Multifamily products offered: Primarily Fannie Mae, Freddie Mac and FHA loans, and occasionally conduit loans. We have closed approximately $3.5 billion for each of the past 3 years, and project similar volumes for 2004. Our loans are all on multifamily properties; they are primarily refinances of existing loans or funded in conjunction with acquisitions. We offer both fixed- and floating-rate loans. Recent Transaction: Berkshire Mortgage Finance (BMF) recently provided $15 million in aggregate loan proceeds to refinance an 11-asset portfolio owned by Emile J. Legere (EJL). The loans were presented as Freddie Mac first mortgages with a 20-year term and 30-year amortization (30/360) schedule. The transaction was structured as nine loans; four properties were cross-collateralized. The EJL portfolio consists of 11 assets located throughout New Hampshire. Ninety-six percent of the units included in this transaction are one-bedroom units. The portfolio is currently operating at an average physical occupancy of 99.3 percent. The borrower needed to close the loans in less than 30 days. In addition, 10 of the 11 properties included as collateral in this transaction operate under the Section 8 housing assistance program, the assignment of which had to be approved by HUD and the New Hampshire Housing Authority prior to closing the loans. BMF successfully closed all of the loans within 30 days. All 11 properties were underwritten based on the same loan-to-value and debt service coverage requirements and cap rate, which helped speed up the transaction. ‹ Steve Wendel, EVP and Managing Partner - Boston

Goldfisher: Loans with several years of interest-only terms are most popular right now, along with 75 percent to 80 percent loan-to-value transactions due to attractive interest rates.

Cannon: Freddie Mac and Fannie Mae DUS programs have been very successful with us this year; both are up substantially over the same period last year. The two products that seem most popular are Fannie Mae discount mortgage-backed securities and Freddie Mac’s capped adjustable rate mortgage. HUD’s MAP [multifamily accelerated processing] program has been very successful as well. Additionally, we are doing a lot of business with our traditional life company correspondents (like ING) and our proprietary conduit operation.

Manginelli: Mezzanine financing has risen in popularity thanks to low interest rates. More developers are beginning to seek permanent financing before the anticipated rise in interest rates takes effect.

Edrei: There is currently a lot of demand for land and/or construction loans in the multifamily sector.

Monfred: Unenhanced bonds have been gaining popularity among developers as an alternative to conventional construction and permanent financing. Some developers have traditionally shied away from bonds thinking that the complexity of the transaction would make the process cumbersome. They are now realizing that lenders who specialize in bond financing have the expertise to lead the transaction and guide the developer through without much difficulty. In addition to generally yielding higher loan proceeds, the unenhanced transaction tends to be efficient and flexible in terms of working through any problematic deal issues as they arise.

DesRochers: Fixed-rate mortgages for acquisition or refinance [are popular now]. Pricing for most lenders is very tight with loan-to-value ratios upwards of 80 percent of value. Affordable housing products are also popular as communities deal with the issue and developers jump in to that market segment.

NREB: What multifamily markets of the Northeast are hot right now? Which ones are struggling?

Cannon: Compared to the rest of the country, the Northeast is considered to have the best apartment markets in terms of stability and balance between supply and demand. So, everything from Delaware to Boston is considered pretty healthy.

GMAC Commercial Mortgage Headquarters: Horsham, Pennsylvania Active: Nationwide. GMAC has commercial loan origination offices in New York City; Red Bank, NewJersey; Buffalo, New York; and Philadelphia. Multifamily products provided: Open-end construction loans; construction perms through our strategic partnership with TIAA; traditional first mortgages; mezzanine loans; and joint venture equity. Recent Transaction: GMAC recently closed an approximately $425 million financing for the acquisition of the multifamily assets formerly owned by PREIT. This was a large multi-asset portfolio located in various Mid-Atlantic states. We provided traditional first mortgage financing, two distinct levels of mezzanine debt along with joint venture equity. We were chosen because of our ability to bring the entire capital structure for the acquiring general partner. — John Cannon, SVP/Managing Director

Wendel: It appears as though southern New Hampshire is doing particularly well, with rents rising 10 percent annually and with low vacancies. The Hartford, Connecticut, area is seeing some new construction and solid absorption. Southern Connecticut and Westchester, New York, are steady as well. Western Massachusetts and upstate New York have been struggling due to single-family affordability competition. Overall, the markets are fairly flat, which isn’t bad given the overall national multifamily trends.

Manginelli: New York and New Jersey markets are performing well. We went through a few years where owners were offering concessions, but now those concessions are used up, and are now lessening. Rental rates are now meeting and exceeding lender pro formas — and will soon start delivering returns to developers, as well.

KeyBank Real Estate Capital Headquarters: Cleveland Active: Nationwide. KBREC has 32 office locations in major U.S. markets. Multifamily products provided: KBREC provides both on- and off-balance sheet capital. KBREC provides all types of loans including permanent loans, construction loans, mezzanine equity, cross-collateralization and loan syndication. Recent Transaction: The former Marshall Harrison Street Apartments in Hoboken, NewJersey, are actually condominiums today, thanks in part to KeyBank. We got involved thinking we were going to finance an apartment building — and provided an interim loan to launch the construction. But the owners decided that the building needed to be a condominium deal. This was challenging because the loan amount rose, and we needed to bring in more banks to make the deal work. KeyBank acted as sole arranger and syndication agent for a $95.5 million condominium conversion finance facility, fully underwritten by KeyBank. We had previously provided a $58.65 million construction loan to construct the building as a rental project, then shifted gears to accommodate the highest and best use of the property. — John Manginelli, Senior Vice President

Edrei: The New York tri-state area is always red hot in terms of real estate, but every market offers opportunities to the entrepreneurial lender.

Monfred: Northern New Jersey has posted a fairly significant increase in permits over last year. Due to the high cost of single-family homes in the area, we expect the demand for rental housing to continue to be strong for the foreseeable future. Another area of note is Philadelphia, which is expected to experience acceleration in job growth over the near term. While vacancy rates have edged up slightly since 2003, they are still among the lowest in the country. The Boston rental market remains moderate with concessions still fairly common and rents have decreased, albeit modestly, over the last 2 years.

Goldfisher: Although the trend toward homeownership affects suburban and urban markets, supply-constrained cities such as Boston and Philadelphia have tended to fare better while some suburban markets have needed to provide more tenant inducements.

LaSalle Bank Real Estate Capital Markets Headquarters: Chicago Active: Nationwide Multifamily loan products: LaSalle provides loans for stabilized multifamily properties that can be securitized and sold on the secondary market. LaSalle is a debt lender with term loans of 5 to 15 years, with amortization ranging from fully amortized to 30-year schedules with interest-only terms available. Recent Transaction: The property is a 28-unit apartment building located in Boston. Short-term versus annual leases and furnished units made the deal challenging. LaSalle handled issues by focusing on the inherent value of the real estate, due to its excellent location in Boston. We were selected to service the loan because we’re flexible in structure and aggressive in pursuing the business. — David Goldfisher, Director, Northeast Originations

DesRochers: We have seen strong activity in secondary urban locations such as Hartford and Bridgeport, Connecticut, where owners are willing to take more risk because of very inexpensive prices (relatively speaking) compared to the rest of the Northeast.

NREB: How does multifamily lending right now compare with lending in 2003?

Goldfisher: Lending in 2003 was relatively strong, and it’s only getting stronger in 2004 because as interest rates begin to rise, many companies begin to take advantage of the market while rates are still good.

Manginelli: In 2003 it was nearly impossible to get an apartment deal done, but condominium projects were prolific. This year, our multifamily developer clients are trying to make rental projects happen, whether they are conversions or new construction. Developers are looking for a long cash-line asset; after going through the extensive approval processes, they want returns over a long period of time.

Wendel: I would say [multifamily lending] is down 10 percent to 20 percent. Obviously, this is somewhat connected with the recent interest rate increases which are moving opportunistic refinances to the sideline as borrowers wait for the Fed’s next move.

Edrei: Bridge and mezzanine multifamily lending was very active in 2003 but has since plateaued somewhat. Although bridge and mezzanine loans are more closely related to equity and venture lending (which are considerably pricier), low interest rates make this type of funding seem more expensive than in the past. Nonetheless, there is always demand for alternative lenders who can think out of the box and fund complex transactions.

Meecorp Capital Markets Headquarters: Fort Lee, New Jersey Active: Nationwide Multifamily products provided: We provide customized financial products for nonconforming real estate transactions ranging between $1 million and $100 million, primarily bridge and mezzanine loans. Recent transaction: MEECORP financed a $500,000 bridge loan for a Class C property on Ralph Avenue in Brooklyn, New York. The building included 12 multifamily units and two retail stores. A private individual, who had difficulty getting financing from conventional sources, owned the building and wanted to renovate it. — Daniel Edrei, Director of Origination

Monfred: MMA Financial has seen an upsurge in lending over the same period last year and expects this trend to continue through the end of the year. The cost of capital is still low versus historic levels, which encourages continued construction activity, and there remains a great need for affordable housing units in many markets.

Cannon: I have not seen lenders or mortgage bankers like GMACCM get crazy when it comes to loan proceeds, so I think discipline has been maintained to a large extent. I have seen some craziness in pricing of loans and in deal structuring — like giving full-term interest-only or waiving reserves on an older asset. But it is what you need to do if you want to lend money on apartments.

NREB: How do you think the lending environment will change during the last half of 2004?

DesRochers: The environment will continue to be the same if the “status quo” stays the same economically and politically. Unforeseen shocks will affect capital availability.

Monfred: We expect to see lending activity increase through the end of 2004 and into 2005 as increasing demand for rental housing continues. Evidence of moderate job growth toward the end of the first quarter indicates strengthening employment and, with the anticipation of rising interest rates, the rental market will be bolstered as first-time homebuyers are priced out of the single-family market and borrowers with homes financed through adjustable rate mortgages find themselves overextended.

MMA Financial, LLC Headquarters: Baltimore Active in: Connecticut, Delaware, Maine, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island and Vermont. Multifamily loan products: Construction and permanent, including LIHTC and market-rate equity. Unenhanced and enhanced tax-exempt bonds, Fannie Mae DUS, Freddie Mac Targeted Affordable, HUD MAP, and proprietary secondary market outlets. Recent Transaction: MMA has developed a reputation for creativity and flexibility. We look at each transaction individually, create a structure that works for the borrower and us, and then work diligently to close the financing quickly. MMA recently financed the rehabilitation of more than 180 affordable housing townhomes in southwest New Jersey; the deal was financed by direct purchase unenhanced bonds. The property is located in an urban redevelopment area and the borrower entered into a Housing Authority Payment (“HAP”) Agreement with the local housing authority. Additionally, there was a payment-in-lieu-of-taxes agreement with the city and an existing mortgage that could not be prepaid for 16 months. The timing of the debt and equity installments became a key component of this underwriting. That, in conjunction with built-in reserves, helped bring the deal to where it needed to be for the borrower and for MMA. — Richard Monfred, Managing Director

Cannon: I think pricing will remain exceptionally tight. No one is going to make a lot of money lending on apartments this year. Obviously, higher rates will have a dampening effect on new loan production. One of the good things about higher rates is that they will stem the flow of tenants from apartments into entry-level single-family housing.

Manginelli: With interest rates rising, there may be a rebounding market for rental product. Conversely, I don’t expect the condo market to diminish rapidly either — that would take a significant spike in rates.

Edrei: As interest rates rise, the demand for bridge and mezzanine loans will also increase.

Wendel: We feel that the rate environment will tend to rise slowly, but steadily, and volume will pick up as refinance dates move nearer.

NREB: What other predictions can you make regarding multifamily lending in the Northeast?

Manginelli: Capital will continue to chase rental. We see opportunity on many fronts, including permanent loans, mezzanine equity, letters of credit for bond financing, interim/construction loans and other financial products.

DesRochers: Despite predictions that values will decrease as rates increase, the fact remains the demand for housing in the Northeast is extremely strong and will continue to be so in the coming years due to new household formations and lack of new construction due to supply constraints caused by stringent zoning regulations.

NorthMarq Capital, Inc. Headquarters: Minneapolis Active: Nationwide. Northeast offices are located in Boston, New York Metro (4), Albany and Rochester. Multifamily loan products: Fixed-rate mortgage loans placed through life insurance loan correspondents, Wall Street conduits and Freddie Mac. Recent Transaction: NorthMarq Capital recently refinanced a 425-unit garden apartment complex on Long Island. The client wanted to refinance its existing balance and take out more proceeds. The deal was challenging because the loan was locked to prepayment. Borrower wanted to refinance early to take advantage of the lower rate environment and recapture equity. The lender, with whom NorthMarq had placed the loan several years earlier, wrote a forward commitment to refinance its existing debt. It funded the increase at a new contract rate. — Ernest DesRochers, Senior Vice President/Managing Director

Wendel: There is a fairly high volume of property sales and repositioning nationally as well as in New England; these types of transactions will keep lending volumes steady going forward. As we move through 2005, refinances of loans made 7 to 10 years ago will begin to drive lending volumes higher.

Goldfisher: Rents that have been soft to flat will tend to increase over the next 12 to 18 months as interest rates continue to rise, thus improving net operating income and values.

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